The characterization and taxability of “data processing” is a complex and hotly contested area. The definition of “data processing” was implemented in 1987, and has not been substantially updated. As all readers are aware, in that same time span the use of computers has evolved from being little more than an afterthought to being an essential part of life, and are the primary engine for both communications and business.
The disconnect between (i) the ever-changing landscape of computers and (ii) the stagnant definition of “data processing” services can create a host of problems when figuring sales and use tax. Let’s use Texas tax law as an example.
Definitions of “Data Processing Services”
Texas Tax Code § 151.0035 defines “data processing service” to include the following:
-word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation;
-the performance of a totalisator service with the use of computational equipment required by Subtitle A-1, Title 13, Occupations Code (Texas Racing Act); and
-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 other beneficiary of the service. 
This definition was originally implemented in 1987, but has not been substantially updated since then.  Comptroller Rule 3.330 defines “data processing services” to mean “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.”  Further, the Comptroller’s definition states that “data processing services” specifically include “word processing, payroll and business accounting, and computerized data and information storage or manipulation.” 
Impact on Various Industries
When the above definitions of “data processing services” were first implemented, computers were scarcely available to the public, and the vast majority of services were still performed without the use of computers. In turn, the taxability of those services was determined based on the service itself, rather than the use of a computer.
Fast forward to 2023, nearly 36 years later. Many of those same services are being performed with at least some computer use, which has prompted the Comptroller to assert that some or all of these services are taxable as “data processing services”. This is despite the fact that, as a general matter, the underlying services themselves have not substantially changed.
The aggressive treatment of “data processing services” has had, and will likely continue to have, an direct impact on many professional services, including the following:
Real estate and title-related services ;
Online management solutions ; and
Other “professional” services, such as marketing and advertising, that increasingly make use of computers to perform those services.
 Tex. Tax Code § 151.0035(a).
 Effective October 1 2021, the definition was updated via S.B. 153 to provide that data processing does not include certain services related to (i) medical dictation by a medical transcriptionist, (ii) services to encrypt electronic payment information onto a payment card network, and (iii) settling of specified electronic payment transactions. See Tex. Tax Code § 151.0035(b), S.B. 153. While unclear at this time, this may have an impact on the treatment of services which the Comptroller has previously attempted to categorize as taxable, such as online banking and bill pay services. See, e.g., Hegar v. CheckFree Services Corporation, 2016 WL 1576414 (Tex. App.—Houston [14th] 2016, no pet.).
 34 Tex. Admin. Code § 3.330(a)(1).
 See, e.g., Hegar v. Black, Mann, and Graham, L.L.P., 2022 WL 567853 (Tex. App.—Austin 2022, no pet.).
 See, e.g., Instill Corporation v. Hegar, 2019 WL 2308592 (Tex. App.—Austin 2019, pet. denied).