Could a debt collector buy notices for resale, and when was separately purchased software support taxable?

Plain-English summary

The debt collector had to pay tax on notices and envelopes sent to debtors because its client did not retain care or custody. The Comptroller withdrew an erroneous 1988 answer saying otherwise.

Software support was taxable when supplied by the software seller, but support from a company that did not sell the software was nontaxable after October 1, 1987. STAR now directs readers to Rule 3.285 as amended November 1, 2017 for current care-custody-control guidance.

What this means for you

The materials result turned on client control; the support result turned on whether the provider also sold the software.

Common questions

Could notices be bought for resale? No. Was seller-provided support taxable? Yes. Unrelated-provider support? Not after the stated date.

Citations and references

• Comptroller Rule 3.3549(c)(1) and STAR's later alert to Rule 3.285.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9008L1044A10

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017).

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

BOB BULLOCK
Comptroller September 17, 1990

Dear **:

Your letter concerning materials used in providing a taxable
debt collection service and computer software maintenance or
support has been forwarded to me.

According to your letter, one of our auditors informed you
that you should pay tax on collection notices and envelopes
that your company sends to your clients' debtors.

Subsection (c) (1) of Rule 3.3549 Debt Collection Services,
provides that tangible personal property may be purchased
tax-free by issuing a resale certificate if care, custody
and control of the property is transferred to the client.
Although the client directs you to send the notices to cer-
tain debtors, the client does not retain care or custody of
the notices. Sales tax should be paid on the purchases of
notices and envelopes.

Our letter addressed to you dated April 26, 1988 is in error.
Ms. Hutcheson thought the letter had been corrected by our
Legal Services Division. I understand that the auditor did
not assess tax on these purchases, but told you that tax
should be paid on these items in the future. Please disregard
our earlier letter.

Your letter also addressed charges for software maintenance
or support. You explained that this service is usually pro-
vided by telephone conversations.

When you purchase computer software from a company and then
enter an agreement with that same company to provide the
maintenance or support, the charges for the maintenance or
support will be subject to tax. The charges are taxable if
there is a contract payable monthly, yearly, etc. or if the
charges are on an hourly as- needed basis, as long as the
provider of the service also sold you the software.

These charges have been taxable since October 1, 1987 for
maintenance on all software. The service was taxable from
October 2, 1984 up to October 1, 1987 on what was then des-
ignated as "canned" or non-customized software.

When your company enters a contract with, or pays an hourly
fee to a company that did not sell you the software, this
charge is not taxable, and has not been taxable since Octo-
ber 1, 1987.

This opinion is based on the facts presented. If there are
additional facts, or if the circumstances change, the opin-
ion may change.

Please write or call if you have any questions. You can
call toll-free at 1- 800- 531- 5441. Our regular number is
512-463-3830 and our FAX number is 512-474-0900.

Sincerely,
Larry Koenig
Taxability Section
Legal Services Division