Were charges for customer-controlled computer hardware and on-site or off-site computer data storage taxable in Texas?

Plain-English summary

COMPANY ABC supplied computer hardware under an agreement that transferred total operational control to its customers. The Comptroller said that arrangement was a taxable rental, even if a customer did not actually operate the equipment, because the agreement granted the right to use it.

The letter also cited Comptroller Hearing No. 26,321 for the conclusion that both online and offline computer data storage were taxable data-processing services, whether or not the customer accessed the stored data. The letter stated that data-processing services had become taxable on January 1, 1988.

The requester also described consulting services, including disaster-recovery planning, but the Comptroller could not find those services in the submitted master agreement and did not give a separate taxability holding for them.

What this means for you

A contract can be treated as an equipment rental when it gives the customer operational control and a right to use the hardware. Separately, the 1991 letter treated computer data storage as taxable data processing even without customer access. The letter did not resolve services that were described outside the reviewed agreement.

Common questions

Did the customer have to operate the hardware for the agreement to be a rental? No. The right to use equipment was enough under the letter's analysis.

Was offline storage treated differently from online storage? No. The cited hearing treated both as taxable data-processing services.

Did the Comptroller decide the taxability of the described disaster-recovery consulting? No. Those services were not found in the submitted master agreement.

Citations and references

• Comptroller Hearing No. 26,321 (October 1990) — online and offline computer data storage

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1118G08

Original ruling text

July 5, 1991

Dear **:

Thank you for your letter concerning the services provided in
Texas by your client, COMPANY ABC.

I have enclosed a copy of a February 1986 response to a taxability
inquiry submitted by the auditor who performed the previous audit
of your client. The agreement between your client and its
customers was determined to be a taxable rental of computer
hardware because your client transferred total operational control
of the hardware to its customers. A rental or lease agreement
grants a lessee the right to use equipment, whether or not the
lessee ever actually operates the equipment.

Your letter indicated that your client provides various consulting
services for its customers including "1) disaster recovery
methodology, 2) disaster recovery planning, 3) recovery site
preparation, and 4) recovery 'bridge' planning." I could not find
this in the copy of the "master agreement" that you submitted for
review.

I have also enclosed a copy of Hearing 26,321 issued in October
1990. The Administrative Law Judge ruled that on-line and offline
computer data storage are taxable data processing services,
regardless of whether the customer accesses the stored data. Data
processing services became subject to Texas sales and use tax
January 1, 1988.

This opinion is based on the facts that 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 513/463-4600.

Sincerely,

Julie Pesl
Tax Administration Division