Are engineering consulting, project management, and phone technical-support charges taxable when a Texas company also sells and installs the computer equipment involved?

Plain-English summary

A computer technology deployment business, which also sold and installed computer equipment and cabling, asked the Comptroller three questions by e-mail: are its project engineering consulting services taxable, are its project management services taxable, and is phone-based technical support for Texas-located equipment taxable when the help desk answering the call sits in another state.

On consulting, the Comptroller explained the general rule: consulting services aren't taxable unless connected to the sale of taxable items, and engineering consulting is presumed connected — and therefore taxable as part of the sales price — when the consultant is also the seller of the equipment/installation being sold, even if the consulting charge is stated separately. But a recent Texas appellate decision, Carole Keeton Rylander... v. San Antonio SMSA Limited Partnership (with a companion Dallas SMSA case), held that when a mixed transaction is "readily separable" into two elements of equal value, each element must be analyzed as its own transaction for tax purposes. Applying that case, the letter sets out a three-part test for when engineering consulting is genuinely "unrelated" (and thus nontaxable): (1) the consulting is offered on a stand-alone basis and isn't required with the equipment purchase, (2) the equipment's price doesn't change based on whether the buyer gets the consulting from this company or a different vendor, and (3) the consulting is also sold independent of any sale, and performed outside a sales situation.

On project management, the letter draws the same line from the other direction: separately stated charges for general business consulting — management consulting, business issue identification, policy decisions, project management, public relations, and tax consulting — are nontaxable as long as they're unconnected to the software or equipment being sold. Finally, telephone technical support answering questions about computer hardware physically located in Texas is taxable, full stop, regardless of where the company's help desk itself is located.

What this means for you

IT deployment, systems integration, and equipment resale businesses

If you sell and install computer equipment AND offer engineering consulting, expect the consulting to be presumed taxable as part of the equipment sale — even billed separately — unless you can show all three SMSA stand-alone factors: the consulting is offered independently, doesn't affect the equipment's price, and is genuinely sold and performed apart from any sale situation.

Businesses offering general management or project-management consulting alongside tech sales

Truly unrelated consulting — general business advice, policy decisions, public relations, tax consulting, project management not tied to the software/equipment — stays nontaxable if separately stated and disconnected from the taxable sale.

Companies with out-of-state help desks supporting Texas equipment

Location of the help desk doesn't matter. If the equipment being supported is in Texas, the phone technical support charge is taxable.

Common questions

Q: Is engineering consulting taxable if I also sell the equipment?
A: It's presumed taxable, even if separately stated, unless it passes the three-part San Antonio SMSA stand-alone test: independently offered, price-neutral to the equipment, and sold/performed apart from any sale situation.

Q: What kinds of consulting stay nontaxable?
A: General business consulting unconnected to a taxable sale — management consulting, business issue identification, policy decisions, project management, public relations, tax consulting — when separately stated.

Q: Is phone tech support for computer hardware taxable?
A: Yes, if the equipment is located in Texas, regardless of where the support desk answering the call is located.

Q: Can any similar IT business rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts against the SMSA test with a tax professional.

Citations and references

Case law:

• Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas, and John Cornyn, Attorney General of the State of Texas v. San Antonio SMSA Limited Partnership, and the companion Dallas SMSA case (readily-separable mixed-transaction 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/200009737L

Original ruling text

September 28, 2000

From: Gilbert Zamora

To: "**" <**>

Subject: Sales tax

Thank you for your e-mail inquiry requesting answers to the following
questions:

Nature of business - computer technology deployment including project
engineering consulting services related to the sale and/or installation of
computer equipment and cabling.

1. Are project engineering consulting services taxable?

Response: As a general rule, consulting services are not taxable unless they
are connected to the sale of taxable items. Engineering consulting services are
presumed to be connected to the sale and/or installation of computer equipment
and cabling. when the consultant is also the seller of the taxable sale and/or
installation of computer equipment and cabling.

The related consulting service remains a part of the sales price of the taxable
sale and/or installation of computer equipment and cabling sold, even if the
charge is separately stated.

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 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.

2. Are project management services taxable?

Response: Unrelated consulting services which are the expert or professional
opinions of the consultant are not taxable when they are separately stated and
not connected in any way to the sale of a taxable item. For example, separately
stated charges for general business consulting or professional services, such
as management consulting, business issue identification and policy decisions,
project management, public relations and tax consulting which are not related
to the software being sold would be considered nontaxable consulting services.

3. Are charges for providing phone assistance taxable for computer hardware
   operations questions from a customer located in Texas to our help desk in
   another state?

Response: Telephone technical support for computer equipment located in Texas
is taxable. A complete set of rules, along with the text of the Tax Code, and
a wealth of other information are available through our website at
through the "Texas Taxes" window.

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, You may e-mail our tax help section at .
You may also 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.

Gilbert Zamora

Tax Policy Division

On Wed, 20 Sep 2000 12:01:28 -0400 "**" <**> wrote:

Please provide us with answers to the following questions:

Nature of business - computer technology deployment including project
engineering consulting services related to the sale and/or installation of
computer equipment and cabling.

1. Are project engineering consulting services taxable?
2. Are project management services taxable?
3. Are charges for providing phone assistance taxable for computer hardware
   operations questions from a customer located in Texas to our help desk in
   another state?

Thank you for your assistance.

** <**>
** phone
** fax