Is a lump-sum digital marketing package — bundling website development, social media marketing, SEO, a local-review software plugin, and pay-per-click advertising — taxable as a data processing service in Texas?

Plain-English summary

A digital marketing company sells lump-sum packages that mix several services: website design/build/hosting/maintenance, social media strategy and posting, SEO (keyword optimization, metatags, link building, monthly reports), a software plugin that lets customers segment online reviews by city, and pay-per-click (PPC) advertising placement. The company asked Texas whether its single bundled charge for all of this is taxable.

Texas ruled the whole lump-sum charge is taxable as a data processing service. Several of the bundled pieces independently meet Texas's broad definition of data processing — which covers data entry, retrieval, search, compilation, and other computerized data manipulation. Website design, creation, and hosting counts; SEO work like maintaining metatags and running search-ranking tools counts; and setting up and managing the local-review software plugin counts too. All of these have been treated as taxable data processing in prior Comptroller decisions and STAR guidance.

PPC advertising and other pure ad-placement services (search ad placement, phone/text ads) are not independently taxable — Texas generally doesn't tax advertising agency services. But Rule 3.330(d)(2) has a bundling rule: if a nontaxable service is combined with taxable data processing in one charge, and the data-processing portion is more than 5% of the total, the whole combined charge becomes taxable. Because this company's package bundles substantial taxable data-processing work with the PPC/advertising pieces, the entire lump sum is taxable, subject to the standard 20% data-processing exemption.

What this means for you

Digital marketing and web development agencies

If your service package includes any of website development, hosting, maintenance, SEO technical work, or similar computerized data manipulation, that portion is taxable data processing — and once it's more than 5% of a bundled lump-sum price, your entire package (including otherwise-nontaxable advertising placement services) becomes taxable.

Agencies wanting to isolate nontaxable advertising services

Separately pricing PPC/ad-placement services from website/SEO/data-processing work — rather than bundling everything into one package price — could keep the advertising piece out of the tax base, though this taxpayer didn't do that and so its entire charge was taxed.

Accountants and tax professionals

This is a clean application of the Rule 3.330(d)(2) 5% bundling threshold specifically in the digital marketing context — useful precedent anytime a client sells a mixed web-dev/SEO/advertising package under one price. Note the taxable-services list here (website design/hosting, SEO, software plugin management) tracks closely with Comptroller's Decision No. 44,736 (2005) and No. 110,022 (2017).

Common questions

Q: Is PPC advertising taxable on its own?
A: No — pure advertising placement (search ads, phone ads, text ads, landing pages tied only to ad placement) is not independently taxable under Rule 3.321(a)(5), unless tied to the sale of taxable fabricated property or bundled with taxable services as it is here.

Q: What would keep the PPC portion out of the tax base?
A: Separately stating and pricing the PPC/advertising services apart from the taxable data-processing services (website, SEO, plugin management), so the taxable share of any single bundled charge doesn't determine the whole invoice's treatment.

Q: Does the 20% data-processing exemption reduce the tax owed?
A: Yes — once the lump-sum charge is taxable, Section 151.351 exempts 20% of the total, so tax is collected on 80% of the package price.

Q: Does this ruling apply to my marketing agency's service packages?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific bundle of services and billing structure. A different mix or separately itemized pricing could change the outcome.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.0101(a)(12) (data processing services as a taxable service)
• Tex. Tax Code § 151.0035 (Data Processing Service, definition)
• Tex. Tax Code § 151.351 (20% data-processing exemption)
• 34 Tex. Admin. Code § 3.330(d)(2) (5% bundling threshold for combined taxable/nontaxable data processing charges)
• 34 Tex. Admin. Code § 3.321(a)(5) (Advertising Agencies)
• Comptroller's Decision No. 44,736 (2005); No. 110,022 (2017)
• STAR Document 201903015L (Mar. 22, 2019)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202010013L

Original ruling text

October 22, 2020

RE: Private Letter Ruling No. 20200225084219

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: (1)] We are responding to your request dated Feb. 21, 2020 and additional information received via email on March 23 and July 31, 2020. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights. You requested guidance on the taxability of services you provide.

Facts Presented

** (Taxpayer) offers a variety of lump-sum packages to enhance their customer’s online presence. Services include website development, social media marketing, search engine optimization (SEO) services, software plugins for local reviews, and pay-per-click (PPC) services.

Website development includes design, integration, testing, creation, management, maintenance, and website hosting of the customer’s website.

Social media marketing includes the creation of a strategy, profile, and photo designs for a customer’s social media webpage account. In addition, the Taxpayer provides account monitoring, management, social media advertising, and adds weekly social media content to their customer’s webpage. This also includes a monthly snapshot of activity, a comprehensive monthly report, and social media consulting to their customers.

SEO services include domain analysis, validation, adding keywords, running simulations, adding metatags, website maintenance, checking error codes, building links, and providing monthly SEO reports.

The software plugin for local reviews includes set-up and implementation, software training, and full management of city webpages/heat maps. The plugin to the webpage allows the Taxpayer’s customer’s the ability to segment reviews by local city, region, or company representative.

PPC services is an advertising model used to drive traffic to websites, in which an advertiser pays a publisher when the ad is clicked. This includes search engine ad placement, phone call ads, text ads, and a landing webpage creation.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Is the lump-sum charge for the Taxpayer’s services of website development, social media marketing, SEO services, software plugin for local reviews, and PPC services, taxable as data processing services?

Ruling: The Taxpayer’s lump-sum charge for their services are taxable as data processing services. Twenty percent of the total charge is exempt from sales tax.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Section 151.0101 (“Taxable Services”) lists services that are taxable in Texas and includes data processing services. Section 151.0101(a)(12). There is a 20 percent exemption on the provision of data processing services. Section 151.351 (Information and Data Processing Services).

Section 151.0035 (“Data Processing Service”) defines data processing service, in pertinent part, to include “… data entry, data retrieval, data search, information compilation, … and other computerized data and information storage or manipulation.” Data processing service also includes the use of a computer or computer time for data processing whether the processing is performed by the provider of the computer or computer time or by the purchaser or the beneficiary of the service. Section 151.0035.

Taxpayer’s services of website design, creation, implementation, maintenance, and hosting are taxable as a data processing services. See Comptroller’s Decision No. 44,736 (2005). This includes services to develop and maintain social media webpages and landing pages for customers. In addition, SEO services involving performing maintenance on their customer’s website, setting up tools, and adding metatags to increase the search ranking of the website is taxable data processing. See Comptroller’s Decision No. 110,022 (2017) and STAR Document 201903015L (March 22, 2019).

Included in website design and maintenance is the Taxpayer’s services of setup and implementation of software plugins to city webpages and providing full management of those webpages, which are also taxable as data processing services. See Comptroller’s Decision No. 44,736 (2005).

Nontangible services such as adding an advertising link onto a website owned by another person (e.g., PPC), add placement, telephone ads, or text ads are not taxable unless related to the sale of employee-fabricated property or other taxable items. Section 151.0035 and Rule 3.321(a)(5)(Advertising Agencies). These services are taxable when combined with taxable data processing services in which the charge for data processing represents more than 5 percent of the total charge. Rule 3.330(d)(2)(Data Processing Services).

Taxpayer must collect sales tax on the lump-sum charge of website development, social media marketing, SEO services, software plugin for local reviews, and PPC services. Twenty percent of the total charge is exempt from sales tax.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20200225084219.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.