Were separately billed mileage, airfare, and hotel costs taxable when incurred while servicing software?

Plain-English summary

The taxpayer separately billed mileage, airfare, hotel, and similar costs at cost while revising software. For periods on or after October 1, 1987, those reimbursed expenses followed the tax treatment of the servicing itself.

Modifying, troubleshooting, or debugging a program by someone other than the program's seller was nontaxable under Rule 3.308, so related reimbursed expenses were also nontaxable. When the person who sold the software performed the servicing, both the service and reimbursed expenses were taxable.

The memo separately describes older rules: custom-program services between October 2, 1984, and October 1, 1987 were nontaxable, while canned software had been defined as tangible personal property.

Common questions

Did separately stating travel costs make them nontaxable by itself? No.

What controlled after October 1, 1987? Whether the underlying software servicing was taxable.

Was service by a person other than the software seller taxable? Not under the cited rule and facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8906L0980F01

Original ruling text

June 29, 1989

TO: Richard A. Ginn, ** Audit (**)

FROM: Eddie C. Washington, Tax Correspondence (**)

SUBJECT: Reimbursable expenses in connection with custom software

RE: TAXPAYER

Facts: Taxpayer sells and services custom software. In connection with charges
for revision of the software, they bill their customers for certain
reimbursable expenses incurred such as mileage, airfare, hotel, etc., as a
separate line item. These reimbursable expenses are billed at cost with no
additional mark-up on them. I have reviewed the following sources and am left
with certain lingering questions. (SOURCES: Rules 3.308 and 3.292, microfiche
8611L0796C02, 8801L0900C06, 8707L0821E10, 8410L0598C03, and 8700L0845E06.)

Questions:

1. Are the "reimbursable expenses in connection with the servicing of software"
   taxable to the customer when billed as a separate line item?

2. Is the service in (revising, making program changes) of software considered
   as a repair of tangible personal property (tpp)?

Answers:

1. Before October 1, 1987, the "nature" of the computer software determines
   Whether or not the reimbursable expenses are taxable or not. The "nature" of
   computer software means either it is a "custom computer program" or a "canned
   computer program". A canned computer program was defined by statute, effective
   October 2, 1984, as tangible personal property. Services to repair, maintain,
   restore, or remodel tangible personal property became taxable October 2, 1984.
   Services performed on custom computer programs, defined in Section 151.0032 of
   the Tax Code (copy attached), between October 2, 1984, and October 1, 1987, are
   not taxable.

2. On or after October 1, 1987, these expenses are taxable only if the
   servicing provided is taxable. Under section (b)(3), (4) of Rule 3.308,
   servicing (modifying, trouble-shooting, debugging, etc.) a computer program by
   a person other than the one who sold the program is not taxable: thus, the
   reimbursable expenses billed in conjunction with such servicing would not be
   taxable. On the other hand, if the servicing is performed on computer software
   that was sold by the servicer, the servicing and the reimbursable expenses
   would be taxable.