Is a computer company's lease of software, sale/installation/support of third-party software, contract programming, and scanning-to-computer-file service taxable under Texas sales tax?

Subject

Scanning Services/Electronic Imaging Services — Documents/Plans/Blueprints

Plain-English summary

This 1992 Texas Comptroller letter answers five separate taxability questions from a company that both develops and resells software, and that also scans documents into computer files. It is worth noting up front that the STAR-assigned heading on this letter — "Scanning Services/Electronic Imaging Services — Documents/Plans/Blueprints" — only reflects the last of the five situations addressed; the bulk of the letter is actually about software licensing, resale, and contract programming. The subject_title on this page has been written to reflect the letter's full scope rather than just the original heading.

In Situation 1, the company leases software it created to end users while keeping the legal rights to the program. Because the company retains ownership, it is not acting as a "contract programmer," and it must collect tax on the entire lease charge, on technical support (treated as taxable software maintenance), and on any technical support service agreements sold with the lease. A separately-stated charge for a formal course of software training, however, is not taxable.

Situations 2 through 4 address variations where the end user buys a software package from someone else. If the company merely installs or supports software it did not sell, those installation and support charges are not taxable. If instead the company sells a third-party package to the end user, the sale, installation, and support charges are all taxable (training remains non-taxable if separately stated). And if the company acts as a true contract programmer — creating templates or macros while the client keeps the legal rights to what's created — none of the programming, training, or support charges are taxable; but if the company keeps the rights to what it creates, the sale and support charges become taxable again.

Situation 5 covers the scanning question: using a scanner (described as an "optoelectronic input device") to convert a client's text or graphics into a computer file is a taxable data processing service, and it is taxable regardless of who owns the scanner used to perform the work. The Comptroller pointed the taxpayer to Rule 3.330 on data processing services for further detail.

What this means for you

Software resellers and developers

Whether your software charges are taxable turns on who retains the legal rights to the program, not on how the transaction is labeled. Leasing your own software (you keep the rights) makes the full lease and support charge taxable. Selling someone else's package makes the sale, installation, and support taxable. But acting as a genuine contract programmer for a client who keeps the rights to the created program keeps programming, training, and support out of the tax base.

Businesses offering document scanning/imaging services

Converting paper documents, plans, or blueprints into computer files with a scanner is treated as a taxable data processing service under Texas law, no matter whose scanner is used to do the work. If you offer this service, you should generally be collecting sales tax on the charge.

Accountants and tax professionals

This letter is useful for spotting the recurring distinction in Texas software rulings between (a) retained-rights leasing/reselling (taxable) and (b) true contract programming where the client owns the resulting program (not taxable), plus the separate rule that formally structured, separately-stated training charges escape tax in either case.

Common questions

Q: If I lease software I wrote to a client but keep the legal rights, do I owe tax on the lease payments?
A: Yes. Because you retain the rights, you are not a contract programmer, and the full lease charge — plus technical support and any support agreements — is taxable.

Q: Is training taxable?
A: No, as long as the training is a separately-stated charge for a formal course of instruction; this holds true across all five situations in the letter.

Q: I just install and support software a client bought from someone else. Do I need to collect tax?
A: No. Because you didn't sell the software, the installation and support charges are not taxable.

Q: Does scanning paper documents into computer files count as a taxable service in Texas?
A: Yes. The letter treats using a scanner to create a computer file from text or graphics as a taxable data processing service, taxable to the client regardless of who owns the scanning equipment.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1175A01

Original ruling text

May 22, 1992

Dear **:

Thank you for your letter concerning the taxability of software. You presented
five situations in which you requested answers on taxability.

Situation (1)

You will be creating, for lease to end users, software programs.

Response:

A person is regarded as a contract programmer when he or she creates a program
for a client's specific needs and the client retains the legal rights to the
program that is created. A contract programmer does not collect tax from the
client. In your situation, you are not a contract programmer because a lease
means you are retaining the legal rights to the program.

You must collect tax on the total charge for the lease, technical support, and
any "Technical Support Service Agreements" sold to the client. Technical
support is considered maintenance of the software and is taxable. However, a
separately-stated charge for software training that is a formal course of
instruction is not taxable.

Situation (2)

The end user purchases a software package from a supplier other than you.

Response:

The installation of software that you did not sell is not taxable to the
client. In addition, the charge for support on the software is not taxable
because you did not sell the software to the client. The charge for training is
not taxable as explained in the previous situation.

Situation (3)

You sell to the end user a software package not created by you.

Response:

The charges for the sale, installation, and support are taxable. Training that
is separately stated to the client is not taxable, as described in situation
(1).

Situation (4)

The end user purchases a software package from a supplier other than you.

Response:

If you are a contract programmer in this situation, the creation of programs
(templates or macros) is not taxable because the client retains the rights to
the programs you create. The training and support would also not be taxable if
the client retains the rights to the created program.

If you retain rights to the created program, you must collect tax on charges
for the sale of the program you create and for any support you provide. A
separately-stated charge for training is not taxable, as described in situation
(1).

Situation (5)

You provide to the user, through the use of a scanner, a computer file.

Response:

The use of a scanner (an optoelectronic input device) to create a computer file
from text or graphics for a client is taxable as a data processing service. It
is taxable to the client regardless of who owns the computer that is used in
performing the service. See the enclosed Rule 3.330 regarding data processing
services.

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

You may call me toll free at 1-800-252-5555, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Administration Division