Is a CPA's 'write-up' work of entering, maintaining, and retrieving payroll-check data taxable as data processing in Texas?

Subject

Write — Up Services — Entering/Maintaining/Retrieving Information From Payroll Checks

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1267B12

Plain-English Summary

A CPA wrote to the Comptroller asking whether "write up" services provided to clients were taxable. The CPA explained that the client computes and writes his own checks, including payroll checks — the CPA does not compute the payroll checks. Instead, after providing certain coding (to make sure entries are posted to the proper accounts), the CPA enters the data from the checks into a computer, adds certain accruals and adjusting entries using CPA expertise, and then produces financial statements on which the CPA renders an opinion. The CPA also produces quarterly IRS and Texas Employment Commission (TEC) reports (941's and TEC reports) and, at year end, 940's, W-2's, and 1099's. The CPA noted that the payroll entries make up more than 5% of the total work, time-wise, and asked whether the entry time is taxable for sales tax purposes given that the payroll itself is computed by others and used primarily as data for financial statements.

The Comptroller's answer: yes, it's taxable. The letter states that data processing includes entering and retrieving information, maintaining information, and specifically includes payroll and business accounting, computerized data and information storage or manipulation. It gives examples of data processing: maintenance of records of employee work time, filing payroll tax returns, and preparing W-2 forms. Based on that, the letter concludes that the quarterly employee reports filed with the TEC and IRS are taxable as data processing services, and that "the entering, maintaining, and retrieving information from the payroll checks is also taxable data processing services."

The letter then addresses how to bill for a mix of taxable and nontaxable work: when the data processing (or other taxable services) portion of the billing to the customer is more than 5% of the total billing, the taxable services must be separately stated from any nontaxable unrelated services and taxed accordingly. If the billing does not separately state the taxable from the nontaxable portions, the total billing must be taxed.

What This Means For You

If you're a CPA or bookkeeper offering "write-up" services: Entering, maintaining, or retrieving payroll data on a computer is taxable data processing in the Comptroller's view — it doesn't matter that your client (not you) actually computes and issues the payroll checks. The taxable character attaches to the entering/maintaining/retrieving function itself.

Watch the 5% threshold on your invoices: If the taxable data-processing portion of what you bill a client is more than 5% of the total bill, you must separately state the taxable services from nontaxable services on the invoice. Fail to separately state them, and the letter says the entire billing becomes taxable — not just the data-processing piece.

Quarterly and annual payroll filings are treated as data processing too: The letter specifically calls out quarterly 941 and TEC reports as taxable data processing services, in addition to the payroll check data-entry work itself.

This is a facts-based letter ruling: The Comptroller notes the opinion is based on the facts presented and may change if the facts are different — so a CPA with a different service arrangement should not assume this letter automatically covers their situation.

Q&A

Q: Is entering payroll-check data into a computer taxable if the CPA didn't compute the payroll?
A: Yes. The letter states that "the entering, maintaining, and retrieving information from the payroll checks is also taxable data processing services," regardless of the fact that the client computes and writes the payroll checks.

Q: Are quarterly 941 and TEC filings considered taxable data processing?
A: Yes. The letter says "the quarterly employee reports filed with the TEC and IRS are taxable as data processing services."

Q: What counts as "data processing" under this letter?
A: The letter says data processing includes entering and retrieving information, maintaining information, and specifically includes payroll and business accounting, computerized data and information storage or manipulation — with examples including maintenance of records of employee work time, filing payroll tax returns, and preparing W-2 forms.

Q: How should a CPA bill a client whose engagement mixes taxable data processing with other nontaxable services?
A: Per the letter, if the taxable data processing (or other taxable services) portion of the billing is more than 5% of the total billing, the taxable services must be separately stated from any nontaxable unrelated services and taxed accordingly.

Q: What happens if the taxable and nontaxable services are not separately stated on the bill?
A: The letter states plainly: "If the billing does not separately state the taxable from nontaxable, the total billing must be taxed."

Original ruling text

October 25, 1993

Dear *:

I am responding to your letter questioning the taxability of the"write
up" services that you provide to your clients. I apologize for the delay.
Part of it was due to a delay occurring in the rerouting from the audit office
to our section.

You explained that your client computes and writes his own
checks,including payroll checks. You do not compute the payroll checks. After
you provide certain coding (to make sure that they are entered into the proper
accounts), you enter the data from the checks into your computer. You add
certain accruals and adjust entries that you feel necessary using your expertise
as a CPA. After these steps are taken,you produce certain financial statements
on which you render an opinion and produce quarterly IRS and TEC reports (941's
and TEC). At the end of the year, you produce 940's, W-2's, and 1099's.

You added that the payroll entries are more than 5% of the total
work, time wise. You asked:

"Inasmuch as the payroll is being computed by others and is being
used primarily as data for financial statements, is the entry time taxable
insofar as Sales Tax is concerned?"

Response: Data processing includes entering and retrieving information,
maintaining information and specifically includes payroll and business
accounting, computerized data and information storage or manipulation. Examples
of data processing include maintenance of records of employee work time, filing
payroll tax returns, and preparing W-2 forms. The quarterly employee reports
filed with the TEC and IRS are taxable as data processing services. The
entering,maintaining, and retrieving information from the payroll checks is also
taxable data processing services.

When the data processing (or other taxable services) portion of
the billing to your customer is more than 5% of the total billing, then the
taxable services must be separately stated from any nontaxable unrelated
services and taxed accordingly. If the billing does not separately state the
taxable from nontaxable, the total billing must be taxed.

This opinion is based upon the facts presented. If there are different or
additional facts, this opinion may change.

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9308195L.4 and/or 9308195L