If a contract programmer bids on a job to enhance a custom software program it did not originally sell, are its charges to modify that program taxable?

Plain-English summary

A contract programmer was bidding on a job to write enhancements to an existing computer program owned by a Texas company. The program had originally been custom-written for that company (which owns the program and all its code), and the programmer bidding on the modification work had not been the one who sold or wrote the original software. The programmer asked whether charges to enhance and improve the program would be subject to Texas sales and use tax.

The Comptroller answered no. Rule 3.308(b)(4), governing computer hardware/software/services/sales, provides that charges to modify an existing program not sold by the person doing the modification are not taxable. Since the programmer bidding on this contract didn't sell the original software, its charges to enhance, improve, and otherwise modify the company's program are not taxable.

What this means for you

Contract programmers and software developers

If you're bidding on work to modify, enhance, or improve software you didn't originally sell to the client, your charges for that work are not subject to Texas sales tax under Rule 3.308(b)(4) — regardless of whether the software itself was custom-written or off-the-shelf. The key fact is simply that you (the person doing the modification) weren't the seller of the underlying program.

Accountants and tax professionals

This is a clean, narrow confirmation of Rule 3.308(b)(4)'s "didn't sell the software" test for software modification services — a useful companion to the broader IT-services letters from the same period (e.g., 9910809L) that draw similar taxable/nontaxable lines based on whether the service provider sold the underlying item.

Common questions

Q: Are my charges to enhance a client's existing software taxable?
A: Not if you didn't originally sell that software to the client — Rule 3.308(b)(4) makes modification charges on a program not sold by the modifier nontaxable.

Q: Does it matter whether the software was custom-written or off-the-shelf?
A: The letter's holding turns on whether the modifier sold the software, not on whether it was custom or off-the-shelf.

Citations and references

Rule:

• 34 Tex. Admin. Code § 3.308(b)(4) (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/9910802L

Original ruling text

October 15, 1999

VIA FAX: **

Dear **:

This is in response to your request for a ruling on the taxability of writing
enhancements to an existing computer program currently owned by a company in
***, Texas. The computer program was custom written for the company and
the company owns the program and all the code belonging to it.

You are bidding on the contract to modify the program and asked if your charges
to enhance and improve the program are subject to Texas sales and use tax.

Response: Subsection (b)(4) of Rule 3.308 - Computers - Hardware, Software,
Services and Sales, provides that charges modify an existing program not sold
by the person doing the modification are not taxable. Therefore, your charges
to enhance, improve, and otherwise modify the *** company's software
program (that you did not sell) are not taxable.

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

cc: Adina Christian