Is a company's charge for custom or noncustom training materials on compact disc, or for other training materials like books and video tapes, taxable under Texas sales tax, and can a separately stated training fee avoid tax?

Plain-English summary

This letter from the Texas Comptroller's Tax Policy Division responds to a company that generates training information for Fortune 1000 companies. The company takes existing training courses and, using an instructional designer, modifies them into interactive versions, then bills the customer based on hours spent analyzing, designing, and creating the training. The finished custom projects are documented on compact discs (CDs) and are usable only by the customer for which they were designed.

The Comptroller held that:

• The total charge for each custom project documented on compact disc is taxable, and the total charge for each noncustom project documented on compact disc is also taxable. The Comptroller characterized this as the conversion of materials from one format to another — i.e., a taxable sale of tangible personal property, not a nontaxable service.
• The charge for other types of training materials — books, video tapes, videodiscs, and computer-based training materials — is likewise taxed.
• If the company separately states a fee for "training" — meaning it actually instructs the client on how to use the materials, or trains the client based on the materials' content — that separately stated training fee is not taxed.

The Comptroller noted the opinion is based on the facts presented and could change if the facts differ, and it referenced a previous accession number (9507390L) for the same letter.

What this means for you

Companies that create or sell training materials

If you sell custom or off-the-shelf training content delivered on compact disc, video tape, videodisc, or as computer-based training materials, expect the full charge for that material to be taxable in Texas — this is treated as a sale of tangible personal property, not a nontaxable service, even when the content is custom-built for one client.

Companies that also provide hands-on training or instruction

If you separately state a charge for actually training your client — walking them through how to use the materials or teaching the content itself — that separately stated training charge is not taxed. Lumping the training fee into the price of the materials, rather than stating it separately, risks having the whole charge treated as taxable.

Accountants and tax professionals

Advise clients in the training/instructional-design business to itemize invoices so that the tangible product (CD, book, video tape, videodisc, computer-based training material) is billed separately from any genuine training/instruction service. Only the latter, when separately stated, escapes tax under this ruling.

Common questions

Q: Is a custom training project delivered on compact disc taxable?
A: Yes. The Comptroller ruled the total charge for each custom project documented on compact disc is taxable.

Q: What about a noncustom (off-the-shelf) training project on compact disc?
A: That is also taxable — the Comptroller treated it the same as custom projects, as a conversion of materials from one format to another.

Q: Are charges for books, video tapes, videodiscs, or computer-based training materials taxable?
A: Yes, the letter states the charge for these other types of training materials is taxed.

Q: Can a company avoid tax by separately stating a "training" fee?
A: Yes, but only for the portion that is genuinely training — instructing the client on how to use the materials or on their content. If that fee is separately stated, it is not taxed, even though the charge for the materials themselves remains taxable.

Citations and references

No statutes, regulations, or case law are cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9507L1361A13

Original ruling text

July 13, 1995

Dear **:

Thank you for your letter mailed July 8, requesting a ruling on the
taxability of the services provided by your company. You explained
these services include generating training information to Fortune 1000
companies.

The training information is typically derived from existing training
courses, modified to take advantage of interactive computer techniques.
The training is based upon consulting services wherein an instruction
designer analyzes existing course materials and designs new interactive
versions. These custom projects are documented on compact discs (CDs)
and are only applicable to the customer for which they are designed.
Your billing for the project is based upon hours of development time to
analyze, design, and create the training.

The total charge for each custom project documented on compact disc is
taxable; the total charge for each noncustom project documented
on compact disc is also taxable. This is conversion of materials from one
format to another.

Additionally, the charge for other types of training materials such as books,
video tapes, videodiscs, and computer-based training materials is taxed. If
your company should provide "training" and impose a separately stated fee for
training your client on the use of these materials or training the client
based upon the content of the materials, the separately stated fee for
"training" is not taxed.

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

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Policy Division
Tax Administration Division

NOTE: Previous Accession Number 9507390L.