Which charges for bank software setup, programming, conversion, installation, training, optional programs, and continuing support were taxable?

Plain-English summary

An Oklahoma company sold data-processing software and services to banks and charged one flat fee for new-site setup, ancillary programs, and continuing support.

The Comptroller classified the components as follows:

• Contract programming was nontaxable if the customer retained the rights to the programs written.
• Data conversion was taxable data processing under Rule 3.330.
• The base system was canned or off-the-shelf software; modifications and installation connected with its sale were taxable.
• Training on software use was nontaxable when separately stated.
• Canned ancillary programs were taxable. Customer-specific programs that modified the seller's base software were also taxable because the seller had sold the software being modified. Rule 3.308(b)(4) instead made modification nontaxable when performed on software the modifier did not sell.
• Continuing error correction, improvements, and technical support for software the company sold were taxable maintenance. Any actual customer training within support was nontaxable only if separately stated.

The letter said taxable and nontaxable products and services had to be separated on the contract or invoice; it did not provide one standard contract format because customer facts varied.

What this means for you

A single flat fee obscured materially different treatments. Rights ownership, who sold the underlying program, the nature of the work, and separate statement controlled the classifications stated here.

Common questions

Was contract programming taxable? Not if the customer retained rights to the program.

Was data conversion taxable? Yes.

Was separately stated training taxable? No.

Were technical support and error correction taxable? Yes, when provided for software the company sold.

Citations and references

• Comptroller Rule 3.330 — data-processing services
• Comptroller Rule 3.308(b)(1)-(4) — canned programs, installation, maintenance, and modifications

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9009L1045A01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

September 10, 1990

Dear ***:

I am responding to your letter of August 23, 1990, regarding the taxa-
bility of computer software sales and services. In reviewing the facts,
I understand that your client; **** , is an Oklahoma corporation
that sells services and data processing software to banks in various
states. Your client intends to solicit clients in Texas and has accord-
ingly applied for a Texas use tax permit. There are three basic cate-
gories for which you are concerned: (1) new site set-up; (2) ancillary
programs; and (3) continuing support. At the current time, your client
charges customers a flat fee that covers all three of the above items.

I will analyze each item as to its taxability under the sales and use
tax laws. This information can be used as guideline in writing con-
tracts for your client.

New Site Set-up

Conversion Programs. You have described this process as the first step
in the new site set-up. This process appears to be broken into two
areas, contract programming (90-100 hours) and data conversion (6 man-
days). Contract programming is not taxable if the customer retains the
rights to the programs written. If this is true in your situation,
then this service would not be taxable. Data conversion is considered
a data processing service. Such services are taxable as explained in
the enclosed Rule 3.330.

Base System. The second portion of the new site set-up is the instal-
lation of the base system. In your analysis, you have compared this
system to canned or "off-the-shelf" software systems. I would agree
with this analysis. The modifications and installation in connection
with the sale of the software are taxable under Rule 3.308(b)(1) and (2).

Training. Training on the use-of the software is not taxable provided
charges for this service are separately stated.

Ancillary Programs.

In your analysis, you indicated that many of these optional programs
are canned. These programs are taxable as completed programs per Rule
3.308(b)(1) and (2). Also in your analysis, you stated that other an-
cillary programs are specifically created for the customer's needs, but
technically they are modifications to the base data processing software.
These ancillary programs also are taxable. As noted in Rule 3.308(b)(4),
charges to modify software that is not sold by the person doing the modi-
fications, are not taxable. Because your client is modifying software
that he or she sold to the customer, the charges for this service are
taxable.

Continuing Support.

In Rule 3.308(b)(3), computer program maintenance is defined as error
correction, improvements, or technical support. Because your client is
providing support on software that he or she sold, the charges for such
services are taxable. Portions of this service that represent actual
training of the customer will not be taxable provided the charges are
separately stated.

In regard to your contract, it is always necessary to separate the taxa-
ble and non-taxable products and services on a contract or invoice. Be-
cause these items may vary from customer to customer, it is difficult to
provide you with a standard contract format.

The above response is based on the facts presented. Additional or dif-
ferent facts may cause this opinion to change.

If you have any 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