Overview
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.”
Buyers do not seek data processing for its own sake but as part of a broader objective.

The Correct Approach: Focus on the Seller’s Conduct
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.
Indicators That a Service Is Not Ancillary
- The seller engages in repetitive or routine data manipulation.
- Such activity is indicative of taxable data processing services.
Indicators That a Service Is Ancillary
- The data manipulation involves the service provider’s external expertise and discretionary judgment.
- This suggests the service is ancillary and not subject to tax as a data processing service.
Summary
Discretionary, expertise-driven manipulation = ancillary, nontaxable.
Essence of the transaction test (buyer’s purpose) is not applicable.
Focus is on the seller’s activities, not the buyer’s goals.
Routine processing = taxable.
Frequently Asked Questions
What does it mean for a data processing service to be “ancillary” to a nontaxable service?
A data processing service is considered “ancillary” when it supports or is integrated with a primary nontaxable service. This typically involves the provider using discretion and expertise beyond routine data handling.
Why is the buyer’s intent not used to determine taxability?
The buyer’s purpose or “underlying goal” is irrelevant because it does not reflect the nature of the service being sold. Tax determinations rely instead on what the seller does, not what the buyer hopes to achieve.
What role does the seller’s conduct play in assessing taxability?
The seller’s conduct is central. If the seller performs routine or mechanical data manipulation, the service is likely taxable. However, if the work involves judgment or specialized knowledge, it may be considered ancillary and thus nontaxable.
Is the “essence of the transaction” test applicable to data processing services?
No, the “essence of the transaction” test is not applicable in this context. The test focuses on buyer intent, which is not the correct lens for evaluating whether a service is taxable under data processing rules.
How can I identify if a service is taxable or nontaxable?
Assess whether the data manipulation is routine and repetitive (taxable) or involves discretionary, expertise-based judgment (nontaxable). The more specialized the work, the more likely it is to be classified as ancillary.