How does Texas tax software licensing, customization, installation, and maintenance, and when is related engineering design nontaxable?

Plain-English summary

A representative asked the Comptroller how Texas sales tax applies to a client that sells, installs, and maintains software. After reviewing the client's contract and license agreement, the Comptroller answered a series of questions:

1. Licensing a program to a customer, where the client also customizes and installs it — taxable. Tax is due on the total charge, including the charges for customizing, installation, and maintenance.
2. A "license to technology" conveyed through a software package — taxable, because the technology is delivered through the software.
3. An off-the-shelf software product that the client neither customizes nor installs — taxable.
4. Installing and customizing a program the customer bought from a third party — not taxable. (The client is servicing software the customer already owns, not selling it.)
5. Designing a process-control system — analyzing the customer's process and developing a detailed control design — is a nontaxable engineering service. But if the client is then hired to implement the design and, as a result, sells customized software or performs a taxable service, then tax is due on those charges.

The theme: selling or licensing the software (with its customization, install, and maintenance) is taxable, while working on software the customer already bought elsewhere, or providing pure engineering design, is not — until the design work turns into a taxable sale or service.

What this means for you

Software vendors

If you license or sell the program, expect the whole bundle — customizing, installation, maintenance — to be taxable. Breaking those out doesn't help when they accompany a taxable license or sale.

Firms servicing customer-owned software

Installing or customizing software the customer bought from someone else is a nontaxable service. The distinction is whether you are the one selling/licensing the software or merely working on software the customer already owns.

Engineering and systems-design firms

Pure design work — analyzing a process and producing a control design — is a nontaxable engineering service. But watch the hand-off: once you implement that design by selling customized software or performing another taxable service, tax attaches to those charges.

Common questions

Q: Is licensing software taxable in Texas?
A: Yes. The Comptroller held that licensing a program is taxable, and tax is due on the total charge — including customizing, installation, and maintenance.

Q: Is installing software the customer bought from a third party taxable?
A: No. Installing and customizing a program the customer purchased from a third party is not taxable.

Q: Is designing a process-control system taxable?
A: No — analyzing the customer's process and developing a control design is a nontaxable engineering service. But if you then implement it by selling customized software or performing a taxable service, tax is due on those charges.

Q: What about a license to technology delivered through software?
A: The Comptroller treated it as taxable, because the technology is conveyed through the software package.

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.

Citations and references

Rules and statutes: The Comptroller answered by applying the general treatment of software licensing/sales as taxable (with associated customization, installation, and maintenance) and engineering services as nontaxable, but did not cite a specific Tax Code section or Comptroller rule by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8807L0911A01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
Comptroller July 25, 1988

Dear ****:

Thank you for your letter concerning your client's tax responsi-
bilities. I have reviewed the contract and license agreement
enclosed with your letter. Based on this information, it appears
that your client is selling, installing and maintaining software.

In your first question you state that a customer is licensed to
use a computer program. In connection with the licensing of the
program, your client customizes and installs the program. The
licensing of a program is taxable. Tax is due on the total charge
including charges for customizing the program, installation and
maintenance.

Your second question concerns the taxability of the license to
technology. It appears the technology is conveyed though a soft-
ware package, and this license agreement is taxable.

The third question is about a software product that is not custom-
ized for a specific use, nor installed by your client. You are
correct, this transaction is taxable.

Your client may install and customize a program their customer
purchased from a third party. Tax is not due on this service.

Your client may design a process control system for a customer.
Your client analyzes the customer's process and develops a de-
tailed control design. This service is an engineering service,
and not subject to tax. If your client is hired to implement the
design and as a result sells customized software or performs a
taxable service, then tax will be due on those charges.

This opinion is based on the facts presented. If there are addi-
tional 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
512/463-4614. You may write me at the Tax Correspondence Division.

Sincerely,
Adina Whittemore