Is a federally-mandated prescription-drug-data (RxDC) compliance reporting service — even the tier where an attorney and CPA are involved — a taxable Texas data processing service?

Plain-English summary

Federal law (the Consolidated Appropriations Act of 2021) requires employer health plans to file annual "RxDC" reports on prescription drug costs with federal agencies. A company helps employers meet this obligation at three service levels: Level 1 (just submits pre-prepared files through the federal portal and runs the federal format-check), Level 2 (guides employers through gathering specific data and reformats some files), and Level 3 ("white glove" — extrapolates the required data files from raw employer documents, using a compliance team that includes an attorney and CPA). It asked whether any or all of these levels are subject to Texas sales tax.

The Comptroller ruled all three levels are taxable data processing services. Testing files against federal format requirements, converting file formats, and compiling/storing employer data are squarely within the statutory definition of data processing (data entry, retrieval, search, compilation, and other computerized data/information manipulation). Even at Level 3, where an attorney and CPA are on the compliance team, the Comptroller found they aren't applying professional judgment in a way that exempts the service — the agreement explicitly disclaims that the company is acting as an attorney, and the CPA isn't applying accounting-specific expertise the way, say, financial-statement preparation would. Instead, the Comptroller found this service resembles the data-processing examples in Rule 3.330(b)(1), like preparing payroll checks or completing W-2 forms — mechanically taxable, unlike (for contrast) preparing financial statements under GAAP or federal/state tax returns, which the same rule lists as nontaxable examples.

What this means for you

Compliance/reporting vendors serving employer health plans

Simply having licensed professionals (attorneys, CPAs) on your team doesn't automatically exempt a data-compilation service from Texas sales tax. What matters is whether they're actually applying specialized professional judgment that goes beyond mechanically compiling and formatting data — this ruling found the RxDC compliance team wasn't, despite the credentials involved.

Employers/benefits administrators buying RxDC compliance services

Budget for Texas sales tax (on 80% of the fee) regardless of which service tier you choose — even the "white glove" full-service tier is taxable under this ruling.

Accountants and tax professionals

The touchstone distinction is Rule 3.330(b)(1)'s own examples: taxable data processing (payroll check preparation, payroll tax return filing, W-2 completion) vs. nontaxable professional services (GAAP financial statement preparation, federal/state tax return preparation). This ruling places RxDC report generation on the taxable side of that line, even when a CPA and attorney are nominally involved, because the agreement itself disclaims the attorney acting as counsel and the CPA's role is described as compiling/extrapolating rather than applying accounting expertise.

Common questions

Q: Does having a CPA prepare data for a compliance filing make the service nontaxable, like tax-return preparation?
A: Not automatically — per this ruling, the CPA has to actually be applying accounting-professional judgment (as in preparing financial statements or tax returns) for that carve-out to apply. Merely compiling/extrapolating data into required report fields, even by a CPA, was found to be data processing.

Q: Is all federally-mandated compliance reporting taxable in Texas?
A: Not automatically — this ruling is specific to the RxDC data-compilation facts presented. Whether a given compliance service is data processing turns on whether it involves the mechanical entry/retrieval/compilation/manipulation of data, versus genuine professional analysis.

Q: Can another RxDC vendor rely on this ruling?
A: No. It binds the Comptroller only for the taxpayer and facts in the request. A vendor whose compliance team applies more substantive accounting or legal judgment to the data could potentially reach a different result.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed); § 151.010 (Taxable Item)
• Tex. Tax Code § 151.0101(a)(12) (data processing as a taxable service); § 151.0035(a)(1) (definition)
• Tex. Tax Code § 151.351 (20% data processing exemption)
• 34 Tex. Admin. Code § 3.330(a)(1), (b)(1) (Data Processing Services — taxable vs. nontaxable examples)

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202503018L

Original ruling text

March 18, 2025

RE: Private Letter Ruling No. 20240514143135

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 May 10, 2024, along with additional information submitted on June 27, 2024, and Oct. 29, 2024. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You are requesting guidance on the taxability of services ** (Taxpayer) provides to its clients.

Facts Presented

Taxpayer provides solutions to employers who sponsor employer-based health plans to satisfy annual prescription drug data collection (RxDC) reporting obligations, created by the Consolidated Appropriations Act of 2021 (Act).

Section 204 (of Title II, Division BB) of the Act requires employer-based health plans to submit information regarding prescription drug benefits and health care spending to the Centers for Medicare and Medicaid Services on behalf of the U.S. Department of Health and Human Services, U.S. Department of Labor, and U.S. Department of the Treasury. This report is known as the RxDC report.

Taxpayer’s RxDC Service Agreement (Agreement) provides that every RxDC report includes group health plan information, a narrative response, at least one data file, and any supplemental information. Data files (Data Files) that may be submitted include premium and life years, spending by category, top 50 most frequent brand drugs, top 50 most costly drugs, top 50 drugs by spending increase, prescription (Rx) totals, and Rx rebates. See Prescription Drug Data Collection (RxDC) Reporting Instructions, Centers for Medicare and Medicaid Services, page 8, https://regtap.cms.gov/reg_librarye.php?i=3860 (last visited Feb. 13, 2025). Taxpayer is responsible for reporting only the Data Files selected by the employer.

