I run a computer backup service and also install software and do on-site hard disk maintenance for small businesses -- which of my fees are subject to Texas sales/use tax, and at what local rate?

Subject

Software — Installation/Configuration

Plain-English summary

A taxpayer planned to launch a computer backup service for small businesses: proprietary software would compress, encrypt, and transmit a client's files to the taxpayer's own computer over a modem for storage, with restoration available the same way. The business model had several revenue streams -- a monthly service fee (varying by backup frequency) covering the backup service and software; a flat per-visit fee for on-site hard disk maintenance (virus scanning, tune-ups, installing the backup software, and a full backup); a separate fee for on-site restoration of a company's files; and outright sales of modems, virus protection software, and other equipment or software.

The taxpayer asked which of these charges were taxable, and at what local rate, given that the office was in one county and most clients were in that county or a neighboring one.

The Comptroller's answer: everything described is taxable. The monthly service fee for data storage/backup and related services is subject to Texas state sales tax. Charges for software installation are taxable as services performed in connection with the sale. On-site maintenance charges and restoration charges are "similarly subject to sales and use tax." On the rate question, the Comptroller explained that -- presuming the taxpayer's own place of business is not within any local taxing jurisdiction -- local use tax is due based on the rate in effect where the customer actually receives the service, and the taxpayer has representation or nexus in every local taxing jurisdiction where it makes sales calls or performs installations.

What this means for you

Businesses offering computer backup, storage, or software installation services in Texas

Treat your monthly service fees, installation fees, on-site maintenance fees, and restoration fees as taxable. This ruling draws no exempt carve-out for any of the listed charges -- backup/storage service, software installation, hard disk maintenance, and file restoration are all folded into the "subject to sales and use tax" answer.

Businesses serving customers across multiple counties or local taxing jurisdictions

Local use tax is based on the rate where the customer receives the service, not necessarily where your office is located (assuming your office itself isn't within a local taxing jurisdiction). Because you have nexus in each local jurisdiction where you make sales calls or installations, you need to track and apply the correct local rate for each client location rather than using a single blanket rate.

Businesses that both provide services and sell hardware/software outright

This taxpayer also sold modems, virus protection software, and other equipment/software to clients in addition to the service fees. The ruling doesn't separately parse the tax treatment of those product sales beyond the general answer that the fees at issue (service, maintenance, restoration, installation) are taxable -- outright sales of tangible personal property like modems would be treated as taxable retail sales in the ordinary course, but that specific point isn't spelled out in this letter.

Common questions

Q: Is my monthly backup/data-storage service fee taxable in Texas?
A: Yes. The Comptroller stated the monthly service fee for data storage/backup and related services is subject to Texas state sales tax.

Q: Is a separate charge for installing backup software taxable?
A: Yes. Charges for software installation are taxable as services in connection with the sale.

Q: What about my on-site hard disk maintenance fee (virus scan, tune-up, install software, full backup)?
A: Taxable. The ruling says charges for on-site maintenance are subject to sales and use tax.

Q: Is the fee I charge to restore a customer's files on-site taxable?
A: Yes. Restoration charges are described as "similarly subject to sales and use tax."

Q: Which local tax rate applies when my customers are in different counties?
A: Assuming your business location isn't itself within a local taxing jurisdiction, local use tax is based on the rate in effect where the customer receives the service. You have nexus in every local jurisdiction where you make sales calls or perform installations.

Citations and references

This letter does not cite any specific Texas statute or administrative rule by number -- it refers only generally to "Texas state sales tax" and "sales and use tax." No further citations are stated in the original text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9612054L

Original ruling text

December 3, 1996

Dear ***:

Thank you for your recent letter which is restated in part with response below.

My company will provide computer backup services for small businesses.
Software that I provide to businesses will, at a selected time, compress and
encrypt the company's selected computer files, automatically dial my computer
over their regular phone line, and transfer the backed up files to my computer
via a modem. Files can be restored in a similar fashion.

I will charge a monthly service fee, varying based on the frequency of backups,
which will cover the backup service (including backup software) described
above. In addition, I will offer on-site hard disk maintenance services to scan
for viruses, tune up the hard disk, install my backup software, and perform a
full backup. I intend to charge a flat fee per visit for this service. I will
also charge a fee for on-site restoration of a company's files.

In addition to these services, I will also sell to my clients modems, virus
protection software, and any other equipment or software that we agree on. My
office resides in COUNTY A and most of my clients will be in COUNTY A or COUNTY
B.

My question is which of these services/fees are taxable (monthly service fee,
maintenance fee, restoration fee, installation fee for hardware and software)
and at what rate (county)?

Response: Your monthly service fee for data storage/backup and related
services is subject to Texas state sales tax. Charges for software
installation are taxable as services in connection with the sale. Presuming
that your place of business is not within any local taxing jurisdiction, local
use taxes will be due based on the rate in effect where the customer receives
the service. You have representation or nexus in each local taxing
jurisdiction that you make sales calls or installations within. Charges for
on-site maintenance and restoration are similarly subject to sales and use tax.
You can obtain information on local tax rates through our web site at
.

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

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 Policy, Comptroller of Public
Accounts. My Internet address is .

Sincerely,
Al Van Allen
Tax Policy Division