If manufacturing software qualifies for Texas's manufacturing exemption, does that exemption also cover the software's installation, training, and maintenance/technical-support charges?

Plain-English summary

A software company whose product is used by electronics manufacturers to manufacture and test printed circuit boards (referenced in the subject line as SCADA-type industrial control/monitoring software) asked whether its software qualifies for Texas's manufacturing exemption, and if so, whether that exemption also covers installation, training, and maintenance/technical-support charges billed alongside it.

The Comptroller confirmed the software itself can qualify: Tex. Tax Code § 151.318(a)(2) exempts tangible personal property (including software) directly used or consumed by a manufacturer exclusively to produce tangible personal property that will be sold, and § 151.318(a)(8) separately exempts property used to test items the manufacturer sells.

On the ancillary charges, the letter walks through Texas's broad sales-price definition -- which includes the total amount charged without deducting for materials, labor, transportation, or installation and maintenance -- meaning those charges normally ride along as part of a taxable sales price. But § 151.3111 creates a specific exemption for maintenance services performed on property that itself qualifies for the manufacturing exemption, so a seller can accept a properly completed exemption certificate covering both the qualifying software/equipment itself and its maintenance. Installation is treated the same way when it's part of exempt qualifying equipment. Training, by contrast, is simply not taxable at all -- it's treated as a nontaxable service in its own right, not something that needs a special exemption carve-out.

What this means for you

Software companies selling to manufacturers

If your software is used directly and exclusively in a customer's production or testing of goods for sale, it can qualify for the manufacturing exemption -- and you can extend that exemption to your installation and maintenance/support charges too, by accepting a properly completed exemption certificate from the manufacturer customer, rather than having to separately justify each line item.

Manufacturers buying qualifying software or equipment

Training charges from your vendor are not taxable regardless of the manufacturing exemption question -- don't pay tax on training line items. For installation and maintenance tied to genuinely qualifying equipment, provide your vendor a proper exemption certificate to keep those charges tax-free too.

Accountants structuring software/equipment vendor contracts with manufacturers

Break out training as its own line item where practical -- it's nontaxable on its own terms, while installation/maintenance charges need the exemption certificate mechanism (§ 151.3111) to stay tax-free, since they'd otherwise ride along with a taxable sales price under Texas's broad sales-price definition.

Common questions

Q: Is manufacturing software automatically exempt from Texas sales tax?
A: It can be, if it's directly used or consumed by the manufacturer exclusively to produce or test tangible personal property being sold, under § 151.318(a)(2) and (a)(8).

Q: Are installation and maintenance charges on exempt manufacturing software also exempt?
A: Yes, if the underlying software/equipment qualifies for the manufacturing exemption -- § 151.3111 extends the exemption to maintenance (and installation is treated similarly), via a properly completed exemption certificate.

Q: Is training on manufacturing software taxable?
A: No -- training charges are not taxable at all, independent of whether the software itself qualifies for the manufacturing exemption.

Q: Does this letter bind the Comptroller for my company's software?
A: No -- this is an informal 2001 letter addressing one taxpayer's specific software and use case, not a modern Private Letter Ruling or General Information Letter, and it cannot be relied on by anyone else.

Citations and references

Statutes:

• Tex. Tax Code § 151.318(a)(2) (manufacturing exemption -- TPP/software used exclusively in production of TPP for sale)
• Tex. Tax Code § 151.318(a)(8) (manufacturing exemption -- TPP used in testing property to be sold)
• Tex. Tax Code § 151.3111 (exemption for maintenance services on qualifying exempt manufacturing property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200109475L

Original ruling text

September 13, 2001

Dear **:

You state you are a software company whose software is used by electronics
manufacturers in the process of manufacturing and testing printed circuit
boards. You asked if your software is exempt from Texas sales and use tax
because it is used in the manufacturing process. If so, does the exemption
extend to installation and training services as well as maintenance (technical
support) or are any or all of these services taxable.

Response: Texas Tax Code Section 151.318(a)(2) exempts tangible personal
property (software) directly used or consumed by a manufacturer exclusively in
the production of tangible personal property that will be sold. Section
151.318(a)(8) exempts tangible personal property used by the manufacturer in
testing property they sell. The sales price is defined as total amount for
which a taxable item is sold, leased, or rented, valued in money, without a
deduction for the cost of:

(1) the taxable item sold, leased, or rented;

(2) the materials used, labor or service employed, interest, losses, or other
expenses;

(3) the transportation or installation of tangible personal property; or

(4) transportation incident to the performance of a taxable service.

The sales price includes the price for installation and maintenance of the
software. The charge for training is not taxable. The manufacturer may claim
the manufacturing exemption for qualifying equipment on the sales price of the
item. Section 151.3111 exempts services including maintenance that are
performed on tangible personal property (including software) that qualifies for
the exemption. The seller may accept a properly completed exemption
certificate on qualifying manufacturing equipment and on maintenance of
qualifying manufacturing equipment.

This opinion is rendered based on the facts presented. Other facts, though
similar, may yield different results.

You may access the sales tax rules online and a wealth of other information
through our Window on State Government web site at www.window.state.tx.us.
Click on Sales Tax under Quick Links for the rules and then scroll and click on
State Sales Tax under Current Tax Rules.

To view or download the Tax Code, please go to our web site address at:
http://www.capitol.state.tx.us/statutes/ta/ta015100toc.html and scroll to the
specific code section.

If you have any questions or require additional information, you may submit
inquiries to our tax help e-mail address at , call me
at 1-800-531-5441, extension 6-5809 or write to Tax Policy Division, Post
Office Box 13528, Austin, Texas 78711-3528.

Sincerely,

Emilio S. Lerma
Tax Policy Division