Can a software manufacturer use resale/exemption certificates for manual production costs, software localization, and licensed fonts/tools/clip art, and do programmers' computers count as manufacturing equipment?

Plain-English summary

A software manufacturer's representative asked the Comptroller's Tax Policy Division four taxability questions about purchases made in the course of producing and selling software. The Comptroller answered three of the four questions and asked for more information before answering the fourth.

1. Manual production costs. The taxpayer asked whether a "resale" certificate should be given to vendors for various costs incurred to produce the instructional manual that accompanies the software — the manual can't be created until the software itself is ready for release because it documents the software's processes, and the taxpayer argued it should qualify as a publication for resale at retail. The Comptroller agreed in substance: typesetting, desktop publishing, artwork, localization charges for language translations, "Read First" sheets, and graphic art used on the packaging box all qualify for exemption if they become an ingredient or component part of the software manual sold with the software package, citing 34 Tex. Admin. Code Rule 151.318(a)(1) and (a)(2). The taxpayer should issue an exemption certificate when purchasing these items if it is publishing its own manual, or a resale certificate to a printer or desktop publisher who prints/publishes the finished manual. Supplies used by that printer or publisher that get incorporated into the finished product are not taxable to the taxpayer.

2. Localization as a "modification." The taxpayer asked whether charges paid for "localization" of software qualify as "modifications" to software, making them exempt under Rule 3.308. The Comptroller ruled that payments to contract programmers to localize software (translating it into a "user friendly" foreign language) for software the taxpayer will sell are not taxable.

3. Fonts, tools, clip art, and other programs. The taxpayer asked whether it should issue a resale certificate when purchasing or licensing fonts, tools, clip art, or other programs that become part of the finished software product. The Comptroller answered simply: yes.

4. Programmers' computers as manufacturing equipment. The taxpayer asked whether personal computers used by programmers to "write the code" — the program later sold at retail — qualify as manufacturing machinery and equipment. The Comptroller did not answer this question in the letter, instead requesting that the taxpayer first outline the specific steps in the production process, from writing the code through producing the actual software program sold, and explain the extent of the computers' involvement in that process.

What this means for you

Software publishers producing manuals and packaging

If you buy or produce typesetting, desktop publishing, artwork, translation/localization work, "Read First" sheets, or packaging graphic art that becomes an ingredient or component part of a manual sold together with your software, those purchases can be bought exempt (issue an exemption certificate to your vendor if you're publishing your own manual) or resold tax-free through a resale certificate to your printer or desktop publisher, per Rule 151.318(a)(1) and (2). Supplies your printer or publisher uses that get incorporated into the finished manual aren't taxable to you either.

Software localization vendors and buyers

Payments to contract programmers who localize (translate) software you will sell — for example, adapting it into a foreign-language "user friendly" version — are not taxable, based on this letter's treatment of localization work.

Purchasing/licensing fonts, tools, clip art, and other programs

When you purchase or license fonts, tools, clip art, or other programs that become part of your finished software product, you should issue a resale certificate for those purchases, according to this letter.

Programmers' computer equipment

This letter does not settle whether programmers' computers qualify as exempt manufacturing machinery and equipment. The Comptroller asked for a detailed explanation of the coding-to-production process before making that determination, so taxpayers in a similar position should not assume this treatment without their own ruling addressing that specific question.

Common questions

Q: Do I need a resale certificate for costs like typesetting, artwork, or translation used in my software manual?
A: According to this letter, those costs qualify for exemption if they become an ingredient or component part of the software manual sold as part of the software package — issue an exemption certificate yourself if self-publishing, or a resale certificate to your printer/publisher.

Q: Is localizing software into another language taxable?
A: No. The letter states that payments to contract programmers to localize software you will sell are not taxable.

Q: Should I issue a resale certificate for fonts, clip art, tools, or other programs I license that end up in my finished software?
A: Yes, according to this letter.

Q: Are the personal computers my programmers use to write code exempt manufacturing equipment?
A: This letter does not answer that question. The Comptroller asked the taxpayer to first describe the production process in detail, from code-writing through the finished software product, before ruling on it.

Citations and references

• 34 Tex. Admin. Code Rule 151.318(a)(1) and (a)(2) (referred to in the letter as "TAC 151.318(a)(a) and (a)(2)")
• 34 Tex. Admin. Code Rule 3.308 (referenced by the taxpayer regarding software modifications)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9502150L

Original ruling text

February 15, 1995

Dear Ms. **:

On February 1, 1995, you asked for taxability rulings on four questions
concerning the application of Texas sales and use tax to certain items
purchased by your client, a software manufacturer. I will not repeat the
information contained in your letter, but all answers are based on the facts as
set out in your letter.

You asked the following questions:

1. Should a "resale" certificate be given to vendors in each of the situations
   described [in my letter] (concerning costs incurred to produce instructional
   guides for software)? The manual cannot be created until after the software is
   in a "ready to be released for sale" condition because the manual describes the
   processes. The taxpayer contends it should qualify as a publication for resale
   at retail.

Response: The typesetting, desktop publishing, artwork, localization charges
for language translations, "Read First" sheets, and graphic art used on the
packaging box will qualify for exemption if they will become an ingredient or
component part of the software manual that will be sold as part of the software
package. See TAC 151.318(a)(a) and (a)(2). Your client should issue an
exemption certificate for the purchase of these items if it is publishing its
own manual Your client may issue a resale certificate to a printer or desktop
publisher for the printing or publishing of the finished manual. Charges for
supplies used by a printer or publisher incorporated into the finished product
would not be taxable to your client.

2. Should charges paid for "localization" of software qualify as
   "modifications" to software and thereby qualify for exemption under Rule 3.308?

Response: Payments to contract programmers to localize software (translate into
a "user friendly" foreign language) that your client will sell are not taxable.

3. Should taxpayer issue a resale certificate when purchasing or licensing
   fonts, tools, clip art or other programs that become part of the finished
   product?

Response: Yes.

4. Do personal computers used by the programmers in "writing the code," which
   is the "program" that is sold at retail, qualify as manufacturing machinery and
   equipment?

Response: Before I can respond to this question, I will need for you to outline
the specific steps involved in this process, starting with the "writing of the
code" to the production of the actual software program that is sold. Please
explain the extent of involvement, if any, of these computers in the production
of the software program sold at retail.

I hope this satisfactorily answers your questions. Should you require
additional
information, please write me or call me toll-free at 1-800 531-5441, extension
3-4004.

Sincerely,

Wade Anderson
Assistant Director, Tax Administration

cc: Joe Galvan, Manager, Tax Administration