Which services that an outside contractor performs for a public pay-phone company in Texas — rate-table downloads and installation testing, coin-collection polling review, long-distance record transfers, software updates and file backups, coin collection, and repairs — are subject to Texas sales tax?

Plain-English Summary

A contractor performed various services for a public pay-phone company, using hardware and software that the customer (the pay-phone company) owned. The Comptroller was asked to sort out which of these services were taxable. The answer varies by task:

• Taxable as remodeling of tangible personal property: downloading a new rate table via modem into a newly installed pay phone, plus the related field testing to confirm the phone and computers communicate properly.
• Not taxable: reviewing daily automated polling information about coin usage (used to schedule coin collections).
• Taxable as data processing services: transferring long-distance credit-card and operator-assisted call records to diskette for delivery to a processing bureau; backing up computer files.
• Taxable as maintenance of tangible personal property: loading software updates onto the customer's computer systems.
• Not taxable: collecting, accounting for, and depositing coins from the phones.
• Taxable: repair charges (whether done by modem or in person), plus related transportation and other expenses tied to the repair.

What This Means For You

Pay-phone companies and equipment owners

If you contract out maintenance of a pay-phone network, expect a mixed tax bill: installation-related programming/testing, software updates, repairs, and any data-processing-type tasks (like transferring call records or backing up files) will generally carry sales tax, while purely administrative or cash-handling tasks (reviewing polling reports, collecting and depositing coins) will not.

Contractors servicing telecom or coin-operated equipment

How you bill matters. Grouping taxable remodeling/maintenance/data-processing work together with non-taxable administrative tasks on the same invoice, without itemizing, risks having the whole charge treated as taxable. Breaking out non-taxable line items (like coin collection and polling review) separately can help ensure only the taxable services are taxed.

Accountants and tax professionals

This ruling illustrates Texas's task-by-task approach to "bundled" service contracts: the same overall contractor relationship produces different tax outcomes depending on whether a given task is characterized as remodeling or maintenance of tangible personal property, a data processing service, or a non-taxable administrative/financial function.

Q&A

Q: Is the initial download of a rate table into a newly installed pay phone (via modem), together with the field testing to confirm it works, taxable?
A: Yes. The Comptroller treated these charges as taxable remodeling of tangible personal property.

Q: Is reviewing the daily automated polling data about coin usage (to know when to collect coins) taxable?
A: No. The Comptroller found these charges are not subject to sales tax.

Q: Is transferring long-distance credit-card and operator-assisted call records to diskette for delivery to a processing bureau taxable?
A: Yes. The Comptroller treated these charges as taxable data processing services.

Q: Are software updates and computer file backups performed by the contractor taxable?
A: Yes, but for different reasons. Loading updated software is treated as maintenance of tangible personal property, while backing up computer files is a data processing service. Both are subject to sales tax.

Q: Is collecting, accounting for, and depositing coins from the phones taxable?
A: No. The Comptroller found charges for these functions are not taxable.

Q: Are repair charges, including related travel expenses, taxable?
A: Yes. Charges for repairs (whether done remotely by modem or in person), along with related transportation and other expenses tied to the repair, are subject to sales tax.

Citations

No specific statutes or administrative rules were cited in the text of this letter ruling.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9408861L

Original ruling text

August 1, 1994

Dear **:

Thank you for your recent letter regarding the tax treatment of services done
for a public pay phone company by an outside contractor. All hardware and
software used by the contractor is owned by the customer. Your facts are
restated in part with responses below.

(1)(a) When a pay telephone is installed in an area in which customer has no
existing phones, a new rate table specifically designed for that area is
purchased. Contractor is responsible for downloading the rate table via modem
into the phone using customers computers and software. Contractor is
responsible for performing field testing to determine that the phone and
computers are communicating properly.

Response: Contractor's charges are taxable as remodeling of tangible property.

(1)(b) Polling of phone is done on a daily basis automatically by the computer
systems. The computer system calls each phone and retrieves coin usage
information. Contractor is responsible for reviewing the polling information as
it relates to the timing of collections.

Response: Contractor's charges for reviewing the polling information to know
when to collect the coins is not subject to sales tax.

(2) Long distance records pertaining to credit card and operator assisted calls
were captured by the computer. Contractor was responsible for transferring the
information to diskette and delivering it to the processing bureau.

Response: Contractor's charges were taxable as data processing services.

(3) Contractor is responsible for updating customer's computer systems with
software updates. Contractor also backs up the computer files on a regular
basis.

Response: Loading updated software is maintenance of tangible property. Backing
up computer files is a data processing service. Charges for both services are
subject to sales tax.

(4) Contractor collects, accounts for and deposits coins from phones.

Response: Charges for these functions are not taxable.

(5) Contractor is responsible for determining the extent of problems related to
the phones and fixing them if they are computer related. Repairs may be done by
modem or in person.

Response: Contractors charges for repair are subject to sales tax. Charges for
transportation and other expenses related to the repair of the customers phones
are also subject to sales tax.

This opinion is rendered based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Administration, Comptroller of Public
Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

cc: Lisa King