Are an IT vendor's PC deployment, maintenance, and asset-management services taxable in Texas, or do they qualify as nontaxable 'services by employees'?

Plain-English summary

The Texas Comptroller ruled that an IT vendor's full range of PC deployment and support services — pre-deployment configuration, on-site installation, break-fix repair, move/add/change work, asset-management, and reporting — are all taxable in Texas, because they were bundled into a hardware-and-software sales contract, and do NOT qualify for the "services by employees" exemption, even though the work is performed by the vendor's own on-site staff at client locations.

The vendor's "Outsourcing PC Domain Services" contract combined selling computer hardware/software with a suite of related services: configuring machines before shipment, installing and connecting them at client sites, fixing hardware/software problems, moving equipment, tracking assets, and generating reports. Because computer hardware and software are taxable tangible personal property, and Texas taxes labor for installing, maintaining, or repairing that hardware/software (34 Tex. Admin. Code § 3.308(b)-(c)), each of these service categories was independently taxable as connected to the underlying equipment sale.

The vendor argued for the "services by employees" exemption (Section 151.3503), which shields services an employee performs for their own employer, an employee of a temp agency, or a covered employee of a state-licensed professional employer organization (PEO). The Comptroller rejected this: the vendor's staff worked for the client, not for the vendor itself, and nothing showed the vendor was a licensed temp agency or PEO under Texas Labor Code Chapter 91 — so the exemption didn't apply, and the services stayed taxable.

What this means for you

IT outsourcing and managed-service providers

Bundling deployment, break-fix, and asset-management services into a hardware/software sales contract makes those services taxable, even if performed by your own on-site staff embedded at the client's location. The "services by employees" exemption is narrow — it requires your workers to be employed by the client (as a temp/PEO placement), not simply performing work at the client's site under your contract.

Staffing agencies and professional employer organizations (PEOs)

The employee-services exemption only protects genuine temp-staffing or licensed-PEO arrangements under Texas Labor Code Chapter 91. If you're not a licensed PEO or temp agency, don't assume placing your staff at a client site converts your services into exempt "employee services."

Accountants and tax professionals

The controlling authorities are Tex. Tax Code § 151.3503 (narrow employee-services exemption) and 34 Tex. Admin. Code § 3.308 (taxable computer hardware/software services), applied consistent with STAR Accession No. 200305893L (2003) on services connected to hardware sales.

Common questions

Q: If my company's own employees perform IT support at a client's office, is that service automatically exempt as "employee services"?
A: No. The exemption applies only when the workers are employees of the client itself (directly, through a temp agency, or through a licensed PEO) — not when they remain your own employees performing a service under your contract with the client.

Q: Does bundling services with a hardware/software sale make them taxable even if they'd be nontaxable standalone?
A: In this ruling, yes — because the services (installation, maintenance, asset tracking, reporting) were tied to the sale of taxable computer hardware and software, they were all taxable regardless of whether they were separately priced.

Q: Can another IT services company rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting taxpayer and the specific facts presented, and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.3503 (Services by Employees, exemption and its limits)
• Tex. Tax Code §§ 151.009, 151.010, 151.051, 151.101 (tangible personal property; taxable item; sales/use tax imposed)
• 34 Tex. Admin. Code § 3.308(b), (c) (Computers—Hardware, Computer Programs, Services, and Sales)
• Tex. Lab. Code ch. 91 (Professional Employer Organizations)
• STAR Accession No. 200305893L (May 14, 2003) (services connected to hardware sales)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201806014L

Original ruling text

June 21, 2018

RE: Private Letter Ruling No. 2017010181

Dear **:

We issue this private letter ruling in accordance with Rule 3.1 (Private Letter Rulings and General Information Letters).1 We are responding to your request dated Jul. 6, 2017, and your supplemental emails received Jul. 24, 2017, and Sept. 19, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10 (Taxpayer Bill of Rights).

You requested guidance on the taxability of providing outsourced IT-related services.

Facts Presented

** (Taxpayer), contracts with clients to sell computer hardware and software and to provide outsourced IT-related services.

Taxpayer’s request relates to a contract formally titled “Outsourcing PC Domain Services.” Taxpayer groups its services into the following six categories:

(1) PC pre-deployment;

(2) PC deployment and installation;

(3) Break-fix and desk-side services;

(4) Move, add, change (MAC) services;

(5) Asset management; and

(6) Reporting services.

PC pre-deployment services include: providing a secure datacenter to host client- provided equipment used before deploying the computer hardware and software to customer locations; maintaining software and hardware updates and additions; assembling the hardware and applying client-provided asset tags; loading software onto the hardware and setting basic network parameters; completing standardized quality assurance tests; and arranging for shipping the equipment to client locations.

PC deployment and installation services include: shipping equipment to the client location; receiving and unpacking the equipment at the client’s location; coordinating with each user or manager; connecting the hardware to the client’s local network; loading software not loaded during pre-deployment activities; connecting the hardware at each user’s desk; conducting a brief user orientation; and recovering retired equipment and coordinating shipping from the client’s location.

Break-fix and desk-side services include: providing a full-time, on-site field engineer, telecom analyst, and program manager at the client’s major locations (CITY1, TX; CITY2, STATE 2, CITY3, STATE 3 AND CITY4, STATE 4; resolving hardware and software incidents at the client’s location; coordinating with the field engineer for client support when issues require technician intervention; performing deployments according to client processes; and performing ad hoc activities as requested.

The MAC services include moving computer hardware within the client’s location and performing upgrades to hardware and related components using client-provided parts.

Asset management services include maintaining the client’s computer hardware and software asset information using the client’s asset-management database and other tools hosted on client’s network or Intranet.

Reporting services include providing reports on services Taxpayer provides the client on a regularly scheduled basis. It also includes providing ad hoc reports as requested.

The “Outsourcing PC Domain Services” contract lists a specific price-per-seat for certain brands of hardware and software (e.g., eMachine, Optifacts). The contract also lists a specific price-per-seat for all other hardware and software. Taxpayer buys the computer hardware and software directly from manufacturers. The manufacturers ship the equipment to Taxpayer’s central location where Taxpayer performs the pre-deployment services described above. Taxpayer then ships and installs the pre-configured equipment to the client’s locations. Taxpayer also sets up other equipment at the client’s major locations in Texas, STATE 2, STATE 3, and STATE 4, then ships it to the client’s users in other minor locations.

Taxpayer currently collects and remits Texas sales tax on its sales to clients in Texas.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Are Taxpayer’s services subject to Texas sales and use tax, or are they nontaxable employee services under Section 151.3503 (Services by Employees)?

Ruling: Taxpayer’s services are subject to Texas sales tax to the extent they are performed at client locations in Texas because Taxpayer provides its services in connection with its sale of computer software and hardware. Taxpayer’s services are not exempt services by employees under Section 151.3503.

Analysis:

Section 151.051 (Sales Tax Imposed) imposes a sales tax on each sale of a taxable item in Texas. Section 151.101 (Use Tax Imposed) imposes a use tax on the purchase of a taxable item for storage, use, or consumption in this state. The term taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). A computer program (i.e., software) is considered tangible personal property. Section 151.009 (“Tangible Personal Property”).

Sales tax is due on the sale, lease, or rental of computer hardware, including central processing units and all peripheral equipment, parts, and supplies. Rule 3.308(b) (Computers--Hardware, Computer Programs, Services, and Sales). Sales tax is also due on charges for labor or services rendered in installing or applying computer hardware and on charges for labor or services rendered in remodeling, repairing, maintaining, or restoring computer hardware. Rule 3.308(b)(3), (4).

Sales tax is due on the sale, lease or license of a computer program. Rule 3.308(c)(1). Charges for the installation of the program are taxable whether or not separately stated. Rule 3.308(c)(1)(B). Charges for computer program maintenance by the person who sold the computer program are taxable. Rule 3.308(c)(2). Maintenance means providing error correction, improvements, or technical support. Id. However, charges to create a program or modify an existing program not sold by the person doing the modification and separately stated charges for instruction on the software’s use are not taxable. Rule 3.308(c)(3), (4).

Taxpayer’s PC pre-deployment, PC deployment and installation, break-fix, MAC, asset management, and reporting services are subject to Texas sales tax to the extent they are performed for clients in Texas. The “Outsourcing PC Domain Services” contract includes the sale of computer programs and hardware, and Taxpayer’s services are related to these sales of software and hardware.

The PC pre-deployment services involve the loading of software sold by Taxpayer onto the computer hardware that will be deployed to the client’s locations. Taxpayer loads the software onto the hardware and sets basic network parameters before shipping the equipment to the client’s locations.

The PC deployment and installation services involve the installation of software and hardware sold by Taxpayer. Taxpayer connects the hardware to the client’s local network, loads additional software not loaded during pre-deployment activities, and connects the hardware at each user’s desk.

The break-fix and desk-side services involve resolving hardware and software incidents at the client’s location and coordinating with the on-site field engineer for client support when issues require technician intervention. These activities fit within the definition of maintenance as the term is used in Rule 3.308(b)(4) and (c)(2) (i.e., providing error correction, improvements, or technical support).

The MAC services involve moving and reinstalling, reassembling, or reconnecting the computer hardware Taxpayer sells. Charges for labor or services rendered in installing or applying computer hardware are taxable. Rule 3.308(b); see also STAR Accession No. 200305893L (May 14, 2003).

Taxpayer’s asset management and reporting services are taxable because they are service provided in connection with the sale of a taxable item. See STAR Accession No. 200305893L (May 14, 2003).

Taxpayers services under the “Outsourcing PC Domain Services” contract are not exempt services by an employee under Section 151.3503. The exemption only applies to services performed for an employer by its employee, by an employee of a temporary employment service, or by a covered employee of a professional employer organization licensed under Labor Code, Chapter 91 (Professional Employer Organizations). Taxpayer’s employees perform the services for Taxpayer’s client, not for Taxpayer, and Taxpayer’s employees are not employees of the client. Additionally there is no information to indicate that Taxpayer is a temporary employment service or a professional employer organization. Accordingly, Taxpayer’s services are not exempt services by employees under Section 151.3503.

The STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010181.

Sincerely,

Tax Policy Division – Indirect Taxes Texas

Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.