Which Texas charges for computer consulting, data processing, custom programming, and software modification were taxable?

Plain-English summary

A service provider asked about consulting, data processing, new programming, and modification of existing software.

Pure consulting, system design, analysis, and estimating were nontaxable when sold alone. They became taxable when performed in connection with the provider's taxable sale of computer hardware or software. Data-processing services were taxable, and combining their price with unrelated consulting in one charge made the entire charge taxable; clearly identified, separately stated unrelated services remained nontaxable.

New custom programming was nontaxable when the customer retained the program's legal rights. If the provider retained those rights and gave the customer an indefinite license, the letter treated the transaction as a taxable software sale.

Modifying a program that the provider had not sold or licensed to the customer was nontaxable custom programming. Merely creating a new program to work with existing third-party software instead followed the ownership analysis for new programming.

What this means for you

Texas looked at both the service performed and the program's legal ownership. Separately stating unrelated consulting also mattered: an undivided charge with taxable data processing pulled the full amount into tax.

Common questions

Was standalone computer consulting taxable? No.

What if the consultant also sold the recommended hardware or software? The connected consulting fee was taxable.

How could unrelated consulting avoid being bundled into taxable data processing? By clearly identifying and separately stating the charges.

When was new custom programming nontaxable? When the customer retained the legal rights to the created program.

Were modifications to third-party software taxable? No, when the provider had not sold or licensed the program being modified.

Citations and references

• 34 Tex. Admin. Code Rule 3.308 — computer hardware, software, and programming treatment cited by the letter
• 34 Tex. Admin. Code Rule 3.330(d)(1)(C) — separately stated data-processing and unrelated-service charges

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9105L1110B01

Original ruling text

May 23, 1991

Dear **:

Thank you for your recent letter. As I understand it, you
would like clarification of taxability of data processing
services, certain consulting services, and software-related
services. I have reproduced below your descriptions of the
services you offer, each followed by a discussion.

1. Data processing consulting fees (inclusive of
   consulting, systems design, analysis, estimating).

Answer: Pure consulting, design, analysis and estimating
services are not taxable, by themselves. They are taxable
when performed in connection with the taxable sale of
computer hardware or software (see Rule 3.308). For
example, if you recommended that a client buy certain
taxable software and/or hardware, and you then sold that
software and/or hardware to the client, your consulting fee
would be taxable as a service connected to the sale of the
taxable items.

Data processing services (as defined in Rule 3.330) are
taxable. If you lump charges for consulting, design,
analysis and/or estimating services together with charges
for taxable data processing services, your entire charge to
the customer is taxable. If you clearly identify and
separately state charges for the unrelated services from
charges for taxable data processing services, you should
charge tax only on the charge for data processing services.
See Rule 3.330 (d)(1)(C).

2. New custom programming services (inclusive of writing,
   testing, debugging, and installing) on programs specifically
   designed for our customers when:

A) Customer retains the copyright to the software.

Answer: You are providing nontaxable custom programming
services when you create a program for a customer who
retains the legal rights to the program you create.

B) our company retains the copyright to the software,
but the customer has the license to use the software
for an indefinite period.

Answer: When you create a program for a customer, but you
retain the legal rights to the program you create, you are
making a taxable sale of customer software.

3. Creation of new programs that become a component to
   software systems purchased/licensed from third entity.

Answer: If you mean that you are actually modifying for
your customer programs that you did not sell to the
customer, then you are providing nontaxable custom
programming services. This refers to modifying the actual
existing program itself, and not simply creating new
programs to work with the existing program.

If you mean that you are creating new programs for your
customer, then see the discussion in question 2, parts A and
B, above.

4. Modifications to existing software system programs not
   purchased or licensed by our company.

Answer: If you modify for a customer programs that you did
not sell (or license) to the customer, then you are
providing nontaxable custom programming services.

I have enclosed Rules 3.308 and 3.330 for your reference.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If
you have further questions, feel free to write or call me at
1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration