If a Texas seller delivers equipment to a Texas customer (who then ships it out of state) and later sells maintenance contracts on that equipment, is Texas tax due on the maintenance charges even though the equipment is located elsewhere?

Plain-English summary

A Texas seller ("FJ") sells hand-held computers to a customer ("FL"), delivering them in Texas and collecting full sales tax on the equipment. FL then ships the units to various locations around the US and world. FJ separately charges FL an annual maintenance fee for these units, and the invoices show the sale as happening in Texas even though the units themselves end up scattered globally. FJ asked whether Texas tax is due on these maintenance charges given where the equipment actually sits.

The Comptroller's answer breaks into scenarios:

1. Original maintenance contract, sold at the same time as the equipment and delivered to FL in Texas: Texas tax is due, and it doesn't matter where the maintenance work is later performed.
2. Subsequent maintenance contract purchases/renewals on equipment already located out of state: NOT taxable, if the units are maintained at out-of-state locations, or are shipped directly to FJ from out of state and FJ ships them directly back out of state after service (i.e., the units never pass back through FL's hands in Texas).
3. Subsequent purchases/renewals where the customer routes units through Texas: Texas tax IS due if the contract calls for units to be shipped to FL in Texas and FL then delivers them to FJ for maintenance, or if FL picks the units up from FJ in Texas after service.
4. Mixed fleets: if FL or FJ can document the total units purchased and which are located in Texas versus out of state, the parties may allocate subsequent maintenance charges based on the percentage of units actually in Texas.

What this means for you

Sellers of equipment with attached maintenance contracts, especially equipment that gets shipped out of state after purchase

The original maintenance contract bundled with an in-Texas equipment sale is always taxable here, no matter where the maintenance is later performed. But renewal maintenance contracts on equipment that's already relocated out of state can escape Texas tax — as long as your customer doesn't route the units back through Texas as part of the maintenance logistics. Track shipping patterns closely, because that routing detail (not just where the equipment physically lives) determines taxability.

Businesses with equipment fleets split between Texas and other states

If you can document unit counts and locations, you can allocate maintenance contract charges proportionally between taxable (in-Texas) and nontaxable (out-of-state) units rather than treating the whole contract as all-or-nothing.

Accountants and tax professionals

This letter is a useful sourcing framework for maintenance/service contracts on mobile equipment: the taxability of renewal maintenance contracts turns on the physical shipping path (does the unit re-enter Texas as part of the service transaction?), not merely on where the underlying equipment happens to be stationed.

Common questions

Q: Is the original maintenance contract taxable if the equipment is delivered and taxed in Texas but later shipped elsewhere?
A: Yes, Texas tax is due on that original contract regardless of where the maintenance is later performed.

Q: What about renewal maintenance contracts on equipment that's already out of state?
A: Not taxable, as long as the units are maintained out of state or shipped directly to/from the seller without passing back through the Texas customer.

Q: What if the customer ships the unit back to Texas for the seller to service it?
A: Then Texas tax is due on that maintenance contract, because the transaction routes through Texas.

Q: Can we split the tax based on how many units are in Texas versus elsewhere?
A: Yes, if you can document the total units purchased and their locations, you can allocate the subsequent maintenance charges proportionally.

Q: Can I rely on this letter for my own maintenance contract structure?
A: No. This opinion is based on the facts presented; other facts, though similar, may provide a different result.

Citations and references

No Texas Tax Code section or administrative rule is cited by number in the original letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200004198L

Original ruling text

Date: April 17, 2000

From: Gilbert Zamora
To: "Dickey, Clyde"
Subject: Maintenance on OOS items

Thank you for your e-mail inquiry.

Facts: ** (TX) ("FJ") sells hand-held computers to ****
("FL").

Delivery takes place in TX and full tax is paid. They are then shipped to
various locations around the world. FJ subsequently maintains these units and
charges an annual maintenance fee. The invoice reads sale by FJ to customer FL
in Texas. The units are actually located all over the US and world. There is
no documentation that identifies where they are with the maintenance sale. The
units are shipped back to Texas for service and returned to locations all over.

Question:

Is Texas tax due on original maintenance contract? In other words, did FL take
possession of the maintenance in Texas? If so, would it matter if item were
shipped to an OOS FJ location for service?

Response:

1. Texas tax is due on the original maintenance contract if sold at the same
   time that the equipment is purchased and delivered to FL in Texas. Where the
   maintenance is performed is not relevant.

2. Subsequent purchases/renewals of maintenance contracts on equipment located
   out of state would not be taxable if the units are maintained at locations out
   of state or are shipped directly to FJ from out of state and FJ then ships the
   units directly out of state after maintenance or repairs are performed.

3. If the subsequent purchases/renewals of maintenance contracts call for the
   units to be shipped to FL in Texas and FL then delivers the units to FJ for
   maintenance, or if FL picks up the units from FJ in Texas after maintenance or
   repairs are performed, Texas tax will be due on the maintenance contracts.

4. For equipment qualifying under (2) above, if FL or FJ can provide
   documentation of the total units purchased and the units located in Texas or
   out of Texas, you may make an allocation of the subsequent purchases/renewals
   of maintenance contracts on these units based on a percentage of the units
   located in Texas. This opinion is based on the facts presented. Other facts
   though similar may provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at: