Texas Letter Ruling 9211L1211C01: Does an on-line service that lets buyers and sellers trade consulting services, software, and information electronically owe Texas sales tax, and has it created nexus in Texas?

Plain-English summary

A tax practitioner asked the Comptroller about a client that ran an on-line computer service linking buyers and sellers of consulting services, software, and information through a host computer in California. Sellers posted a priced synopsis of what they were selling, and buyers accessed and downloaded (or printed) the material electronically — no tangible personal property changed hands. The client billed buyers directly, and its main contact with Texas customers was mailings, magazine ads, and phone calls, but it also attended Texas trade shows, conventions, and users group meetings, sometimes giving away free access time or demo software there.

The Comptroller held that attending those Texas trade shows, conventions, and users group meetings was enough to establish nexus in Texas. Once nexus existed, the ruling worked through seven specific charge types:

1. Consulting fees (results delivered electronically) — not taxable by themselves, but taxable when the consulting is performed in connection with the sale of a taxable item.
2. Prewritten text sold and invoiced electronically — taxable when the buyer is in Texas.
3. Other information (software, graphics, sound templates) invoiced by the client — taxable when sold to Texas buyers.
4. Hard-copy mailing by the seller directly to the buyer (outside the Service) — taxability depends on the facts: if the client doesn't transmit or bill for it and the seller itself isn't doing business in Texas, the seller doesn't have to collect tax (the buyer would owe use tax instead). But when the information moves through the bulletin board service, the client is treated as having taken possession of the materials sold and is a "seller" under Section 151.008(5) of the Texas Tax Code, so the client (having nexus) must collect the tax; if the underlying seller is also engaged in business in Texas, that seller must collect too.
5. Monthly access fees paid by buyer and seller — taxable to Texas users.
6. On-line connection fees — taxable if the call originates in Texas and is billed to a Texas telephone number or billing/service address (Rule 3.344).
7. Storage fees paid by sellers to store data on the host computer — taxable for Texas users, treated as a data processing service under Rule 3.330.

The ruling notes it is based on the facts presented and could change if the facts are different.

What this means for you

Operators of on-line marketplaces, bulletin boards, or information-exchange services

Physical presence at Texas trade shows, conventions, or users group meetings can create nexus even if you have no office or employees permanently in the state and your main customer contact is mail, print ads, and phone. Once you have nexus, delivering software, text, or other digital products electronically through your platform makes you a "seller" of those items under Section 151.008(5) — you're expected to collect Texas tax even though nothing physical is shipped.

Sellers who use a third-party platform to reach buyers

If your buyer is in Texas and your item is delivered or billed through the platform, tax collection generally falls on the platform (once it has nexus). But if you sidestep the platform — mailing a hard copy directly and billing the buyer yourself, without the platform's involvement — the outcome depends on whether you are separately engaged in business in Texas; if not, the buyer becomes responsible for self-assessing use tax.

Buyers of consulting, software, or information through such a service

Monthly access fees and on-line connection fees you pay can be taxable, with connection fees turning on where the call originates and where it's billed. If a seller doesn't collect tax on a direct hard-copy sale outside the service, you may owe use tax yourself.

Accountants and tax professionals

This ruling illustrates the Comptroller's approach to electronic delivery of intangibles in the early 1990s: no transfer of tangible personal property occurred, yet the Comptroller still applied sales/use tax based on the "seller" definition in Section 151.008(5) and treated storage fees as taxable data processing services under Rule 3.330. Consulting fees standing alone remain nontaxable — the taxable trigger is a connection to a taxable item.

Common questions

Q: Did attending a trade show or convention in Texas really create nexus by itself?
A: Yes, per this ruling — the Comptroller stated the client "has established nexus with Texas by attending conventions, trade shows, and/or users group meetings," even though the company's ongoing Texas contact was otherwise mail, advertising, and phone.

Q: Is consulting always taxable?
A: No. The ruling says consulting is not taxable by itself; it becomes taxable only when performed in connection with the sale of a taxable item.

Q: Are monthly access fees and on-line connection fees taxed the same way?
A: Not quite. Monthly access fees are taxable to Texas users outright. On-line connection fees are taxable only if the call originates in Texas and is billed to a Texas phone number or billing/service address (see Rule 3.344).

