How does Texas tax custom software, modifying purchased software, training, troubleshooting/maintenance, installation, and computer-run tax or payroll work?

Plain-English summary

A computer company asked the Comptroller — during the confusing rollout of the 1987 sales-tax law changes — how tax applies to a range of its software and computer services. The Comptroller enclosed Rule 3.308 (computer hardware and software) and answered point by point:

1. Write custom software from scratch — not taxable (Rule 3.308(b)(4)); charges to create a program, or to modify an existing program you did not sell, are not taxable.
2. Modify "off-the-shelf" software the customer already bought — taxable if you sold it; not taxable if someone else sold it.
3. Training on hardware/software — separately stated charges for instruction on using the software and hardware are not taxable (Rule 3.308(b)(3)).
4. Consulting:
   • A. Troubleshooting (finding why hardware/software doesn't work) — computer-program maintenance (error correction, improvements, technical support) is taxable when charged by the person who sold the program (Rule 3.308(b)(3)); charges for remodeling, repairing, maintaining, or restoring computer hardware are also taxable (Rule 3.308(a)(4)).
   • B. Systems analysis / proposals — consultation with potential clients about their needs is taxable if the software or hardware you sell is taxable.
   • C. Installing software the customer bought elsewhere (tax already paid) — installation charges are not taxable when not connected with a taxable sale.
   • D. Updating software (e.g., installing a purchased year-end payroll-tax update) — installation charges are taxable.
5. Preparing clients' tax returns on your computer — taxable as a data processing service (Rule 3.330).
6. Preparing monthly accounting schedules or weekly payroll on your computer — taxable data processing (Rule 3.330).

The through-line: creating new/custom code and separately stated training are nontaxable, but maintenance by the software's seller, taxable-sale-linked services, and running clients' data (tax/payroll/accounting) on your machine are taxable.

What this means for you

Software developers and resellers

Custom development from scratch is not taxable, and neither is modifying a program you didn't sell. But once you are the seller, modifying, maintaining, and supporting that software becomes taxable — the tax often follows who sold the program.

Training and installation

Separately state training on using hardware/software to keep it nontaxable. Installation is nuanced: installing software the customer bought elsewhere isn't taxable when it's not tied to a taxable sale — but installing a purchased update is taxable, so track the two differently.

Running clients' data is data processing

Preparing tax returns, accounting schedules, or payroll for clients on your computer is taxable data processing under Rule 3.330 — regardless of the software questions above.

Common questions

Q: Is writing custom software taxable in Texas?
A: No. Writing custom software from scratch (or modifying a program you did not sell) is not taxable under Rule 3.308(b)(4).

Q: Is modifying off-the-shelf software taxable?
A: It is taxable if you were the one who sold the software; not taxable if someone else sold it.

Q: Is software maintenance or troubleshooting taxable?
A: Computer-program maintenance — error correction, improvements, technical support — is taxable when charged by the person who sold the program, and hardware repair/maintenance is taxable too.

Q: Is running clients' payroll or tax returns on my computer taxable?
A: Yes. That is a taxable data processing service under Rule 3.330.

Q: Is training taxable?
A: No, when it is a separately stated charge for instruction on using the hardware or software (Rule 3.308(b)(3)).

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy — and it references the emergency/early versions of these rules from the 1987 law change.

Citations and references

• 34 Tex. Admin. Code Rule 3.308 — computer hardware and software; the letter cites subsections (b)(4) (custom programs not taxable), (b)(3) (separately stated instruction; maintenance by the seller), and (a)(4) (taxable hardware repair/maintenance).
• 34 Tex. Admin. Code Rule 3.330 — data processing services; the basis for taxing computer-run tax-return, accounting, and payroll work (enclosed as an emergency rule).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8801L0900C05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

January 28, 1988

Dear ****:

On behalf of Mr. Bullock, I hope you'll accept my apology for the delay
in answering your question involving changes in the sales tax law. This
isn't the way we normally do business.

Our people were, and still are, swamped by a deluge of inquiries as they
attempted to interpret provisions of the new law and draft rules which
would not adversely impact business. In many instances, an answer to a
question just wasn't available when the question arrived.

I have enclosed a copy of Rule 3.308, regarding computer hardware and
software, for your review.

I have listed your questions and my responses:

1. Write custom software from scratch.

Response: not taxable under (b)(4), charges to create a program or to
modify an existing program you did not sell are not taxable.

2. Modify "Off the Shelf" software that they have already purchased, from
   us or someone else, and paid sales tax on.

Response: Taxable if sold by you. Not taxable if sold by someone else.

3. Training on hardware and/or software that has been purchased from us
   or from another source and sales tax has already been paid at the time of
   purchase.

Response: Separately stated charges for instruction on the use of the
software and hardware are not taxable (See Rule 3.308 (b)(3).

4. Consulting --

A. Trouble shooting - Determining why something (hardware and/or
software) doesn't work.

Response: Charges for computer program maintenance are taxable if the
charges are by the person who sold the computer program (See Rule 3.308)
(b)(3). Maintenance means providing error correction, improvements or
technical support. Charges for labor or services rendered in remodeling,
repairing, maintaining or restoring computer hardware are taxable (See
Rule 3.308 (a)(4).

B. Systems analysis and/or Proposals

Response: Consultation sessions with potential clients regarding their
needs would be taxable if the software or hardware you sell is taxable.

C. Installations of software, purchased someplace else, on their
computer.
Sales tax was paid at the time of original purchase.

Response: Charges for installation are not taxable when not connected
with a taxable sale.

D. Updating of software

Example: They purchase a Payroll program from us or someone else in
1987, at which time sales tax was paid. In January of 1988, we install
the update in the Payroll program to reflect any tax changes for the new
year. This update was purchased by our client and sales tax was paid on
the update program.

Response: Charges for installation are taxable.

5. Preparing tax returns for clients on our computer.

Response: Taxable under Rule 3.330, Data Processing Service. I have
enclosed a copy of the emergency rule for your review.

6. Preparing monthly accounting schedules and/or weekly payroll
   processing for clients, on our computer.

Taxable under Rule 3.330, Data Processing Services.

This opinion is based on the facts you presented. If there are addition-
al or different facts, this opinion may change.

Please feel free to contact me if you have additional question. You may
write me, call toll free 1-800-252-5555 from anywhere in the U.S., or
phone
512/463-4600.

Sincerely,
Adina Whittemore
Tax Policy Division