Texas Comptroller holds hearing on proposed data processing rule

On Friday, December 6, 2024, the Texas Comptroller held a public hearing in Austin, TX regarding the proposed changes to the data processing regulation (section 3.330) published in the Texas Register on September 13, 2024. Several parties submitted written comments in response to the proposed regulation, including the Texas Taxpayers and Research Association (TTARA) and the Council On State Taxation (COST). Both TTARA and COST requested the public hearing.

Eight individuals spoke during the hearing: two from TTARA, one from COST, two marketplace sellers, one representative from Dell Technologies, and two attorneys. The general undertone was that the Comptroller’s proposed rule exceeds to scope of the data processing statute, Texas Tax Code section 151.0035, and the expanding the statute is the legislature’s job, not the Comptroller’s.

Several of the comments related to the proposed regulation’s preamble, specifically addressing:

• The Comptroller claiming it has exclusive authority to interpret revenue laws;
• The proposed regulation disavowing the essence of the transaction test in favor of the ancillary services test, when the essence of the transaction test was created by the Texas Supreme Court and the Comptroller does not have the power to overrule the Supreme Court; and
• The notion that no one purchases data processing for its own sake, which multiple speakers highlighted as not being true and gave various examples of common data processing services that involve processing data.

In addition to the comments targeting the preamble, multiple commentators also addressed:

• The proposed regulation’s state and local sourcing provisions, with the speakers requesting additional clarity; and
• The increased cost of doing business that the proposed change will impose on marketplace sellers.

The Comptroller did not take questions and did not offer any comments in response to the testimony that was offered. The Comptroller concluded the hearing by stating that they are considering the written comments and the hearing testimony, and hope to publish the adopted version of the regulation in early 2025. The Comptroller also stated that the upcoming Texas legislative session may have an impact on the timing of the regulation’s implementation. Separately, legislation has been prefiled that would exempt payment processing services provided by marketplace providers.