A company shifting from pure consulting into internet services asks three things: (1) is ASP programming (which generates HTML) taxable contract programming or a taxable data processing service? (2) is building a webpage using client-supplied graphics taxable? (3) can consulting and custom programming stay nontaxable if separately invoiced from taxable website development?

Plain-English summary

A company that had historically provided nontaxable systems programming and consulting services was expanding into internet-related services and asked the Comptroller three questions about how the new offerings would be taxed.

1. Is ASP programming (which generates HTML pages) taxable?
Contract programming itself is not taxable — that's true when either (a) custom software is created for a specific client who gets exclusive rights to it, or (b) software not sold by the person modifying it is modified for a client. Creating a program from scratch (e.g., in JAVA) for a client who receives exclusive rights is likewise nontaxable. But HTML programming is a taxable data processing service when the client benefits from it in Texas, and under Tax Code § 151.007 the total taxable price includes related charges that are part of a sale — so ASP programming embedded as part of an HTML document is swept into the taxable data processing service. (Effective October 1, 1999, 20% of data processing charges are exempt.)

2. Is building a webpage using client-supplied graphics taxable?
Yes — creating a webpage that incorporates graphic art is taxable data processing, taxed to the extent the benefit is received in Texas (per Rule 3.330(e) and (f)).

3. Can consulting/programming stay nontaxable if separately stated from taxable website development?
Website development (including HTML creation) is taxable data processing, as discussed above. But separately stated consulting and programming CAN escape tax if they satisfy the "readily separable" mixed-transaction test set out in a then-recent Texas appellate decision (the SMSA case, involving San Antonio and Dallas SMSA limited partnerships). Under that test, the consulting is treated as a genuinely separate, nontaxable transaction only if it is:

• Offered on a stand-alone basis, not required as a condition of buying the taxable item;
• Priced independently — the taxable item's price doesn't change based on whether the client buys the service from this vendor or someone else; and
• Available outside a sales situation — offered and performed independent of the taxable sale.

If those conditions are met, the "real object" of the transaction is understood to be two distinct things (the advice, and the taxable service), each with its own identifiable cost, and the consulting charge stays nontaxable when separately stated.

What this means for you

Web developers and IT consultants adding internet services to a consulting practice

Don't assume "contract programming" status automatically covers everything you do once your work touches web pages — creating HTML documents (including via ASP), and building pages with graphics, are taxable data processing regardless of the "contract programming" label. Custom application development that transfers exclusive rights to the client can still be nontaxable, but web-page creation itself generally isn't.

Businesses bundling consulting with website development

If you want your consulting fee to stay untaxed, structure it to be genuinely separable: offer it on a stand-alone basis, price it independently of the taxable web-development work, and make sure it's available (and sometimes actually purchased) outside the context of a taxable sale. Merely itemizing it on the same invoice is not enough on its own — it has to reflect real, independent transactions.

Accountants and tax professionals

This letter is a useful worked application of the SMSA "readily separable" mixed-transaction doctrine to a software/web-development fact pattern, and a clean explanation of how § 151.007 sweeps embedded services (like ASP-generated HTML) into a taxable data processing charge even when the underlying programming would otherwise be nontaxable contract programming.

Common questions

Q: Is ASP programming taxable in Texas?
A: When it generates HTML documents, yes — it's swept into the taxable data processing service, even though contract programming standing alone is generally not taxable.

Q: Is building a webpage with a client's own graphics taxable?
A: Yes, per this letter — creating a webpage incorporating graphic art is taxable data processing, taxed to the extent the benefit is in Texas.

Q: How can consulting fees stay nontaxable when bundled with a taxable web-development project?
A: Only if they meet the "readily separable" test: offered stand-alone, priced independently of the taxable item, and available outside a sales situation — not merely itemized on the same invoice.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.007 (taxable sales price includes related charges that are part of the sale)
• 34 Tex. Admin. Code Rule 3.330(e), (f) (referenced for taxation of data processing benefit received in Texas)

Case law:

• Carole Keeton Rylander, Comptroller of Public Accounts v. San Antonio SMSA Limited Partnership & Dallas SMSA Limited Partnership (mixed-transaction "readily separable" test)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200007501L

Original ruling text

July 10, 2000

Dear **:

Thank you for your letter to Mr. Karey Barton, concerning the Texas sales and
use tax implications of the business transactions described below. Mr. Barton
is no longer an employee of this agency.

Background

Company A has historically been in the business of providing non-taxable
systems programming and consulting services. However, Company A's business
model is changing, and the company plans to provide several new
internet-related services. Company A is therefore requesting a formal written
response from the State Comptroller with respect to the following specific
questions:

Rulings Requested

1. ASP programming is a type of contract programming and it is our
   understanding that contract programming is not a taxable service. However, by
   definition, ASP programming generates HTML documents for web pages. Is ASP
   programming a taxable service?

Response: You are correct, contract programming is not taxed. Contract
programming occurs when either (1) a computer program is created for a specific
client and exclusive rights of the program are transferred to the client or (2)
software not sold by the person providing the modification is modified.
Creating a computer program (using a programming language such as JAVA) from
scratch for a customer that who will be given the exclusive rights to the
program is also not taxable.

For state sales and use tax purposes, HTML programming is a data processing
service and is taxable in Texas when your customer derives a benefit from the
service in Texas.

Under Texas Tax Code 151.007, the total amount for which a taxable item is
sold, leased, or rented includes all related charges including a service that
is a part of the sale.

Accordingly, ASP programming that is embedded as part of an HTML document would
be considered part of the taxable data processing service.

Effective October 1, 1999, 20% of the charge for data processing services is
exempted from sales tax.

2. Company A's client creates and provides graphics to Company A. Company A
   then creates a web page using the graphics provided by the client. Is the
   service provided by Company A taxable?

Response: Yes. The creation of a web page incorporating graphic art is
considered taxable data processing. Tax is due to the extent benefit is
received in Texas. See Rule 3.330 (e) and (f).

3. Company A enters into a contract with a client to provide consulting,
   customized programming (application development), and website development
   services. The website development services will include the creation of HTML
   documents. Are the consulting and programming services nontaxable as long as
   they are specifically identified and separately stated on the client invoice?

Response: Website development, including the creation of HTML documents is
taxable data processing as discussed in response to question 1.

In a recent court decision, Carole Keeton Rylander, Comptroller of Public
Accounts of the State of Texas; and John Cornyn, Attorney General of the State
of Texas, Appellants v. San Antonio SMSA Limited Partnership, Appellee & Carole
Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and John
Cornyn, Attorney General of the State of Texas, Appellants v. Dallas SMSA
Limited Partnership, the court found that when a mixed transaction is "readily
separable" into two elements of equal value the elements must be analyzed as
separate transactions for tax purposes.

Following the ruling in this court decision, your client's consultation
services will be considered unrelated if:

• they are provided on a "stand alone basis" and not required with the purchase
  of the taxable item,

• the price of the taxable item is not affected by acquiring the services from
  a different vendor, and

• the services are also offered independent of sale and are also performed
  outside of a sales situation.

When the purchase of a nontaxable service is combined with the purchase of
taxable property, but each transaction is independently desired and
independently provided, there is a mixed transaction in which neither element
is "incident" to the other. The real object of the transaction was both the
advice obtained through the consulting services and the resulting taxable
service that was needed. The costs of the two elements of the mixed transaction
must be distinct and identifiable. If your client's consultation services meet
this criteria, they will not be taxable when separately stated from the charge
for taxable services.

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:
[email protected]

Sincerely,

Gilbert Zamora
Tax Policy Division