Data Processing Services: Taxable

Entering, storing, manipulating, and retrieving a customer’s data is taxable. Below is a list of some taxable data processing services:

• Data Storage
• Internet Services such as creating a web page and providing server space.
• Editing, entering, and manipulating client’s data
• Totalisator services
• Compiling and producing records
• Data conversion services
• Scanning documents

So, what are nontaxable services that use computers? When you use a computer merely as a tool to provide a professional service this is nontaxable. Some examples of this include:

• Auditing services
• Consulting services
• Developing specifications for designs
• Interpreting a client’s data
• Preparing financial statements, federal income tax, sales tax
• Processing seismic data/geophysical
• Services for encrypting electronic payment information.
• Transcribing medical dictation or records.

How to collect tax if your business includes both taxable and nontaxable services?

If your business includes both taxable and nontaxable services, collect tax only on the taxable services only. The nontaxable service must be identifiable, and it must be a type of service that is commonly provided by itself without another service.

IF the taxable service is 5% or less of the overall contract price, don’t worry about collecting tax from the client.

IF the taxable service is more than 5% of the fee the total amount is charged tax unless you separately show the charges for the two separate services.

Data processing services can be nontaxable when the service is provided to a tax-exempt organization. Make sure to get an exemption certificate if this is the case.

What about Computer Hardware? Programs?

Selling, leasing, renting, or licensing computer hardware and programs are taxable. Some sales may qualify for resale exemptions. An example of this would be the sale of a computer program to an internet hosting provider.

If you are providing contract programming services, this work would be exempt as long as you transfer all rights including intellectual property rights to the computer program to the purchaser.

Repair, maintenance, or restoration of a computer program is taxable if you sold the computer program. These “repairs’ include error corrections, technical fixes, technical support whether provided telephone or through online. If you didn’t sell the program then repair, maintenance or restoration is non-taxable.