For a company selling check-processing hardware/software to Texas banks and government agencies, which specific charges (hardware, software, installation, training, maintenance, travel) are taxable?

Plain-English summary

A company selling check-processing equipment (computer hardware and software, mostly to financial institutions, utilities, and state revenue departments) was updating its accounting software to correctly invoice sales tax across every state it operates in, and asked the Comptroller to fill in a Texas-specific taxability table for its charge types.

Taxable in Texas:

• Hardware
• Software (both purchased and custom)
• Installation performed by the company itself
• Freight charges
• Maintenance agreements (both hardware and software)
• Repair parts and service call labor NOT covered under warranty or a maintenance agreement
• Travel expenses (mileage, etc.) tied to the sale of a taxable item
• Supplies

Not taxable in Texas:

• Installation performed by an unrelated third party, for software that third party didn't itself sell — though the letter cautions that initial computer setup (connecting the monitor, mouse, keyboard, and printer to the CPU) counts as taxable "assembly" regardless of who performs it.
• On-site training — if separately stated on the invoice.
• Training conducted out of state (in this case, Wisconsin) — if separately stated.

Also flagged:

• Sales to Texas state agencies and to Federal Credit Unions are exempt from sales and use tax entirely.
• Consultation services: genuine expert/professional opinions unrelated to a taxable sale are not taxable, but consultation that's really more of an information service — like advising a customer where to get the best price on a product — is taxable as an information service.

What this means for you

Sellers of computer hardware/software bundled with services

Break out your invoice into the specific categories above rather than billing one lump sum — separately stating on-site/out-of-state training and third-party installation (of software you didn't sell) can keep those pieces out of the taxable base, while hardware, software, your own installation, maintenance agreements, and travel remain taxable.

Sellers to government and credit union customers

Confirm your customer's specific status — sales to Texas state agencies and Federal Credit Unions are fully exempt, distinct from the line-item taxability rules that apply to other commercial customers.

Common questions

Q: Is on-site training for new equipment taxable in Texas?
A: No, per this letter, as long as the training charge is separately stated from the taxable equipment/installation charges.

Q: Is installation always taxable?
A: Not always, per this letter — installation by the selling company is taxable, but installation performed by an unrelated third party (for software that party didn't sell) is not, though basic computer assembly (connecting peripherals) is taxable regardless.

Q: Are sales to Texas state agencies taxable?
A: No, per this letter — sales to Texas state agencies and Federal Credit Unions are exempt from sales and use tax.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9805706L

Original ruling text

May 8, 1998

Dear **:

This is in response to your request for information to update your sales and
use data for states that charge sales tax. ** (COMPANY) is updating
its accounting software by attempting to break out your sales into categories
so that you may better invoice your customer the correct amount of sales tax.

COMPANY sells check processing equipment, which generally consists of numerous
pieces of computer hardware and software. Your customer base are mostly
financial institutions, utilities and state revenue departments - entities that
process large quantities of checks.

You are asking for us to complete the following table, indicating the
taxability of each by placing a "T" (taxable) or an "N" (nontaxable) beside
each item.

STATE: TEXAS

T Hardware
T Software - purchased
T Software - custom
T Installation by COMPANY
N Installation by 3rd party **
T Freight Charges
N Training on site *
N Training in **, WI
T Maint agreement - hardware
T Maint agreement - software
T Repair parts ***
T Service Call Labor ***
T Travel Expenses *
T Supplies

Notes:

• must be separately stated

** Charges for installing and configuring software not sold by the 3rd party
are not taxable.
However, the initial set up of a computer, i.e. connecting the monitor mouse,
keyboard and printer to the CPU, is considered assembly and is subject to sales
tax.

*** parts and labor not covered under warranty or maintenance agreement are
taxable

**** travel expenses, mileage, etc. related to the sale of taxable item are
taxable

Sales to Texas state agencies and to Federal Credit Unions are exempt from
sales and use tax.

Other Areas COMPANY Should Be Concerned With:

Consultation services. Consultation services which are the expert or
professional opinions of the consultant are not taxable if they are not related
to sales of taxable items. Consultation services more in the nature of
information services, such as where to get the best price on a product, are
taxable as information services.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division