Did a publisher owe Texas tax when it licensed a hotel-advertising software database to an airline for no charge?

Plain-English summary

A publishing company earned revenue from hotel listings and advertisements in a software database. It licensed the database and software to an airline at no charge, and the airline included the database with hardware and software sold or leased to travel agents.

Because the publisher charged the airline nothing for the software and database, it did not have to collect Texas sales or use tax. If it later began charging, the airline could issue a resale certificate as long as it continued collecting tax on its sales or leases of the database software to travel agents.

The attached earlier correspondence distinguished the publisher's activities. Advertising-space sales to hotels were nontaxable, but tangible pictures were taxable. CD-ROM hotel directories, readers, and other hardware or software sold to customers were taxable under Rule 3.308. The September letter left the exact hotel contract unresolved until more facts were supplied; the October letter then relied on the clarified no-charge licensing structure.

What this means for you

The final result turned on the actual consideration and distribution chain. Nontaxable advertising revenue did not make separately sold hardware or software exempt.

Common questions

Was the free license to the airline taxable? No.

What if the publisher later charged for the database? The airline could use a resale certificate if it continued taxing its downstream software sales or leases.

Were hotel advertising-space sales taxable? No.

Were CD-ROM directories and readers taxable when sold? Yes.

Citations and references

• 34 Tex. Admin. Code Rule 3.308 (computer hardware and software)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9010L1053A01

Original ruling text

October 25, 1990

Dear *:

I an responding to your letter of October 10, 1990, regarding
the agreement between PUBLISHING COMPANY and AIRLINES COMPANY as it affects
your Texas tax responsibilities.

Initially, I would like to summarize the facts as I
understand them from your letter and from our telephone conversation of
October 18, 1990. PUBLISHING COMPANY, a subsidiary of *** USA, has
entered into an agreement with AIRLINES COMPANY whereby PUBLISHING COMPANY will
license to AIRLINES COMPANY at no charge, its Jaguar Computer software and
database.

Furthermore, as part of the agreement, AIRLINES COMPANY
will share in the
revenues PUBLISHING COMPANY receives from the sales of ads
and listings in the database. PUBLISHING COMPANY does not sell or rent any
computer hardware or software. All of PUBLISHING COMPANY'S revenues are
generated from the sales of listings and advertisements for the Jaguar
database.

AIRLINES COMPANY sells or leases Sabervision to travel
agents. Sabervision is an enhancement to the already existing Sabre Travel
reservation system. When a travel agent purchases or leases Sabervision they
get all appropriate hardware and software, including the Jaguar database owned
by PUBLISHING COMPANY.

Because PUBLISHING COMPANY does not charge AIRLINES COMPANY
for the use of the Jaguar software/database, PUBLISHING COMPANY is not
required to collect Texas sales and/or use tax. If PUBLISHING COMPANY should
begin charging AIRLINES COMPANY for the software/database in the future,
AIRLINES COMPANY could issue a resale certificate to PUBLISHING COMPANY in
lieu of paying tax to PUBLISHING COMPANY, provided AIRLINES COMPANY continues
to collect tax on the sale or lease of the Jaguar software/database to
travel agents.

The above opinion is based on the facts presented.
Additional or different 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

September 7, 1990

Dear *:

Thank you for the additional information that you sent
concerning the business relationship between PUBLISHING COMPANY and Sabre
Travel Information Network.

The copy of the press release that you sent did not indicate
whether PUBLISHING COMPANY and Sabre have formed a business relationship, such
as a legal partnership or joint venture, for the purpose of selling the hotel
directories stored on CD-ROMS. If PUBLISHING COMPANY and Sabre have formed a
partnership or joint venture for this purpose, then the new entity should
have the permit to collect Texas sales or use tax.

If Sabre as a separate entity sells the hotel directories,
then Sabre must hold the permit. An application for a Texas sales and use tax
permit should be completed by Sabre.

You indicated that PUBLISHING COMPANY or Jaguar is
responsible for "selling the pictures and other advertising
components to the hotel industry." I said in my previous letter that the sale
of advertising space is not taxable. The sale of tangible personal property
such as pictures is taxable, however. It is not clear exactly what PUBLISHING
COMPANY is selling. You should provide a copy of a contract with a hotel or a
full explanation of what the hotel receives from PUBLISHING COMPANY or Jaguar
as a part of the agreement to advertise in the Jaguar directory.

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

Please feel free to contact me if you have any additional
questions. You may write me, call toll free 1-800-252-5555 (ext. 3-4685) from
anywhere in the United States or phone 512/463-4685.

Sincerely,

Julie Pesl
Tax Correspondence

August 13, 1990

Dear *:

Thank you for your letter dated July 27, 1990, concerning
sales to hoteliers of advertising space that will "appear on an electronic
hotel directory interfaced with travel agents' reservation screens."

The sale of advertising space to the hoteliers is not subject
to sales or use tax. Sales, leases or licenses of computer hardware and
software programs are taxable, however. You must collect sales
or use tax from the travel agents that purchase your JAGUAR hotel directories
stored on CD-ROMs (Compact Disc-Read-only-Memory).

CD-ROMs are computer software. The CD-ROM readers are
hardware. You should collect tax on the total charge to your customer for any
hardware or software that you sell as a part of the JAGUAR
system. Please review Rule 3.308 on computers.

You should complete the sales tax permit application that you
have received. I have enclosed several brochures and rules for your review.

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

Please feel free to contact me if you have any additional
questions. You may write me, call toll free 1-800-252-5555 (ext. 3-4685) from
anywhere in the United States or phone 512/463-4685.

Sincerely,

Julie Pesl
Tax Correspondence