Are a video-conferencing/telecom company's lump-sum charges for remote support, on-site maintenance, and infrastructure add-on services taxable in Texas?

Plain-English summary

The Texas Comptroller ruled that a video-conferencing and telecom equipment/services company owes sales tax on all three of its lump-sum service offerings, largely because bundling everything into one undifferentiated monthly charge kept the taxpayer from proving any part was exempt.

Remote Services (a hybrid on-premises/cloud video-conferencing environment, monitoring, and VoIP) were taxable because they include telecommunications services (electronic transmission of voice/data, including VoIP) — one of Texas's specifically enumerated taxable services — plus possibly taxable computer program repair, all folded into one monthly bill.

On-Site Services (in-person maintenance and support of customers' communication hardware/software at their Texas headquarters) were taxable as repair, maintenance, or restoration of tangible personal property (computer hardware and programs). Texas has a narrow carve-out: repair/maintenance of a computer program is NOT taxable if the person performing the repair did not sell the software being fixed and the charge is separately stated. But because the taxpayer billed everything as one lump sum with no separate line for that exception, the whole charge stayed taxable.

Add-On Services (implementing/configuring/managing communication infrastructure, like migrating phone systems to the cloud) were taxable for the same structural reason: the same "not taxable if you didn't sell the software" carve-out could apply, but the taxpayer couldn't produce records proving it didn't sell the underlying software, so the exclusion failed and the charge was fully taxable.

The throughline across all three rulings: Texas's rule that when an invoice mixes taxable and nontaxable items with no way to break out the nontaxable portion, the Comptroller taxes the entire lump sum — and the burden is on the seller to keep records proving any exclusion applies.

What this means for you

Managed-service, AV, and telecom providers billing lump-sum fees

If any part of your bundled monthly service charge includes telecommunications services or computer hardware/software repair, and you bill everything as one number, expect the Comptroller to tax the whole thing — even portions that would be exempt on a standalone, separately-invoiced basis.

Businesses relying on the "I didn't sell the software" repair exclusion

This exclusion (Rule 3.308(c)(2)) only protects you if you can prove, with records, both that you didn't sell the software AND that the charge for repairing it is separately stated from other charges. Skipping either requirement collapses the whole invoice into taxable.

Accountants and tax professionals structuring service contracts

Advise clients providing mixed telecom/hardware/software services to separately itemize charges by category (equipment sale, telecom service, hardware repair, software repair not sold by them) on invoices — this is the single biggest lever for reducing exposure under Section 151.0101(a)(5)(D) and Rule 3.308.

Common questions

Q: Is repairing a customer's computer hardware always taxable in Texas?
A: Yes — hardware repair, maintenance, and restoration is taxable regardless of who sold the hardware, per Rule 3.308(b)(3)-(4).

Q: Is software repair/maintenance always taxable?
A: Not necessarily — it's exempt if the person doing the repair did NOT sell the software originally, but only if that charge is separately stated on the invoice. If sold by the same provider, or bundled without separation, it's taxable.

Q: What happens if my invoice mixes taxable and nontaxable services with one lump-sum price?
A: The entire charge becomes taxable. Texas presumes the full invoiced amount is taxable unless there's a documented basis to break out the nontaxable portion.

Q: Can I rely on this ruling for my own business?
A: Only if you're the taxpayer it was issued to. It binds the Comptroller solely as to that taxpayer's specific facts and billing structure and can't be relied on by others, though it's a useful illustration of the lump-sum-billing trap.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.009 (Tangible Personal Property)
• Tex. Tax Code § 151.010 (Taxable Item)
• Tex. Tax Code § 151.0101(a)(5), (a)(5)(D), (a)(6) (Taxable Services — repair/maintenance, telecommunications)
• Tex. Tax Code § 151.0103 (Telecommunications Services)
• 34 Tex. Admin. Code § 3.344(a)(16), (b)(9), (h)(6) (Telecommunications Services)
• 34 Tex. Admin. Code § 3.308(a)(2), (b)(3)-(4), (c)(2) (Computers — Hardware, Computer Programs, Services, and Sales)
• 34 Tex. Admin. Code § 3.281(b) (Records Required; Information Required)
• Comptroller Decision No. 103,588 (2012) (mixed taxable/nontaxable lump sum is fully taxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202301018L

Original ruling text

January 3, 2023

RE: Private Letter Ruling No. 20220201161745

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. We are responding to your request dated January 31, 2022 and supplemental submissions dated July 6, 2022 and conference call held on June 20, 2022 to discuss ** services. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights. You requested guidance on whether ** (Taxpayer) provides taxable services.

Facts Presented

Taxpayer sells and provides audiovisual and videoconferencing equipment and services. Taxpayer’s services include a Cisco Hybrid environment, which includes on-premises UCM and Webex branded suite of products; monitoring, reporting and analytics of infrastructure, software version control and testing; user and device management to operate programs; and infrastructure management. Included within these services are telecommunications services such as Voice over Internet Protocol (VoIP) and other electronic transmissions. These services are referred to as “Remote Services” and are billed for a lump-sum charge.

Taxpayer also provides on-site support and maintenance services referred to as “On-Site Services” on customer’s software and hardware infrastructure. On-site personnel support the customer’s use of its communication infrastructure related to connectivity for, among other things, videoconferencing. Taxpayer bills its customers a lump-sum charge for the On-Site Services. All Company personnel providing On-Site Services to the Customer perform such services at the Customer’s headquarters located in Texas.