Taxpayer provides three levels of services for employers: Level 1: Reporting Entity Only Service; Level 2: Guided Service; and Level 3: White Glove Service.

Level 1: Reporting Entity Only Service

For Level 1, Taxpayer acts only as a reporting entity. Only a reporting entity can submit RxDC reports through the federal agency portal (Federal Portal).

The process begins when employers upload their RxDC report to Taxpayer’s system through an online intake form. Upon receiving the data, Taxpayer tests files within the Federal Portal. Taxpayer may convert the file format from one form to another, if necessary. If the submission passes the Federal Portal submission test, Taxpayer will submit the RxDC report and send the employer a submission confirmation and Federal Portal receipt. If the submission fails the Federal Portal submission test, Taxpayer emails the employers the submitted files, the Federal Portal generated error report, and a link to a second submission form.

After the first failure, the employer will upload the corrected files back to Taxpayer. Taxpayer will again test the report. If the second submission passes the submission test, Taxpayer will submit the RxDC report and send the employer a submission confirmation and Federal Portal receipt. If the second submission fails the submission test, Taxpayer reserves the right to amend the Agreement to Level 2 or Level 3 service. Taxpayer does not perform any calculations or generate data files as part of Level 1 service.

Level 2: Guided Service

For Level 2, Taxpayer provides employers a guided process for gathering and submitting information regarding the premium and life-years Data File in the RxDC report. Guided Service is only available if the other Data Files have the necessary data and require minimal formatting.

Employers gather information including their provider information, monthly employee/employer premium contribution amounts, and member counts. Employers upload the information through Taxpayer’s intake form that has step-by-step directions specific to health plan level and premium and life year information. The Agreement provides that Taxpayer assists the employer in ensuring the proper information for the Data File is collected.

If Data Files other than the premium and life-years file are uploaded, they must only require reformatting into the appropriate format. Taxpayer is not responsible for duplicate uploads or accuracy of the information collected in the additional Data Files. If any employer uploads include raw data, the Agreement is amended to Level 3 service.

Level 3: White Glove Service

Taxpayer’s Level 3 Service requires minimal manual entry by employers. Employers upload supporting documents and Taxpayer generates the Data Files requested for submission.

Employers provide supporting documents that include information such as Census information, premium invoices, stop-loss invoices, benefit guides, Form 5500 information, and member state of residence documentation. Based on the supporting documents, Taxpayer extrapolates information into the Data Files required for RxDC reporting.

Taxpayer may request additional information or clarifying information from employers. Both Taxpayer and employer work to ensure that Taxpayer has the data needed for an accurate and timely submission.

Taxpayer states for Level 2 and 3 services that its compliance team comprised of an attorney and certified public accountant (CPA) are involved in analyzing and extrapolating information as well as performing calculations needed to complete each assignment. The Agreement states that Taxpayer is not engaged in the practice of rendering legal advice and in no event will offer a legal opinion nor act as the employer’s attorney. Taxpayer performs the service in a non-fiduciary capacity.

Questions, Rulings, and Analyses

Our restatements of your questions are shown below, followed by our responses and analyses.

Question One: Are Taxpayer’s services subject to Texas sales and use tax?

Ruling One: Yes. Taxpayer’s Level 1, Level 2, and Level 3 services are taxable as data processing services.

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). Taxable services include data processing services. Section 151.0101(a)(12) (Taxable Services).

Data processing services include data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation. Section 151.0035(a)(1) (Data Processing Service).

Rule 3.330(a)(1) (Date Processing Services) provides that data processing includes word processing and payroll and business accounting data production. Examples of taxable data processing services include preparing payroll checks, filing payroll tax returns, and completing W-2 forms. Rule 3.330(b)(1). Examples of services that are not taxable data processing services include the preparation of financial statements in accordance with generally accepted accounting principles and the preparation of federal income tax or state sales tax returns.

Taxpayer’s Level 1 and Level 2 services include testing files received from employers within the Federal Portal to determine whether the information will meet federal requirements. Taxpayer compiles and stores employer data submitted to Taxpayer’s system. Taxpayer also converts data files to the appropriate type for submission, which is data manipulation. These activities fall under the definition of data processing under Section 151.0035(a)(1) and Rule 3.300(a)(1). Therefore, Taxpayer’s Level 1 and Level 2 services are taxable data processing services.

For the Level 3 service, employer data is uploaded and stored on Taxpayer’s system. Taxpayer extrapolates information from employers supporting documents to generate the required Data Files. These activities involve the storage, manipulation, and compilation of data in order for Taxpayer to generate the required RxDC report.

While the compliance team includes an attorney and CPA, the Agreement states that Taxpayer is not acting in the capacity of an attorney. Additionally, the compliance team merely assists the employer with compiling the proper information into the RxDC report.

The Agreement does not indicate that the CPA is applying the knowledge of an accounting professional such that the service would be excluded from the definition of data processing services. Taxpayer’s service is more similar to the data processing examples of filing of payroll tax returns or preparing W-2 forms in Rule 3.330(b)(1). Therefore, the Level 3 service is a taxable data processing service.

Section 151.351 (Information Services and Data Processing Services) provides a 20 percent exemption for data processing services. Taxpayer is responsible for collecting and remitting Texas sales and use tax on 80 percent of the amount charged for its Level 1, Level 2, and Level 3 services.

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. 20240514143135.

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.