The test to determine if a data processing service is “ancillary” to a nontaxable service
The test to determine if a data processing service is “ancillary” to a nontaxable service does not rest on the essence of the transaction test. That test focuses on uncovering the ultimate objective of the buyer—what Combs v. Chevron, Inc., 319 S.W.3d 836, 843 (Tex. App.–Austin 2010, pet. denied) refers to as the “underlying goal.” Buyers are never interested in data manipulation for its own sake; they value it only as a means to achieve a broader purpose. Therefore, assessing the buyer’s “underlying goal” is not the proper approach for evaluating data processing services. See also Hellerstein & Hellerstein, State Taxation §12.08 (3rd ed. 2020), which dismisses the primary purpose test as “folly.”
Instead, when determining whether a data processing service is “ancillary” to a nontaxable service, the comptroller focuses on the seller’s conduct rather than the buyer’s intent. If the seller engages in repetitive or routine data manipulation, this indicates that the activity is not ancillary and should be taxed as a data processing service. In contrast, when data manipulation involves the service provider’s external expertise and discretionary judgment, it suggests that the service is ancillary and should not be subject to tax as a data processing service.
The test to determine if a data processing service is “ancillary” to a nontaxable service