Were custom-software work, computer repair, and recovery of deleted data taxable under Texas's 1988 rules?

Plain-English summary

The Comptroller said that completed software programs and subsequent services on those programs were taxable under the rules discussed in the letter. Combining existing program modules into a standalone program made the charges to create, modify, install, and maintain it taxable. Consulting connected with a taxable program was also taxable, while separately stated training was not.

A program written entirely from scratch—without using or customizing existing program modules—was not taxable under the letter's interpretation of Rule 3.308.

The letter also addressed troubleshooting and deleted-data recovery. Hardware repair was taxable whether or not the service provider sold the hardware. Software repair was taxable when the provider had sold the program. Recovering accidentally deleted data was taxable data processing under Rule 3.330, effective January 1, 1988.

What this means for you

Under the 1988 guidance, taxability depended on both the work performed and the origin of the software. Reusing existing modules produced a taxable program and taxable related services; writing a program entirely from scratch did not.

Deleted-data retrieval was treated separately from hardware or software repair. Even though the letter said it was neither a hardware nor software problem, it classified the service as taxable data processing.

Common questions

Was a program assembled from existing modules taxable? Yes, including the charges to create, modify, install, and maintain it.

Was software written entirely from scratch taxable? No, if the provider did not use or customize any existing program modules.

Was separately stated training taxable? No.

Was recovering deleted data taxable? Yes. The letter classified it as data processing taxable under Rule 3.330 effective January 1, 1988.

Citations and references

• 34 Tex. Admin. Code Rule 3.308, discussed for software programs and related services.
• 34 Tex. Admin. Code Rule 3.330, cited for taxable data processing effective January 1, 1988.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8805L0902D11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

May 6, 1988

Dear ****:

Thank you for your letter requesting clarification of Rule 3.308. I have
reviewed your interpretation and will try to clarify your impression.

Sales tax is due on all completed software programs which you sell and
for all subsequent services performed on such programs. In your letter of
April 10, 1988 you state you do not carry or sell any computer software
programs; however per a conversation with Diane Gatica on May 2, 1988 you
mentioned the computer programs you had were the tools you use to create
programs for your customers.

If you create a program by combining existing program modules into a
stand alone program the charges to create, modify, install and maintain the
program are taxable. Consulting fees are taxable if connected with the sale of
a taxable program. Training fees are not taxable if separately stated.

For the purpose of Rule 3.308 if you are writing a program on which you
do not utilize or customize any existing program modules, then you have created
a program from scratch and the charges are not taxable.

I have restated question 6 and 7 on Comptroller letter written to you on
January 26, 1988 and have clarified our responses.

Question:

6. A client has a problem with their tape backup system. We're not sure
   if the problem is hardware or software related. We check out their hardware
   and their software that runs the tape backup. We correct the problem which may
   be either hardware or software related.

Answer:

The service is taxable if you fix any problems with the hardware, whether
you sold it to the customer or not. If you fix any problems with the software
and you sold the program to the customer then the service is taxable.

Question:

7. A client accidentally deletes all data on their hard disk. We go to
   their office and using the *** software package retrieve their
   deleted data.

Answer:

Retrieving deleted data is neither a hardware or software problem;
however, it is a data processing service and is taxable under Rule 3.330
effective January 1, 1988.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call our
toll-free number
1-800-531-5441. The regular number is 512/463-4600. You may write me at
the Tax Policy Division.

Sincerely,
Adina Whittemore
Tax Policy Division