Is custom contract programming taxable in Texas, and what about the compilers, languages, and library modules a programmer uses?

Plain-English summary

A contract programmer asked the Comptroller to clear up when its work crosses from nontaxable contract programming into a taxable sale of software. The Comptroller worked through the scenarios:

• Contract programming is not taxable. Designing and building a system specifically for a client — "starting from scratch" — is contract programming, and the resulting custom software developed for that specific client is not taxable.

• Selling library modules is not contract programming. For sales-tax purposes, a "library" means modular software programs. If, in implementing (say) an accounting system, you sell and install three of a six-module accounting software library, you have not performed contract programming — you have sold prewritten software, which is taxable. "Starting from scratch" instead means designing the accounting system specifically for your client, using your own programming languages and compilers (which naturally have their own built-in, essential libraries).

• Your programming tools are just tools. The programming languages, compilers, and other software you use to design, code, compile, and implement a program are tools you use for contract programming — you are not selling portions of your library to the client, so their use is not a taxable sale.

• Selling remarketing rights makes it taxable. A software development project for a specific client is nontaxable contract programming. But if the client sells you the rights so you can market that same software to other clients, the software becomes taxable on each subsequent sale.

• Named packages (dBASE III, C, FORTRAN, AutoCAD). None of the programming activities you perform in these languages or packages is taxable unless you sell the software itself (for example, selling AutoCAD or dBASE) to the client. Because this taxpayer stated it does not sell the software, it is not required to collect tax.

The Comptroller enclosed Rule 3.308, which further outlines the taxability of hardware, software, and computer services.

What this means for you

Custom-software developers and contract programmers

Building software to a specific client's specification is nontaxable contract programming, and the compilers, languages, and development tools you use to do it are not sales to the client. Keep that work distinct from selling finished, prewritten programs.

When you're really selling prewritten software

Pulling ready-made modules off a library shelf and installing them is a taxable sale of software, not contract programming — even if you install and configure them. Look at whether the deliverable was built for this client or already existed as a product.

Licensing your custom code to others

If you obtain the rights to resell software you originally wrote for one client, each later sale of that software is taxable. The first custom job can be nontaxable while the resales are taxable.

Selling the underlying packages

Using tools like dBASE, C, FORTRAN, or AutoCAD in your work is not taxable, but if you actually sell copies of those packages to a client, that sale is taxable.

Common questions

Q: Is custom contract programming taxable in Texas?
A: No. Designing and building software specifically for a client from scratch is nontaxable contract programming.

Q: Are the compilers and languages I use taxable?
A: No. They are considered tools you use for contract programming, not software you sell to the client.

Q: What if I install modules from a software library?
A: That is treated as a taxable sale of prewritten software, not contract programming.

Q: When does my custom software become taxable?
A: If a client sells you the rights to market the same software to other clients, that software is taxable on each subsequent sale.

Q: Do I owe tax for using dBASE, C, FORTRAN, or AutoCAD?
A: Not for the programming work itself — only if you actually sell that software to the client. This taxpayer did not sell the software, so no tax was due.

Q: Can I rely on this 1988 letter for my own software business?
A: Treat it as guidance only. It is based on the specific 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. Rule 3.308 has since been updated, so confirm the current rules.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.308 (computers, programs, and related services; taxability of hardware, software, and computer services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8810L0922F12

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

October 26, 1988

Dear ****:

Your letter of October 20, 1988, regarding the taxability of
contract programming has been referred to me. I will attempt to
answer each of your questions or situations as they are outlined
in your letter.

Initially, contract programming is not taxable, as stated in the
brochure. The brochure then speaks of using, combining, or
modifying software from a library when creating a program. This
is where the confusion begins.

A "library" for sales tax purposes, would consist of modular type
software programs. For example, if in implementing an accounting
system for a client, you sold and installed three modules of a six
module accounting software library, you have not performed
contract programming activities for sales tax purposes. If, on
the other hand, you "started from scratch", you would not be
required to design the operating system, device drivers, BIOS,
etc. to avoid collecting the sales tax. Rather, "starting from
scratch" would consist of designate an accounting system
specifically suited for your client. You would obviously have to
use your programming languages and compilers which have built-in,
essential libraries.

The programming languages, compilers, and other software used in
designing, coding, compiling and implementing the program are
considered tools used by you for contract programming activities.
You are not selling portions of your library to your client.

In reference to your software development project for a specific
client, this activity would constitute contract programming for
sales tax purposes, and would not be taxable. develop. If the
client were to sell you the rights so that you could market this
same software to other clients, the software would then be taxable
on each subsequent sale.

In reference to your use of a compiled version of dbase III, "C",
FORTRAN, and AutoCAD, none of the programming activities performed
in these languages or packages would be taxable unless you sold
the software (e.g. AutoCAD or dbase) to the client. In your
letter, you specifically stated that you do not sell the software,
so you would not be required to collect tax.

I have enclosed a copy of Sales Tax Rule 3.308 which further
outlines the taxability of hardware, software, and computer
services.

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

If you have any questions, please contact Tax Correspondence. You
may call toll free 1-800-252-5555, or our regular number is
512/463-4600. My extension is 3-4608.

Sincerely,
Brad Gabbart
Tax Correspondence