When is a multimedia presentation on CD-ROM or diskette taxable as a computer program in Texas, versus a non-taxable production service?

Plain-English summary

This letter follows up on an earlier ruling to clarify a single term: "source code." The taxpayer develops multimedia/interactive presentations for clients and asked whether "source code" meant only original code written in languages like C, C++, or UNIX.

The Comptroller explained that "source code," for purposes of the earlier ruling, means any series of instructions that lets the computer process data and produce results -- not just code the programmer writes from scratch, but also code drawn from a reusable module inside authoring software (for example, the instructions behind a pull-down menu, icon, or radio button). Even though the programmer didn't type that module's instructions directly, the module itself is written in a language like C, C++, or UNIX, so it still counts as source code.

Applying that definition: if a production contains no such code and just needs the computer's operating system or another program (like Quicktime or MoviePlayer) to play -- for example, a motion picture on CD-ROM/laser disc or an audio recording on compact disc -- the service to create the master is not taxable. But if the production includes original code or module-based instructions (menus, buttons, icons), the entire charge for the presentation is taxable as a completed computer program under Rule 3.308(b). The letter also notes the authoring software itself can still qualify for the manufacturing exemption (since it's used to create tangible personal property for sale), but warns that if manufacturing-exempt equipment gets used for other purposes, tax is due on its fair market rental value for that divergent-use period under Rule 3.300(j).

What this means for you

Multimedia and CD-ROM/software producers

Whether your production is taxable turns on whether it contains "source code" in this broad sense -- including code buried in reusable authoring-software modules for menus, icons, or buttons -- not just code you personally typed. A simple movie or audio recording that just needs an external player is not taxable; an interactive presentation with navigation logic is.

Businesses using the manufacturing exemption for authoring equipment

If you buy computer/video equipment tax-free under the manufacturing exemption, using that equipment for anything besides creating the tangible product you sell triggers tax on the fair rental value of the equipment for that divergent-use period.

Common questions

Q: Does "source code" only mean code I personally wrote?
A: No. Per this letter, it also includes instructions contained in a reusable module in your authoring software (e.g., for menus, icons, or buttons), even if you didn't type that code yourself.

Q: Is a training video I put on CD-ROM taxable?
A: Not if it contains no source code and just requires an operating system or external program to play -- the service to create the master is not taxable in that case, per this letter.

Q: What happens if my interactive presentation has pull-down menus or icons?
A: Per this letter, that means it contains source code (from the authoring-software modules), so the entire charge for the presentation is taxable as a completed computer program under Rule 3.308(b).

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.308(b) (completed computer program)
• 34 Tex. Admin. Code Rule 3.300(j) (divergent use of manufacturing-exempt equipment)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9703385L

Original ruling text

March 6, 1997

Dear ***:

I received your email of February 26, 1997. I apologize for the delay in
responding to your questions. I was out of the office part of last week.

You asked that we clarify what is meant by source code. You asked if it is
limited to original code written in computer programming languages such as "C",
"C++", or UNIX.

In my previous letter regarding the multi-media presentations you develop, I
used the term "source code" in the following sentence:

"If the production you create does not contain source code and requires the use
of a computer's operating system or another computer program (e.g., Quicktime
or MoviePlayer) to play, your services to create the master are not taxable."

For purposes of this discussion, I meant "source code" to refer to a series of
instructions designed to permit the computer to process data and provide
results and information. A series of instructions can be original code written
specifically for the application being created or may be contained in a module
that is used time and again. As an example, the instructions for a pull down
menu, icon or radio button may be contained in a module in the authoring
software you use. Rather than typing the original code instructing the
computer to jump to another segment of the presentation, a programmer may use a
module in the authoring software already containing the code allowing the
computer to produce the desired result. However, the instructions in the
module are written in computer programming languages such as C, C++, and UNIX.

Therefore, if the production you create does not contain any code with
instructions from modules (e.g., as included in pull-down menus, radio buttons,
or icons) or original code you write to direct the computer to process data or
provide results and information, your services to create the master are not
taxable. Examples of these types of presentations include motion pictures on
CD-ROM or laser disc and audio recordings on compact disc that require other
hardware, the computer operating system, or an external software package to
play.

If the presentation contains a series of instructions from original code or
modules for creating pull-down menus, radio buttons, or icons, the total charge
for the presentation is taxable as a completed computer program as define in
section (b) of Rule 3.308. The authoring software still qualifies for the
manufacturing exemption because it is used to create tangible personal property
that you sell.

Also, I should point out that if computer hardware, software, video equipment,
etc. you purchase tax free under the manufacturing exemption is used for
purposes other than creating or processing tangible personal property that you
will sell, tax is due on the fair market rental value of the equipment for the
period of divergent use. Please refer to Section (j) of Rule 3.300 regarding
divergent use of manufacturing equipment.

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

I hope this information is helpful. If you have any questions, please do not
hesitate to contact me. I can be reached by phone at 1-800-531-5441, extension
5-0037, or by e-mail at [email protected]. Our mailing address is
Tax Policy Division, Comptroller of Public Accounts, P. O. Box 13528, Austin,
Texas 78711.

Sincerely,

Lindey Osborne
Tax Policy Division