Were a contractor's charges to update and correct software developed by someone else subject to Texas sales tax?

Plain-English summary

COMPANY C developed software for use in its hospitals, hired CORPORATION A to maintain it, and CORPORATION A hired COMPANY B to develop updates and corrections.

The Comptroller said Rule 3.308(b)(4) made charges to modify a program nontaxable when the person performing the modification did not sell the program. Because COMPANY B worked on software developed by COMPANY C, the described modification charges were not taxable.

The letter also enclosed Rule 3.325 on obtaining a refund of overpaid sales tax and referred questions about amended returns to the Comptroller's account-maintenance staff.

What this means for you

The key fact was who sold the underlying program. A contractor modifying software developed and supplied by someone else received the nontaxable treatment stated in this letter.

Common questions

Did COMPANY B sell the software? No. COMPANY C developed it.

What work did COMPANY B perform? Updates and corrections to COMPANY C's software.

Were those charges taxable? No under Rule 3.308(b)(4).

Did the letter discuss recovering tax already paid? Yes. It directed the requester to Rule 3.325 and the account-maintenance section.

Citations and references

• 34 Tex. Admin. Code Rule 3.308(b)(4) — modifications to a program not sold by the modifier
• 34 Tex. Admin. Code Rule 3.325 — procedure for refunding overpaid sales tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9106L1113E01

Original ruling text

June 6, 1991

Dear **:

I received your follow-up letters dated May 8, 1991, and May 20, 1991,
concerning the computer software maintenance services that **
(CORPORATION A) hired your company (COMPANY B) to provide for ****
(COMPANY C).

My understanding of the situation is as follows. COMPANY C developed its
own software for use on Data General Computers in COMPANY C hospitals. COMPANY
C then contracted with CORPORATION A to provide the maintenance services for
the software. CORPORATION A in turn hired your company to develop updates and
corrections for the COMPANY C-developed software.

As I said in my April 26, 1991 letter to you, section (b)(4) of Rule
3.308 on computers states that charges to modify a program not sold by the
person doing the modification are not taxable.

I have enclosed a copy of Rule 3.325 concerning the procedure for
obtaining a refund of overpaid sales tax for your review. I also forwarded
your letter concerning your April 1991 sales tax return to the Account
Correspondence Section in Account Maintenance Division. You should contact
that section if you have any questions concerning the amendments to your sales
tax returns. You may contact that section at 1-800-252-5555, ext. 3-3601.

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 from anywhere in the United States
or phone 512/463-4600.

Sincerely,

Julie Pesl
Tax Administration Division