Ezel / Tax Rulings / TX
TX 9003L0998G07 Sales and/or Use Tax (State,Local,MTA) 1990-03-13

Were fees taxable when a customer paid for restricted use of software in Texas, even if the agreement called the payment a royalty?

Short answer: Yes. The payment was taxable as a software sale, lease, or license fee; calling it a royalty did not change the result. The letter distinguished royalties paid to creators per copy sold, which could be nontaxable in other circumstances.

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This page answers the general question as of 1990. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1990
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A software licensing agreement gave customers the right to use programs subject to restrictions. Rule 3.308 taxed software sales, leases, and licenses, so the licensor was correct to collect tax on these agreements.

Calling the fee a royalty did not change the tax result when the customer paid directly for use of the software product. The letter noted that other royalties—such as payments to a writer, musician, or inventor for each copy sold—might not be taxed in the same way.

Common questions

Were the software license fees taxable? Yes.

Did calling them royalties make them exempt? No.

Are all royalties necessarily taxable? The letter says some creator royalties may be different.

Source

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

March 13, 1990

Dear **:

I am responding to your letter of February 16, 1990. wherein you have
inquired about the taxability of license and royalty fees paid for the use of
software.

In your situation, you have enclosed a software licensing agreement that
gives your customer the right to use your programs with certain restrictions
imposed. The enclosed Rule 3.308 states that tax is to be charged on the sale,
lease or licensing of software. Therefore, you have been correct in charging
tax on these license agreements since 1987. The fact that the fee you have
charged is titled a royalty does not change the taxability of this transaction.

There may be certain situations where royalties are not taxed, such as
royalty paid to a writer, musician or inventor for each copy sold of his or her
works. In other situations where a royalty is being charged directly to a
customer for use of a product, tax will be due on a royalty as it is on the
sales or lease price, or the license fee.

This opinion is based on the facts provided. Additions or changes to
these facts may cause this opinion to change.

If you have any further questions, please contact Tax Correspondence.
You may write to the above address or call toll free 1-800-252-5555.

Sincerely,
Brad Gabbart
Tax Correspondence

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