Was a March 1987 custom-software maintenance agreement taxable, and what happened after Texas began taxing custom programs in October 1987?

Plain-English summary

Under the November 11, 1985 version of Rule 3.308, custom computer programs and maintenance for custom programs were not taxable, while non-custom programs and their maintenance were taxable.

The taxpayer did not mass-produce its software, configured it for each customer's use, and did not provide source code. The Comptroller classified it as custom software, so no tax was due on the program or the March 30, 1987 maintenance agreement under the rule then in effect.

Texas began taxing sales, leases, and licenses of computer programs—including custom programs—on October 1, 1987. The existing agreement might qualify under Rule 3.319 as a prior contract through March 29, 1988, but a renewal in March 1988 was taxable, including seller-provided maintenance.

Common questions

Was the software custom under the old rule? Yes.

Was the March 1987 maintenance agreement taxable when made? No.

Could it remain exempt after October 1, 1987? Only if it qualified for the prior-contract exemption.

Was a March 1988 renewal taxable? Yes.

Citations and references

• 34 Tex. Admin. Code Rule 3.308(b)(1)-(4)
• 34 Tex. Admin. Code Rule 3.319

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9002L0984C12

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
Comptroller February 12, 1990

Dear ****:

We received your letter, questioning the taxability of a computer
software maintenance agreement entered into March 30, 1987. Accord-
ing to our telephone conversation, your company renewed the annual
maintenance agreement on March 30, 1987. The maintenance agreement
consists of software updates and technical support over the telephone.

The enclosed Rule 3.308 relating to computers, with an effective
date of November 11, 1985, was the rule in effect on March 30,
1987. At that time, custom computer programs were not taxable.
Likewise, the charge for computer program maintenance provided for
custom computer programs was not taxable.

However, the charge for non-custom computer programs was taxable,
along with the charge for non-custom computer program maintenance.
Rule 3.308, effective November 11, 1985, gave guidelines for
distinguishing between custom and non-custom computer programs.

According to your letter, you do not supply the source code to the
customer, you do not mass produce the software, and you configure
the program to each customers' usage. Based on the guidelines in
the rule, your program qualifies as a custom computer program;
therefore, no tax was due on the custom program or the maintenance
agreement provided with the program.

Effective October 1, 1987, tax is due on the sale, lease or
license of a computer program. No exclusion is provided for
custom computer programs. And, charges for computer program
maintenance by the person who sold the computer program are also
taxable. See Rule 3.308, effective December 31, 1987, subsection
(b)(1) through (b)(4).

Because the agreement was entered into before custom programs and
maintenance on custom programs became taxable, the agreement may
qualify for a prior contract exemption for the period from October
1, 1987 to March 29, 1988. If the agreement qualifies for a prior
contract exemption, in accordance with the enclosed Rule 3.319
relating to prior contracts, then no tax is due on the annual
charge for the maintenance agreement. However, when or if the
agreement was renewed in March of 1988, then tax should have been
collected on the charge for the maintenance agreement.

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

If you have any questions you may call or write Tax
Correspondence. You may call toll free 1-800-252-5555, or our
regular number is 512/463-4600. My extension is 3-4658.

Sincerely,
Sherry Buckley
Tax Correspondence