Which software installation, customization, training, maintenance, programming, data-processing, and consulting charges were taxable?

Plain-English summary

The letter gave an item-by-item answer for a computer-services business.

• Installing canned or custom software was taxable when connected to the provider's software sale, even if separately stated; installing software bought from someone else was not taxable.
• Modifying a completed program, providing automated backups, or creating graphics was taxable when tied to software the provider sold. Modifying a client's separately purchased software could be nontaxable.
• Separately stated training was not taxable. Problem resolution was maintenance and was taxable when performed on software the provider sold; a combined maintenance-and-training charge was presumed taxable unless training was separately stated.
• Creating a program through contract programming was not taxable, while processing a client's data to produce accounting reports was taxable data processing.
• Consulting unrelated to a taxable sale was not taxable, but consulting connected to the provider's sale of hardware, software, or another taxable item was taxable.

Common questions

Was software training taxable? Not when separately stated.

Was custom programming taxable? Creating a program was not; processing data to produce reports was taxable data processing.

Did it matter who sold the original software? Yes. Seller-connected installation, modification, and maintenance were generally taxable under the described rules.

Citations and references

• 34 Tex. Admin. Code Rule 3.308(b)(3) and (b)(4) (Computer hardware and software sales and services)
• 34 Tex. Admin. Code Rule 3.330 (Data Processing 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/9002L0997A14

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

February 21, 1990

Dear *****:

I am responding to your letter of January 22, 1990, wherein you
have inquired about the taxability of various computer services
offered by your company. I will respond below to each of the
individual questions in your letter.

Installation: You have indicated that you copy software from
diskettes onto the user's hard disk or network server. You also
use features of the accounting software to specify which printer
is to be used for each type of report. You may have sold the
software to the client, or the client may have purchased the
programs from an outside vendor.

Charges to your client for installation of canned and custom
software are taxable when the installation services are in
connection with the sale of the software. This is true whether or
not the installation charges are separately stated. Therefore,
when you are installing software that you did not sell to your
client, you are not required to charge tax for your services.

Customization: In your situation, customization is described as
using programming tools provided by the accounting software
developers to make the software print information in the correct
places on pre-printed forms. It may also include using other
software to schedule and automate data backups, or using various
software with the accounting data to create graphic
presentations.

The service you described would be considered modifications to a
completed program. Again, if you are writing programs, providing
automated backups, or creating graphic presentations, you should
charge your client tax if this service is being performed with
software that you sold to your client. If you did not sell the
original accounting software package to your client, but you sold
him the backup or graphics software used to enhance the accounting
software, your services would still be taxable as installation and
modification in connection with the sale of a completed program.

Training and Problem Resolution: Training on the use of software,
whether in groups, one-on-one, or by telephone, is not taxable
provided charges for your services are separately stated. Problem
resolution is considered maintenance. Maintenance is taxable when
performed on software that you sold to your client. See the
enclosed Rule 3.308(b)(3) regarding computer hardware and software
sales and services. If you are billing maintenance and training
together, your total charge will be presumed taxable unless you
separately state the training charges.

Custom Programming: Custom programming, as you have referred to
it, involves using the client's accounting software (that you did
not sell to him), and creating special reports for his use. If
you are actually writing programs or designing report formats
within the client's software, your charges for these services
would be nontaxable as modifications to software that you did not
sell. Also, charges to create a program (contract programming)
are not taxable services to your client. (Rule 3.308(b)(4)). If
you are using the client's accounting data, and processing this
data to produce accounting reports (as opposed to report formats),
your services would be taxable to the client as data processing
services. (See enclosed Rule 3.330 Data Processing Services).

Consulting: Charges for consulting services that are not
connected with the sale of taxable products or services are not
taxable. For example, if you suggested to your client that they
purchase certain hardware and software which you would sell to
him, then your consideration fees in connection with the sale of
these items would be taxable. On the other hand, if you assessed
his needs, provided him with a report of your recommendations, but
sold them no taxable items, your consulting fees would not be
taxable to the client.

The above responses are based on the facts provided. Changes or
additions to these facts may cause these opinions to change.

In regard to staying current on these matters, as a permitted
taxpayer in Texas, you will automatically receive any general
sales and use tax brochures and updates that the Comptroller
publishes. You may also want to consider subscribing to an
outside tax service. These services provide information on law
and rule changes, administrative hearings, and court cases, on
major taxes in Texas.

If you have any questions, please contact Tax Correspondence
Division. You may call toll free 1-800-252-5555. My extension is
34608.

Sincerely,
Brad Gabbart
Tax Correspondence Division