For a company with both Texas and California offices sharing software licenses across state lines (via servers in either state, or a single floating license), how is each scenario taxed by Texas?

Plain-English summary

A company with locations in both Texas and California asked the Comptroller about three different multistate software licensing setups.

Situation 1 — software delivered to and first used in Texas, later a California license added. Company A buys software delivered to its Texas location and placed on its Texas server, licensed for Texas use. Months later, it buys an additional license for its California location to access that same Texas-hosted server. The Comptroller's answer: the original Texas software purchase and use is taxable in Texas. The LATER California license is ALSO subject to Texas sales tax if Company A purchased that license in Texas — subsequently downloading a copy to California doesn't undo the Texas tax. But if the California license is instead purchased from OUTSIDE Texas, and Company A made no use of it before downloading it to California, it is NOT subject to Texas use tax.

Situation 2 — software delivered to and hosted in California, Texas location accesses it. Company A buys two $100 licenses (one for California use, one for Texas use) for software delivered to and hosted on a California server; the Texas location accesses the California server directly, or downloads a copy for local use. The Comptroller's answer: the Texas license is subject to Texas USE tax once the software is downloaded or otherwise placed on a computer in Texas. As a member of the multistate tax compact, Texas allows a credit against its use tax for legally-imposed sales/use tax already paid to another state (or subdivision) on the same property — even if that state isn't itself a compact member.

Situation 3 — a single floating license shared across states. Company A buys one floating license (usable by only one person at a time) covering software hosted on a California server, used by whichever location needs it at a given moment — sometimes accessed remotely from Texas, sometimes downloaded and used locally in Texas. The Comptroller's answer: the floating license is subject to Texas use tax (with the same multistate compact credit available) whenever it's being used in Texas — no special "allocation" formula is required beyond that use-tax-when-used-in-Texas approach.

What this means for you

Multistate companies sharing software licenses across state lines

The recurring theme across all three scenarios: Texas taxes software based on where it was purchased/first used (sales tax) or where it's actually used/downloaded (use tax) — not based on where the underlying server physically sits. Moving a license or downloading a copy across state lines after the fact doesn't retroactively change an already-taxable Texas purchase, but a license purchased and first used entirely outside Texas generally isn't pulled into Texas tax just because it's later accessed remotely from Texas equipment.

Accountants and tax professionals

This letter is a useful three-scenario reference for structuring and taxing multistate/multi-location software licenses, including the multistate compact credit mechanism for use tax already paid to another state on the same software.

Common questions

Q: If I buy a software license in Texas and later download it to an out-of-state office, does that remove the Texas tax?
A: No, per this letter — the original Texas purchase stays taxable regardless of later relocation of the software.

Q: If a Texas office accesses software hosted on an out-of-state server, does Texas tax apply?
A: Yes, per this letter — Texas use tax applies once the software is downloaded or otherwise placed on a Texas computer, with credit available for tax already paid to another state on the same property.

Q: How is a single "floating" license shared across multiple states taxed by Texas?
A: Per this letter, it's subject to Texas use tax whenever it's being used in Texas, with the same multistate compact credit available.

Citations and references

No specific Tax Code section or Comptroller rule number is cited in this letter; the Comptroller applied its general software sales/use tax sourcing and multistate compact credit policies to these three scenarios.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9809798L

Original ruling text

September 8, 1998

Dear Mr. **:

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

Situation 1. Company A has locations in both California and Texas. Company A
purchases software from a vendor either outside or inside of Texas and has the
software delivered by the seller to the Texas location and placed on the server
in Texas. The payment to the vendor is for a license to use the software in
Texas. After using the software in Texas for several months Company A decides
to buy a license for use of the Software in California. The California
location would access the software on the Texas server and use it. Would the
California license be subject to Texas Tax? If the software program or a copy
of the software program located on the Texas server were downloaded to the
California location and then used in California what would the Texas sales tax
implications be?

Response: The software purchased and used in Texas is subject to Texas tax.

The licenses purchased for use in California are subject to Texas sales tax if
Company A purchased the software in Texas. The fact that it was subsequently
downloaded to California would not serve to exempt the transaction.

The licenses purchased for use in California from outside Texas are not subject
to Texas use tax if Company A made no use of the software licenses prior to
downloading the software to the California location.

Situation 2. Company A has locations in both California and Texas. Company A
purchases software from a vendor outside or inside of Texas and has the
software delivered by the seller to the California location and placed on the
server in California. The cost of the software is $100 for a license to use
the software by our California location and $100 for a license to use the
software by our Texas location. The Texas location will accesses the
California server directly. Would the Texas License be subject to Texas sales
tax? If the software program or a copy of the program located on the California
server were downloaded to the Texas location and then used in Texas would the
Texas License be subject to Texas sales tax?

Response: The Texas license would be subject to Texas use tax if the software
is downloaded or otherwise placed on a computer in Texas. As a member of the
multistate compact, Texas will allow as a credit against Texas use tax due any
combined amounts of legally imposed sales or use taxes paid on the same
property to another state or any subdivision of another state. Credit will be
allowed even though the other state may not be a member of the multi-state
compact.

Situation 3. Company A has locations in both California and Texas. Company A
purchases software from a vendor outside or inside of Texas and has the
software delivered by the seller to the California location and placed on the
server in California. Company A purchases one single use floating license that
covers use of the software in all locations. When the software is being used
in California it is considered licensed for use in California. When the Texas
location needs to use the software it is either accessed on the California
server by Texas or it is downloaded to the Texas facility and used in Texas.
At that time the floating license is considered a Texas License. The software
can only be used by one person at a time. How would Texas tax this floating
license? Would some sort of allocation need to be made up front?

Response: The floating license would be subject to Texas use tax. As a member
of the multi-state compact, Texas will allow as a credit against Texas use tax
due any combined amounts of legally imposed sales or use taxes paid on the same
property to another state or any subdivision of another state. Credit will be
allowed even though the other state may not be a member of the multi-state
compact.

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. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division