A new business will offer computer-aided drafting (CAD) production, CAD training, computer consulting, customization/deployment recommendations, and custom programming, all billed hourly and without selling any hardware or software. Which of these services are subject to Texas sales tax?

Plain-English summary

Someone starting a computer drafting and consulting business asked how Texas sales tax applies to a lineup of hourly-billed services: computer-aided drafting (CAD) production, CAD training, general consulting on hardware/software needs, customization and deployment work, and client-specific programming — with no hardware or software actually sold by the business itself.

The Comptroller broke the services out individually:

• CAD production — taxable, under Rule 3.312(a).
• General consulting not related to selling a taxable item — not taxable.
• CAD training — not taxable if separately stated.
• Customization, deployment, standards, and hardware/software recommendations — not taxable if unrelated to selling a taxable item (i.e., the business isn't also selling the hardware/software being recommended).
• Programming: writing a program from scratch where the client gets exclusive rights to it is not taxable; creating or licensing a program where the client does not get exclusive rights is taxable, under Rule 3.308.

What this means for you

IT consultants, CAD shops, and custom software developers

Whether a service is taxable in Texas often turns on whether it's tied to a sale of a taxable item (software/hardware) and, for custom code, whether the client walks away with exclusive rights. Pure advice-giving and training (if separately billed) tend to be exempt; production work like CAD drafting and non-exclusive software licensing tend to be taxed.

Businesses that recommend but don't sell hardware/software

Because this business only recommends products and doesn't sell or take a commission on them, its consulting, customization, and recommendation charges fall outside the taxable-item link and are not taxable — a distinction that would flip if the business started selling what it recommends.

Accountants and tax professionals

The letter is a useful checklist for classifying a mixed-services computer consultancy: Rule 3.312(a) for CAD, and Rule 3.308's exclusive-rights test for custom-versus-licensed software, both keyed to whether the charge is tied to a taxable-item sale.

Common questions

Q: Is charging clients for computer-aided drafting (CAD) production taxable in Texas?
A: Yes, under Rule 3.312(a).

Q: Is general IT/hardware-software consulting taxable?
A: Not if the charge isn't related to selling a taxable item.

Q: Is CAD training taxable?
A: Not if it's separately stated from other charges.

Q: Is custom programming taxable?
A: Not if you write it from scratch and the client gets exclusive rights to it. It IS taxable if you create or license a program to a client who does not get exclusive rights.

Q: Can I rely on this letter for my own consulting business?
A: No. It's based on the specific facts presented and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.312(a) (computer aided drafting)
• 34 Tex. Admin. Code Rule 3.308 (computer programs)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9909697L

Original ruling text

September 22, 1999

Subject: Sales tax charges for drafting & consulting services

Dear **:

This is in response to your request for a ruling on the following fact
situation and questions:

I am starting a business which will primarily offer computer drafting
production services as well as consulting services such as computer aided
drafting training, customizations, deployment, standards and hardware/software
recommendations. I will not be selling any of the hardware or software I
recommend and my programming will generally be client specific. All of these
services will be billed on an hourly basis.

I have researched your and have seen several documents relating to
similar business enterprises and have also had some of my questions addressed
via email. However, I would like to receive a more formal response that I
could keep on record for clients who may question my charging sales tax on
specific services and for help in setting up my books with an accountant.

Any additional pertinent tax code, forms or applications you could forward
would be greatly appreciated.

Response: Following are my responses to the various services that you will
provide:

Computer aided drafting- taxable (see Rule 3.312 (a))

Consulting - A charge for consulting services, that are not related to the sale
of a taxable item, is not taxable

CAD Training - training is not taxable if separately stated

Customizations, deployment, standards and hardware/software recommendations:
Charges for these services are not taxable if not related to the sale of a
taxable item (i.e., computer hardware/software).

Programming- Creating a computer program (using a programming language such
as JAVA) from scratch for a customer that who will be given the exclusive
rights to the program is not taxable. Creating or licensing a software program
to another where the client does not obtain exclusive rights is taxable. See
Rule 3.308.

Sales tax rules are available on the Internet
.

You may download an application for a sales tax permit, which allows you to
issue resale certificates for taxable items that you will resell, at :

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:

Gilbert Zamora

Tax Policy