Equipment and computer programs used by Taxpayer's customers for the telecommunication, collaboration activities, and audiovisual functions are supported by Taxpayer’s Remote and On-Site services. Taxpayer asserts they have sold all or some of the equipment and software that is used by its customer for the Taxpayer’s Remote and On-Site services related to the telecommunication, collaboration activities and audiovisual functions.

In addition, Taxpayer on occasion provides a separate statement of work for the provision of specific tasks related to the customer’s telephony communication infrastructure such as migration services from on-premises physical phones to cloud-based software for its customers' call center communication technologies. These services are called “Add-On Services” and are billed as a lump-sum charge.

For all Remote Services, On-Site Services, and Add-On Services, Taxpayer bills its customers a monthly lump-sum amount (i.e., there are not separated charges for equipment, software or the services provided by Taxpayer.) Because the billings to its customers are for lump-sum amounts, Taxpayer asserts it is not possible to determine what equipment, software, and software maintenance its customer purchased from Taxpayer and what equipment, software, and software maintenance the customer purchased from other vendors.

Questions, Responses, and Analysis

Our restatement of your questions is shown below, followed by our responses and analyses.

Question One: Are Taxpayer’s Remote Services taxable?

Response One: Taxpayer's Remote Services, billed as a monthly lump-sum charge, are taxable. Taxpayer’s lump-sum charge may include telecommunications services under Section 151.0103 (Telecommunications Services), sales of tangible personal property under Section 151.009 (“Tangible Personal Property”), and repair, maintenance, creation, and restoration of tangible personal property under Section 151.0101(a)(5) (“Taxable Services”).

Analysis One:

Texas imposes a sales tax on each sale of a taxable item in the state. Section 151.051 (Sales Tax Imposed). The term “taxable item” means tangible personal property and taxable services. Section 151.010 (Taxable Item). Only specifically enumerated services are taxable in Texas, including telecommunications services. Section 151.0101(a)(6) (“Taxable Services”).

A telecommunications service is “the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information utilizing wires, cable, radio waves, microwaves, satellites, fiber optics, or any other method now in existence or that may be devised, including but not limited to long-distance telephone services.” Section 151.0103. This includes intrastate long-distance telecommunications services, and interstate long-distance telecommunications services that are both originated from, and billed to, a telephone number or billing or service address within Texas. The service also includes VoIP which are telephone calls made through a data network. Rule 3.344 (a)(16) (Telecommunications Services).

Taxpayer’s “Remote Services” meet the definition of telecommunications services in the statute and rule in that telecommunications services includes electronic data transmissions and VoIP.

In addition, equipment leased, rented, or sold by Taxpayer is taxed as part of the sale of telecommunications service if the equipment is not separately invoiced. See Rule 3.344(b)(9). However, if the equipment is invoiced separately, the sale of equipment is subject to sales or use tax as the sale of tangible personal property and is not taxed as part of the telecommunications service. See id.

It is unclear if Taxpayer provides software with its telecommunications services. Software is taxable as tangible personal property. Repair, maintenance, creation, and restoration of software is also taxable when performed by the person who sold or provided the software. Section 151.0101(a)(5)(D).

Question Two: Are Taxpayer’s On-Site Services taxable?

Response Two: Taxpayer’s lump-sum charge for On-Site Services is taxable. Taxpayer’s service can include repair, remodeling, maintenance, or restoration of a computer program and hardware under Section 151.0101(a)(5).

Analysis Two:

A computer program and hardware are considered tangible personal property. Section 151.009. Taxable services include repair, remodel, maintenance, and restoration of tangible personal property except the repair, maintenance, creation, and restoration of a computer program, including its development and modification, not sold by the person performing the repair, maintenance, creation, or restoration service. Taxpayer is providing taxable repair, remodel, maintenance, and restoration of tangible personal property, not contract programming services. See Section 151.0101(a)(5)(D) and Rule 3.308 (a)(2) and (c)(2) (Computers—Hardware, Computer Programs, Services, and Sales).

Taxable computer program repair, maintenance, or restoration includes error correction, technical fixes, and technical support, whether provided in person, virtually, or over the phone. Taxpayer must collect sales tax on all on-site support and maintenance services provided, unless charges for software repairs, restoration or updates are made on software Taxpayer did not sell and are separately stated on the invoice or billing. Rule 3.308(c)(2).

Sales tax is due on all charges for labor or services to install, remodel, repair, maintain, or restore computer hardware located in Texas, regardless of who sold the hardware. Rule 3.308(b)(3)-(4).

If Taxpayer’s lump-sum charge includes both taxable and nontaxable services, the entire lump sum charge is taxable. See Comptroller Decision No. 103,588 (2012) (“When an invoice includes charges for both taxable and nontaxable items with no basis for a breakout the entire charge is taxable.”).

Question Three: Are Taxpayer’s Add-On Services taxable?

Response Three: The lump-sum charge for Add-On Services to implement, configure, and manage a communication infrastructure is taxable under Section 151.0101 (a)(5).

Analysis Three:

Taxpayer is not able to confirm if they do or do not provide the computer program involved in the Add-On service to implement, configure, and manage a communication infrastructure. As a result, the service is taxable as the repair, remodeling, maintenance, and restoration of tangible personal property. Section 151.0101 (a)(5).

When this service is provided by the seller of the computer program, the charge is taxable. Section 151.0101(a)(5)(D) and Rule 3.308 (c)(2). The same service provided by a seller who did not provide the computer program is not taxable. Id.

Records must support any claim to an exclusion of sales tax such as proof Taxpayer did not provide the computer program being configured. Rule 3.281(b) (Records Required; Information Required). If records cannot substantiate and exclusion claim, the entire charge is taxable. Id.

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 general information letter, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference PLR 20220201161745.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts