Is a subscription fee for accessing freely-licensed, company-branded open-source software (bundled with support services) taxable in Texas, even though the underlying open-source license itself is free?

Plain-English summary

A software company takes freely-licensed open-source code and packages it into its own branded, ready-to-run software. It doesn't charge for the underlying open-source license itself — anyone could get that for free — but customers can only actually download, access, and use the company's branded version by paying for a subscription. The subscription also bundles in support: bug fixes, enhancements, upgrades, and technical support. The company argued its subscription fee was really just payment for nontaxable support services, since the software license itself is free.

Texas rejected that argument. The company's branded software is still a "computer program" under Texas law regardless of its open-source origins, and Texas taxes the sale, lease, or license of a computer program. The key fact is that customers cannot get "use or access" to the software at all without buying a subscription — so the subscription fee is what's actually transferring possession of the software to the customer, which is enough to count as a taxable sale even though no separate license fee is charged. Once the software itself is taxable, the bundled support services (fixes, upgrades, maintenance) are automatically part of the same taxable sales price, because services provided in connection with a computer program sale are folded into that sale's tax base.

What this means for you

Companies distributing branded or modified open-source software

Charging nothing for the open-source license doesn't make your product nontaxable in Texas if you charge for the only practical way to access or use it (a subscription, download fee, or similar gate). The Comptroller looks at whether possession/access is effectively being sold, not just at what's labeled a "license fee."

Software-as-a-subscription businesses generally

Bundling software access together with support, maintenance, or upgrade services in one subscription price means the whole charge is taxable if the software component is taxable — there's no need to separately break out "software" from "support" once they're tied together in a single required-to-use-the-product subscription.

Accountants and tax professionals

This ruling is a useful precedent for the "constructive sale via required access" theory — even a $0 license fee doesn't defeat taxability when the fee actually gating use/access is paid elsewhere in the transaction. Rule 3.308(c)(1)(A)-(B) and STAR 201807007L are the controlling authorities tying software sales and bundled support together.

Common questions

Q: Does it matter that the underlying open-source code is free to anyone?
A: No. What matters is whether the taxpayer is effectively selling access to or possession of its own branded, compiled version — and here, that access is only available through a paid subscription.

Q: Are the support services (fixes, upgrades, maintenance) separately taxed?
A: No — they're not separately taxed because they're not separately priced. Since they're bundled into the same subscription fee as the taxable software, they're simply part of the total taxable sales price.

Q: Could the company avoid tax by separately pricing the software access from the support services?
A: The ruling doesn't test that scenario, but Texas's general rule (seen across multiple rulings in this corpus) is that separately stating nontaxable from taxable charges can sometimes preserve nontaxable treatment for the nontaxable piece — though software access itself would likely remain taxable regardless of how support is billed.

Q: Does this ruling apply to my open-source or subscription software business?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts and subscription structure. Different licensing or access models could be analyzed differently.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.009 (Tangible Personal Property, includes computer programs)
• Tex. Tax Code § 151.0031 (Computer Program, definition)
• Tex. Tax Code § 151.005(1) ("Sale" or "Purchase" — transfer of possession)
• Tex. Tax Code § 151.007(a)(2) ("Sales Price" — includes labor/service employed)
• 34 Tex. Admin. Code § 3.308(c)(1)(A), (c)(1)(B) (Computers — sale/license of computer program; bundled support services)
• STAR Accession No. 201807007L (July 11, 2018)
• Comptroller's Decision No. 101,769 (2011)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202008022L

Original ruling text

August 4, 2020

RE: Private Letter Ruling No. 20200225153410

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE: (1)] We are responding to your request dated Feb. 21, 2020, and additional information received via email on March 16 and March 23, 2020. Detrimental reliance relief is provided for this response in accordance with Rule 3.10, Taxpayer Bill of Rights. You requested guidance on the taxability of a subscription fee related to the sale of open source software.

Facts Presented

** (Taxpayer) offers a variety of open source software packages for sale. Open source software is licensed as approved by the COMPANY, which allows software to be freely used, modified and shared. There is no charge for open source software licensure.

Taxpayer takes open source software in the form of source code and creates machine-readable, executable files, with the Taxpayer’s branding and trademark—its “branded open source software” (software).

Taxpayer does not charge a license fee for its software. Taxpayer provides its software and support services through the purchase of its subscription. Subscriptions grant customers the right “to access or use” Taxpayer’s software for a subscription fee. See ** Agreement, §1.1; 7; 15.5, 15.12, 15.14, 15.18, 15.19, 15.22, 15.23. Subscriptions also provide customers with a specified level of support, software maintenance (which includes software fixes), enhancements and upgrades, and supported hardware and software (support services). Support services are only provided with a subscription.

Question, Ruling, and Analysis

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

Question: Is the Taxpayer’s subscription to download/access its software and support services taxable?

Ruling: Taxpayer’s subscription fee is taxable as the sale of tangible personal property. Support services are included in the sales price and are considered taxable as a part of the sale.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Tangible personal property is defined as personal property that is perceptible to the senses in any manner and includes a computer program. Section 151.009 (“Tangible Personal Property”).

Taxpayer contends the software licensure is available for free; therefore, the subscription fee represents nontaxable support services.

Section 151.0031 (“Computer Program”) defines a computer program as a series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information.

Taxpayer’s subscription includes Taxpayer branded open source software that meets the definition of a computer program. Sales tax is due on the sale, lease, or license of a computer program. Rule 3.308(c)(1)(A)(Computers—Hardware, Computer Program, Services, and Sales) and STAR Accession No. 201807007L (July 11, 2018). Taxpayer’s subscription also includes support services for its computer program. When such services are provided in connection with the sale of a computer program, they are considered part of the sales price of the computer program and taxable. Rule 3.308(c)(1)(B) and Comptroller’s Decision No. 101,769 (2011).

Taxpayer does not charge for the licensure of the open source software; however, “use or access” of its computer program is not available without the purchase of a subscription.

A sale or purchase means, in pertinent part, the transfer of title or possession of tangible personal property. Section 151.005(1) (“Sale” or “Purchase”). Taxpayer’s subscription allows customers to download/access and interface with its computer program. Customers can manipulate, expand, or otherwise alter the code. For purposes of establishing a sale of tangible personal property under Section 151.005(1), this represents the transfer of possession.

Taxpayer must collect sales tax on the total amount for which the software subscription is sold. Taxpayer’s sale of support services is part of the sales price of the software, which includes “labor or service employed” or “other expenses” associated with the sale. Section 151.007(a)(2) (“Sales Price” or “Receipts”).

Comptroller’s Decisions and 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. 20200225153410.

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.