How did Texas tax computer hardware, software, programming, support, freight, trade-ins, refunds, and bad debts in 1989?

Plain-English summary

This 1989 letter taxed computer-hardware maintenance and repair, whether sold through a monthly agreement or billed per job. Seller installation and assembly were taxable, as were hardware sales, leases, rentals, on-site hardware support, and software license fees.

The letter also treated both prepackaged and custom software as taxable under the rules then in effect. Modifying software that the seller had sold, leased, or licensed was taxable, including programs written within that package. Writing a new program or modifying software the service provider had not sold was nontaxable contract programming. Software support was taxable when it supported software the provider had sold; consulting and professional design, analysis, and specification services were generally nontaxable, but services connected with a hardware or software sale were presumed taxable unless clearly separated on the invoice.

Seller-billed transportation connected with a taxable sale, lease, or license was taxable for transactions after October 1, 1987. A like-kind computer trade-in could reduce the taxable sales price, while an unrelated item such as a delivery truck could not.

The seller could seek a refund after a leasing company supplied a resale certificate only if it first refunded the tax collected from its customer and documented that refund. The letter also recognized deductions or refunds for qualifying bad debts under Rule 3.302(d).

Common questions

Was all programming taxable? No. New contract programming and modification of software the provider had not sold were nontaxable under the letter; seller-related modifications were taxable.

Did a separately stated installation charge escape tax? Not when the equipment seller performed it.

Could any trade-in reduce the taxable price? No. The trade-in had to be of the same nature as the computer property sold.

Does this page state current computer-tax law? No. It summarizes the Comptroller's rules and effective dates as described in the 1989 letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8906L0958B06

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller June 5, 1989

Dear ****:

Your letter of April 21, 1989, regarding the taxability of computer
products and services, was referred to me. I will respond below to each of the
specific items referenced in your letter, contract, and invoices, as you
requested.

A Monthly Maintenance charges - These charges, which represent
payment for a maintenance agreement on certain computer equipment, are subject
to Texas sales and use tax.

B Time and Material charges - Both labor and material for
maintenance and repair of computer hardware are subject to tax whether the
charges are billed in the form of a monthly maintenance agreement or on a
per-job basis.

C Installation charges - Charges for installation in connection
with the sale of computer hardware are taxable whether or not such charges are
separately billed.

D Programming charges - Both prepackaged and custom software are
taxable, but contract programming is not. Programming charges for
modifications to software that you sold, leased, or licensed to your client,
are taxable. If you are modifying software that you did not sell to the
customer, or if you are writing a new program for the customer, the charges for
these services would not be taxable. A program written within the framework of
a software package that you sold to a customer is considered modifications as
opposed to a new program. For example, if you sold your customer a dBase III
software package, your charges would be taxable. If you subsequently wrote a
program in dBase for the customer, these charges would also be taxable, for you
have modified of enhanced the dBase package. If, however, you wrote a
specialized program for a client(not prepackaged software) in Pascal, compiled
the program, and delivered the program to the client on disks or tapes, this
would not be taxable. This would be considered a new program.

On site support for hardware is taxable. On site support for software is
also taxable provided the support is for software that you sold the customer.

Professional services such as design, analysis, and specifications are
generally not taxable. That is, contract programming is not taxable and
computer consulting services are not taxable. However, if the services that you
reference are in the form of maintenance or technical support on software that
you have already sold to the customer, then your services would be taxable.
Furthermore, consulting services in connection with the sale of hardware or
software would be presumed taxable, unless these services are clearly set apart
on an invoice. I can not determine the exact nature of these services from the
invoice (item 4).

E Operating/Application Software License Fees - The licensing
fees for software are taxable. This would include any initial fees, annual
renewal charges, and monthly license charges.

F Software charges - Both canned and custom software are taxable.
Charges for modifications to software that you sold to a customer are also
taxable. Charges for modifications to software that you did not sell to the
customer are not taxable. Refer to (D) above.

G Transportation charges - As of October 1, 1987, transportation
charges billed by the seller in connection with the sale, lease, or license of
a taxable item, are taxable. This is true for transportation charges incurred
both before and after the sale, even if the charges are separately stated.

H Monthly Rental charges - The sale, lease, or rental of computer
hardware is taxable. This includes the central processing unit, all peripheral
equipment, parts and supplies.

I Outright Sale charges - Outright sales of computer hardware are
taxable as stated in (H) above. If you are referring to purchases from the
standpoint of your purchases, you may issue a valid resale certificate for any
hardware that you purchase for resale. Sales or use tax would be due on any
hardware that you purchase for your own use.

J Trade-In Property - The amount of the sales price subject to
sales tax may be reduced by the value of the trade-in property provided the
trade-in property is of the same nature. That is, if you sold a customer a new
computer system and took as trade-in, a delivery truck, the value of the
delivery truck could not reduce the sales price of the computer equipment for
sales tax purposes. On the other hand, if you took an old computer system as
trade-in the value of the old system could be used to reduce the amount subject
to sales tax.

K Applying for Tax Credits - As I understand your situation, your
customers are leasing your computer systems from a leasing company as opposed
to buying or leasing them directly from you. You often are not aware of this
transaction, so you have already billed your customer directly and have also
remitted the sales tax. When you learn of the lease you accept a resale
certificate from the leasing company and bill them for the equipment less the
tax. If I have interpreted this transaction correctly, you would be entitled
to a refund for taxes paid. Before a refund can be issued, you must provide
evidence that any taxes paid to you by your customers, have already been
refunded to the customers. A credit memo will suffice provided it is signed by
you and your customer. I have enclosed a set of refund procedures that you may
use in preparing your refund request. I have also enclosed the appropriate
rule on refunds.

L Bad Debts - There are provisions in the sales tax law for
credits and/or refunds for bad debts. you may take a deduction on your sales
tax report, or you may file a refund claim. There are certain criteria that
must be met in order to obtain a credit or refund. These criteria are outlined
in the enclosed Sales Tax Rule 3.302(d).

I have enclosed the following Sales Tax Rules for your information:

3.286 Seller's and Purchaser's Responsibilities
3.302 Accounting Methods, Credit Sales, Bad Debt Deductions,
Repossessions, Interest on Sales Tax, Trade-ins
3.303 Transportation and Delivery Charges
3.308 Computers - Hardware, Software, Services and Sales
3.325 Refunds, Interest and Payments under Protest
3.330 Data Processing Services
3.346 Use Tax

The above responses are based on the facts provided. Changes to these
facts may cause this opinion to change. If you have any further questions,
please contact Tax Correspondence. You may call toll free 1-800-252-5555. My
extension is 34608.

Sincerely,
Brad Gabbart
Tax Correspondence