Texas excludes payment processing services from sales and use tax

In detail

Background

Texas statute imposes sales and use tax on any service that meets the definition of a ‘data processing service.’

New exclusion

S.B. 153 provides that effective October 1, 2021 a ‘data processing service’ does not include:

• services exclusively to encrypt electronic payment information for acceptance onto a payment card network to comply with standards set by the Payment Card Industry Security Standards Council; or
• settling of an electronic payment transaction by:
  • a downstream payment processor or point of sale payment processor that routes electronic payment information to a federally insured financial institution or a payment card network;
  • a person who is engaged in the business of money transmission and required to obtain a license under Section 151.302(a);
  • a federally insured financial institution that is organized under the laws of Texas, another state, or the United States, or an affiliate of the institution;
  • a person who has entered into a sponsorship agreement with a federally insured financial institution for the purpose of settling the financial institution's electronic payment transactions through a payment card network; or
  • a payment card network that allows a person to accept a specific brand of debit or credit card by routing information and data to settle an electronic payment transaction.

Observation: According to the S.B. 153 statement of intent, the comptroller historically has “excluded merchant credit/debit card processing services from the definition of ‘data processing service,’ resulting in these services being considered a non-taxable service or occurrence. However, stakeholders have reported that during recent audits the comptroller has called into question the exclusion of merchant credit/debit card processing services from the definition of data processing service."

‘Settling of an electronic payment transaction’ defined

‘Settling of an electronic payment transaction’ is defined as “the authorization, clearing, or funding of a payment made by credit card, debit card, gift card, stored value card, electronic check, virtual currency, loyalty program currency such as points or miles, or a similar method. The term does not include charges by a marketplace provider.”

Observation: Texas Section 151.0242 provides that a ‘marketplace provider’ means a person who owns or operates a marketplace and directly or indirectly processes sales or payments for marketplace sellers. S.B. 153 clarifies that payment processing transactions excluded from the data processing service definition do not include charges provided by marketplace providers.