Is a new computer/drafting consulting company's revenue — drafting, technical graphics, consulting, hardware/software sales, and sub-contracted work — subject to Texas sales tax?

Plain-English summary

A person starting a new consulting company wrote to the Comptroller describing five categories of planned services and asking how each would be taxed. The Comptroller responded to each category in turn:

1. Contract drafting and design (mechanical, architectural, structural, electrical, civil drawings, mostly produced by computer/CAD, delivered on disk or paper): Taxable. Sales tax applies to all drafting delineations and blueprints, including CAD drafting, whenever the draftsman works from specifications supplied by the customer. Additional copies are also taxable, and the taxability is the same whether billed hourly or by the job. The letter cites this to Comptroller Rule 3.312 (Graphic Arts or Related Occupations; Miscellaneous Activities).

2. Contract technical graphics (charts, graphs, posters, flow/process charts for presentations, training, seminars — not commercial art): Taxable. The total charge for the finished charts, graphs, and posters is subject to tax as a sale of tangible personal property, citing subsection (c)(2) of Rule 3.308 (Computers — Hardware, Software, Services and Sales).

3. Consulting (computer system training, installation, customizing, and possible programming, not sold commercially): Stand-alone consulting charges are not taxable. However, if a client buys the recommended hardware or software from the consultant, the consulting charge becomes taxable as part of the sales price of the taxable items — even if separately stated. If the client instead buys the taxable items from a third party, the consulting charge is not taxable. Separately stated charges for instruction or training on software use are not taxable. Charges to create or modify a program that the consultant did not sell are also not taxable, citing Rule 3.308(b)(4).

4. Sales (of computer hardware and software): Taxable, as the taxpayer already recognized. However, if the consultant creates custom software for a customer and transfers all rights in that software to the customer, the sale is not taxable. The letter points to Rule 3.308 generally for other related taxable services.

5. Sub-contracting (using employees and/or contract labor for the above work): Whatever is taxable when the company performs it directly remains taxable whether performed by employees or by contract labor.

What this means for you

Consulting and drafting business owners

If you provide drafting, CAD, or technical graphics services based on customer specifications, expect to charge sales tax on those charges and on any additional copies, regardless of whether you bill hourly or by the job. If you also do computer consulting, keep your consulting fees separate from any hardware/software sales — stand-alone consulting is not taxable, but it becomes taxable once bundled with a sale of hardware or software you provide. Separately stating training/instruction charges, or charges to modify software you didn't sell, keeps those specific charges non-taxable.

Businesses buying these services

If you hire a consultant purely for advice, training, or programming customization (without buying hardware or software through them), that consulting charge should not carry sales tax. If you buy hardware or software from the same consultant who advised you, expect the consulting fee to be taxed along with the equipment/software price.

Accountants and tax professionals

This letter is useful as a checklist for splitting a mixed computer-services business into its taxable and non-taxable components: (1) drafting/CAD/graphics work product is taxable as tangible personal property regardless of billing method; (2) consulting is taxable only when tied to a sale of hardware/software by the same provider; (3) training/instruction and program modification (where no sale occurred) remain non-taxable; and (4) the analysis doesn't change based on whether the work is performed by employees or subcontractors.

Common questions

Q: Is CAD drafting work taxable in Texas?
A: Yes, according to this letter — sales tax applies to drafting delineations and blueprints, including CAD drafting, when the draftsman works from customer-supplied specifications, whether billed by the hour or the job.

Q: Are stand-alone computer consulting fees taxable?
A: Not according to this letter, as long as the consulting fee is not part of a sale of hardware or software provided by the same consultant. If the client buys the recommended hardware/software from a third party instead, the consulting charge remains non-taxable.

Q: What happens if I recommend software and then also sell it to the client?
A: The letter says the consulting charge becomes taxable as part of the sales price of the taxable item, even if you list the consulting fee as a separate line item.

Q: Are training and instruction charges on software use taxable?
A: No — the letter states that separately stated charges for instruction or training on software's use are not taxable.

