If I run a small sole-proprietorship selling software over the internet from Texas, do I need a Texas sales tax permit, and do I owe tax on sales to out-of-state customers?

Plain-English summary

(Note: STAR's own subject heading references software "downloaded from a Texas server," implying the server's location matters, but the actual letter text never mentions a server or its location at all — the analysis turns entirely on where the customer is located when the sale is made, not on where the software happens to be hosted. A corrected subject_title is used above; the url_slug is left unchanged per standing practice.)

Someone who had recently moved to Texas and ran a small sole-proprietorship selling software over the internet — low volume, not their primary income — asked the Comptroller what their Texas tax obligations were and which forms they'd need to file.

The Comptroller explained that Texas treats the sale, lease, or license of software as a sale of tangible personal property, so it's subject to Texas sales or use tax under Rule 3.308. Because the seller is located in Texas and is soliciting sales of a taxable item, they must obtain a sales tax permit and collect and report tax on sales made to purchasers residing in Texas. However, sales shipped or sent electronically to customers outside Texas are not taxable — with the important caveat that the seller must keep documentation of the out-of-state shipment/delivery to support that treatment.

What this means for you

Online software sellers based in Texas

If you're a Texas resident or business selling software over the internet, you need a Texas sales tax permit and must collect tax on sales to Texas-based customers, even if software sales are a small side business. Sales to customers outside Texas escape Texas sales tax, but only if you keep records documenting that the delivery went out of state — don't skip that documentation step.

Accountants and tax professionals

This letter confirms the straightforward "seller location + customer location" framework for internet software sales under Rule 3.308: Texas-based seller, Texas-based customer = taxable; Texas-based seller, out-of-state customer with documented delivery = not taxable. Nothing in the actual analysis turns on server location, despite what STAR's own subject heading for this letter implies.

Common questions

Q: Do I need a Texas sales tax permit if I sell software online from Texas, even as a side business?
A: Yes — if you're soliciting sales of a taxable item (software) from a Texas location, you must get a permit and collect tax on sales to Texas customers.

Q: Do I owe Texas tax on software sales to customers outside Texas?
A: No, as long as the software is shipped or sent electronically to an out-of-state customer and you keep documentation of that out-of-state delivery.

Q: Does the location of my hosting server matter for this analysis?
A: The letter doesn't discuss server location at all — the taxability turns on where the seller is located and where the customer receives the software.

Citations and references

Rule:

• 34 Tex. Admin. Code § 3.308 (Computers — Hardware, Software, Services and Sales)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9910763L

Original ruling text

October 12, 1999

Dear **:

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

I recently moved to Texas. I run a small business (sole-proprietorship), in
which I sell software over the Internet. The volume is low, and it is not my
primary source of income. I have registered the business name in
** County.

I would like to know what my tax obligations are under Texas law. Could you
please send me any forms I need to file my business?

Response: The Texas Tax Code treats the sale of software as the sale of
tangible personal property. Therefore the sale, lease or license of software in
Texas is subject to Texas sales or use tax. See Rule 3.308, copy attached.

Because you are located in Texas and are soliciting sales of taxable items, you
are required to obtain a sales tax permit and collect and report tax on sales
of software made to purchaser's residing in Texas. Sales that are shipped or
sent electronically to customers outside of Texas are not taxable. Be sure to
keep documentation of out-of-state shipment.

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:

You may also wish to download a copy of our publication Guidelines for
Collecting Local Sales and Use Tax (94-105) at:

http://www.window.state.tx.us/taxinfo/taxpubs/taxpubs.html

The State Tax Automated Research system may be accessed on the Internet
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