Texas: Service Fee Charged to Facilitate Online Ticket Sales is Taxable Data Processing

Download PDF

The Texas Comptroller recently issued a private letter ruling addressing whether a service fee imposed on customers who purchased lottery tickets via an app was taxable data processing.  The taxpayer provided a mobile software application that enabled Texas-based customers to purchase lottery tickets.  This was done, in part by scanning an image of the actual physical ticket using optical character resolution (OCR) and adding a watermarked barcode unique to the customer to the image. The taxpayer then stored the image electronically so that it could be accessed by customers using the app. The taxpayer requested guidance on whether the service fee charged to customers was taxable.  Under Texas law, “data processing services include “word processing, data entry, data retrieval, data search, information compilation … and other computerized data and information storage or manipulation.” A Texas rule further defines data processing services as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information and entering and retrieving information. It specifically includes … computerized data and information storage or manipulation.”  The Comptroller concluded that because the taxpayer’s services included scanning images using OCR, adding a watermarked barcode to the images, and storing the images, the service fee was taxable data processing. Please contact Sarah Vergel de Dios at 713-319- 3981 with questions on Private Letter Ruling No. 20190912081126.