When were charges to sell or install software updates taxable, including installation of a third-party update?

Plain-English summary

This letter replaced two answers in an earlier December 13, 1991 STAR letter. Despite STAR's training-oriented subject label, the operative text addresses software updates and installation.

When the company sold and installed an update, both the update and installation charges were taxable, whether or not separately stated. That applied to canned updates and custom-created updates whose rights the company retained, and it did not matter whether the company had sold the original program being updated.

When the customer acquired the update from a third party and hired the company only to install it, the answer turned on the underlying program. Installation was taxable if the company had sold that underlying program, because the work modified a program it had sold. Installation was nontaxable if the company had not sold the underlying program.

The letter added that a contract programmer, by definition, was not the seller of tangible personal property. Thus a company acting only as the contract programmer that created the underlying software had not “sold” that program for this test.

What this means for you

Software vendors

Installation bundled with your update sale was taxable under the letter even when separately invoiced.

Independent installers

For a third-party update, determine whether your company sold the original program. That relationship, not merely who supplied the update, controlled the installation charge.

Contract programmers

Creating the underlying program solely as a contract programmer did not count as selling it under the rule stated here.

Common questions

Was a separately stated installation charge taxable when the company sold the update? Yes.

Did it matter who sold the original program in that situation? No.

What if the customer bought the update from someone else? Installation was taxable only if the installer had sold the underlying program.

Does the original text actually address training? No. The STAR subject suggests training, but the letter replaces prior answers about update sales and installation.

Citations and references

The letter refers to the earlier ruling by accession number STAR 9112L1180E03 but cites no statute or administrative rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9201L1180E01

Original ruling text

January 17, 1992

Dear **:

Per our telephone conversations before the end of the year, I am writing to
supplement my December 13, 1991 letter regarding COMPANY. Specifically, I need
to substitute the following response to your original questions 5 and 6
relating to the sale and installation of software updates/upgrades as
originally documented in STAR 9112L1180E03.

Situation 1: Company A sells and installs an update for Customer. The update is
either canned, or Company A custom-created the update but retained all rights
in it. Are the charges for the update and/or the installation taxable?

Answer: Both charges are taxable, whether or not separately stated. This is a
simple sale and installation of tangible personal property. The installation
labor is taxable as a service connected to the taxable sale of the update. It
makes no difference whether Company A sold to Customer the underlying computer
program that is being updated.

Situation 2: Company A only installs an update for Customer. Customer bought
the update from a third party, or paid a third-party contract programmer to
create it. Is Company A's installation charge taxable?

Answer: Because the installation labor charge is not connected to a taxable
sale of tangible personal property, its taxability depends on whether it
constitutes a taxable service, in and of itself. Installation of an update
causes modification of the program being updated. Therefore:

1. If Company A sold the underlying computer program that is being updated,
   then Company A's installation labor charge is taxable as a charge for
   modification of a program sold by Company A (a taxable service); but

2. If Company A did not sell the underlying computer program that is being
   updated, then Company A's installation labor charge is not taxable because
   Company A is modifying a program that it did not sell (a nontaxable service).

Note: When applying these rules, remember that a contract programmer by
definition is not a seller of tangible personal property. If Company A, acting
only as a contract programmer, had created the underlying program that it is
updating, then by definition, it did not sell the underlying program.

If you have further questions, feel free to write or call me at 800-252-5555,
ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division

NOTE: Previous Accession Number 9201193L