Q: Does it matter whether the drafting/consulting work is done by an employee or a subcontractor?
A: No. The letter states that services taxable when performed directly by the company remain taxable whether performed by employees or by contract labor.

Citations and references

The letter references two Comptroller rules by number: Rule 3.312 (Graphic Arts or Related Occupations; Miscellaneous Activities), applied to drafting and CAD services, and Rule 3.308 (Computers — Hardware, Software, Services and Sales), including subsection (c)(2) for technical graphics and subsection (b)(4) for non-taxable program creation/modification charges. No Texas Tax Code statute section is cited in the letter itself.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9404L1302A11

Original ruling text

April 13, 1994

Dear ***:

Thank you for your letter requesting information on the
taxability of services offered by your new company. The
services are explained below followed by my response:

1. Contract Drafting and Design

You will be doing work both by the hour and by the job. You
will be offering technical drafting services in the
following areas: mechanical (machine parts), architectural,
structural, electrical, civil, ... Most of the these
drawings will be produced on a computer, with only a small
percentage being done by hand. The results may be delivered
on disk, paper or both. Some of these drawings will
be done for other companies and some for individuals. With
some of the work being done on your equipment and some being
done on the clients equipment (contract labor).

RESPONSE: Sales tax is due on all drafting delineation's and
blueprints, including CAD drafting services, where the
draftsman is provided with specifications by the customer.
Additional copies of the product are also taxable. The
taxability is the same whether billed by the hour or by the
job. Drafting services are covered by Rule 3.312 - Graphic
Arts or Related Occupations; Miscellaneous Activities. A
copy is enclosed for your benefit.

2. Contract Technical Graphics.

You will be preparing technical graphics, similar to those
listed above. However, in this category you are referring to
graphics like: charts/graphs, posters, and flow/process
charts. The type of graphics that might be used in office
presentations, training sessions, seminars and presentations
by attorney's,... The results may be delivered on disk,
paper or both. Some of these graphics will be done for
companies and some for individuals. You are not planning on
getting into the commercial art field, i.e., advertising or
art work that be sold commercially.

RESPONSE: The total charge for the finished charts, graphs
and posters will be subject to tax as the sale of tangible
personal property. See subsection (c)(2) of Rule 3.308 -
Computers - Hardware, Software, Services and Sales (copy
enclosed).

3. Consulting.

You will be doing computer system training, installation,
customizing and possible programming. You are not planning
on doing any programming that would be sold commercially,
only to the company/individuals with whom you are
contracted. Most of your programming will be in the form of
spreadsheets, word processing forms and macros, and database
setup.

RESPONSE: Stand alone consulting charges are not taxable.
However, if a client buys from you the hardware or software
that you recommend, the consulting charge is taxable as part
of the sales price of the taxable items sold, even if the
charge is separately stated. If the client purchases the
taxable items from a third-party, the consulting charge is
not taxable. Separately stated charges for instruction or
training on the software's use will not be taxable. Charges
to create a program or modify an existing program, that you
did not sell, are not taxable [see Rule 3.308(b)(4].

4. Sales.

There is a possibility that you will sell computer hardware
and software. You are aware that these sales will be
taxable. However, if you create software for a particular
customer and transfer all rights to the software to your
customer', the sale is not taxable.

RESPONSE: See Rule 3.308, for other related services that
may be taxable.

5. Sub-contracting

There is a good possibility that you will at some point in
the future, either hire employees and/or sub-contract work
out (contract labor). You are wondering how that will affect
the sales taxes that you collect and/or pay.

RESPONSE: The charges for services (that your company
performs for others) noted above as taxable, would still be
taxable if conducted by your employees or by contract labor.

This opinion is based on the facts presented. Other facts
though similar may provide a different result. If you have
other questions or need more information, you may call me at
1-800-531-5441, extension 3-4502. The regular number is
512/4163-4502. You may also write to Tax Administration
Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9404369L