Q: What if a seller mails a hard copy straight to the buyer instead of using the electronic service?
A: It depends. If the platform doesn't transmit the information or bill for it, and the individual seller isn't otherwise engaged in business in Texas, that seller doesn't have to collect Texas tax — the buyer owes use tax instead. But if the information passes through the bulletin board service, the platform operator is treated as the "seller" under Section 151.008(5) and (having nexus) must collect the tax.

Q: Are storage fees taxable?
A: Yes — the ruling treats fees sellers pay to store data on the host computer as taxable, collectible for Texas users, characterizing them under Rule 3.330 (Data Processing Services).

Citations and references

Statutes and rules cited in the ruling:

• Section 151.008(5), Texas Tax Code (definition of "seller")
• Rule 3.352(b)
• Rule 3.344 (taxability of telecommunications/connection charges based on origination and billing address)
• Rule 3.330, Data Processing Services

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9211L1211C01

Original ruling text

November 16, 1992

Dear **:

Thank you for your letter of October 6, 1992, concerning the tax
responsibilities of a client. As I understand it, your client operates an
on-line computer service (the "Service") for buying and selling consulting
services, software and information. The Service links information buyers and
sellers together through their computers and a host computer located in
California.

Your client's primary contact with Texas customers will be through mailings,
advertisements in magazines and telephone connections. However, your client
does participate in trade shows, conventions, and users group meetings. While
attending these functions, your client may give away free access time and/or
demonstration software.

Both buyers and sellers access the Service using their computer and a modem.
The information is then delivered electronically. There is no transfer of
tangible personal property (TPP). Sellers of information must write a synopsis
of the information they are selling, price it and post it electronically on the
host computer. The buyer obtains a perpetual, personal license to download and
make one electronic or printed copy of the information purchased. Buyers and
sellers negotiate the terms of the contract. Billing is mailed by your client
to the billing address of the buyer. This address may not be the same as where
the information is delivered. You question whether your client has established
nexus in Texas.

Your client has established nexus with Texas by attending conventions, trade
shows, and/or users group meetings.

You also question the taxability of the following situations:

(1) Sale of consulting charges invoiced by our client if the results are sent
electronically though the computer.

Response: By itself, consulting is not a taxable service; however, the
consulting is taxable when performed in connection with the sale of a taxable
item.

(2) Prewritten text sold electronically through the computer and invoiced by
our client?

Response: Your client should collect tax on this charge provided the buyer is
in Texas.

(3) Other information such as computer software graphics and sound templates,
invoiced by taxpayer (client)?

Response: Your client should collect tax on charges for these items sold to
Texas buyers.

(4) Would the taxability change if the seller mailed a hard copy of the
information directly to the buyer? (Our client has no control over transactions
outside the Service, as this would be).

Response: The answer could change if the client does not transmit the
information through the bulletin board, does not bill the buyer, and the seller
is not engaged in business in Texas. Under these circumstances, the seller
would not be required to collect Texas tax on a charge billed directly to the
buyer, but the buyer would be responsible for remitting use tax directly to the
Comptroller. When the information is transferred electronically through the
bulletin board service, your client has effectively taken possession of the
materials sold (e.g. software, prewritten text, graphics, etc.) and is a
seller as defined in Section 151.008(5) of the Texas Tax Code. Also refer to
Section (b) of Rule 3.352. Since your client has established nexus in Texas,
your client is responsible for collecting tax on the items it sells. If the
seller is engaged in business in Texas, the seller would also be required to
collect Texas tax on the taxable items he sells.

(5) Monthly access fees paid to our client by both buyer and seller?

Response: These fees are taxable to Texas users of your client's service.

(6) On-line connection fee paid to your client by both buyer and seller.

Response: These fees are taxable if the call originates in Texas and is billed
to a telephone number or billing or service address in Texas. Please refer to
Rule 3.344.

(7) Storage fees paid by the seller for storing data on the host computer?

Response: Your client should collect tax on this charge for Texas users. Please
refer to Rule 3.330, Data Processing Services.

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

If you have any questions or need additional information, you may call toll
free 1-800-252-5555, ext. 50037 or the regular Austin number is 512-475-0037.
You also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division