Which of a third-party IT consultant's on-site network services — server maintenance, hardware repair, software support, network administration — are taxable in Texas?
Apply this to your situation
This page answers the general question as of 1999. Ezel answers yours, under current Texas tax law, with citations.
Plain-English summary
A business asked the Comptroller to sort out the sales tax treatment of a dozen different IT services that its client was buying from a third-party consultant. The consultants work on-site full-time, essentially functioning as part of the client's own IT department.
The Comptroller answered each item separately, and the line consistently drawn is between charges tied to a taxable item you sold (taxable) and charges for a service that stands on its own, with no taxable item sale attached (not taxable):
- Designing/testing new network (NT domain) architecture and testing/implementing new server tools: not taxable when separately stated and not related to selling a taxable item.
- Maintaining physical servers (NT, Exchange, SQL): taxable, because it's maintenance of tangible personal property.
- Maintaining software applications the consultant didn't sell: not taxable.
- General network administration not tied to a taxable item sale: not taxable.
- Installing/configuring software not sold by the consultant: not taxable.
- Installing and repairing hardware components: the initial setup of a new computer (connecting monitor, mouse, keyboard, printer to the CPU) counts as taxable assembly, and repairing hardware components is taxable as repair of tangible personal property.
- Technical support for software applications: taxable if the consultant sold that software, not taxable if it didn't.
- Setting up or updating mail/network accounts: not taxable (treated the same as installing software not sold by the consultant).
- Ordering equipment/software from a third party on the client's behalf: not taxable, as long as the consultant isn't acting as the actual seller of that equipment or software.
What this means for you
IT consultants and computer service businesses
Whether your invoice line is taxable often comes down to two things: (1) did you sell the underlying hardware or software, and (2) are you performing physical assembly/repair of equipment versus a stand-alone design, testing, or administration service. Separately stating non-taxable service charges on your invoices matters — bundling them with taxable hardware work can pull the whole charge into the taxable column.
Business owners buying IT support
If you're paying a consultant for network administration and support, ask them to break out charges for physical hardware repair/assembly and software support on things they sold to you (taxable) from design, testing, general administration, and support on software they didn't sell (not taxable) — it affects what tax you should expect to see on the invoice.
Accountants and tax professionals
This letter is a useful item-by-item map for classifying mixed IT service contracts, but note the Comptroller flagged two of the twelve items (network architecture "implementation" and "implementing" new server tools) as needing more factual detail before a final answer — those weren't fully resolved in this letter.
Common questions
Q: Is maintaining our company's servers taxable?
A: Yes — maintenance of tangible personal property like physical servers is taxable.
Q: Is technical support on software taxable?
A: Only if the consultant providing the support also sold you that software. Support on software the consultant didn't sell isn't taxable.
Q: Is the initial setup of a new computer taxable?
A: Yes — connecting the monitor, mouse, keyboard, and printer to the CPU is considered assembly and is subject to sales tax.
Q: Can I rely on this letter for my own IT services contract?
A: This letter answers the specific facts presented by the requester; different facts, even if similar, may lead to a different result, and only the original requester can rely on it for detrimental reliance purposes.
Citations and references
No specific Tax Code section or Comptroller rule number is quoted in this letter.
Source
- STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
- Opinion: https://star.comptroller.texas.gov/view/9910809L
Original ruling text
October 20, 1999
Subject: Sales tax policy on computer network relating consulting services.
Dear **:
This is in response to your request for a ruling on the following fact
situation and questions:
The following is a list of services that my client currently is contracting
with a third party to perform. Could you please indicate the taxability of each
of these. The consultants are on-site at the client's facility on a full-time
basis. They take all their directions from the client and really act as a part
of the IT [Information Technology] department or the network administrators.
The services are:
- Designing, testing, and implementing NT [Network Technology] domain
architecture.
Response: A separately stated charge for designing and testing NT domain
architecture, not related to the sale of a taxable item is not taxable. You
will need to provide more detail on the specific services involved in
implementing the NT domain architecture, so that I may provide you with a more
informed response.
- Testing and implementing new server tools and applications on the network.
Response: A separately stated charge for testing, not related to the sale of a
taxable item, is not taxable. You will need to provide more detail on the
specific services involved in implementing the new server tools.
- Maintaining the NT servers, Exchange servers, and SQL servers.
Response: Maintenance of tangible personal property is taxable.
- Maintaining any and all applications that run off the servers.
Response: Maintenance of software programs that you did not sell is not
taxable.
- General Network Administration.
Response: Nontaxable, if not related to the sale of a taxable item.
- Install and configure software on new or refurbished PCs.
Response: Charges for installing and configuring software not sold by you are
not taxable
- Install and repair hardware components on upgraded or new PCs.
Response: 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. The repair of hardware components is taxable as the repair of
tangible personal property.
- Assist users with application problems.
Response: Technical assistance on software applications that your company sold
is taxable. If your company did not sell the software sales tax is not due on
your charge for technical support.
- Assist users with network login problems.
Response: Technical assistance on software applications that your company sold
is taxable
- Setup new mail and network accounts.
Response: Same as response to 6.
- Update mail and network accounts
Response: Same as response to 6.
- Order equipment and software (from another 3rd party).
Response: Your separately-stated charge to your client to order equipment and
software from a third party for your clients is not taxable if you are not
acting as the seller of the equipment or software.
Sales tax rules are available on the Internet at:
Enter 34 for the Title Number, 1 for the Part Number and the last three digits
of the Rule number, i.e., 322 for Rule 3.322, after Rule)
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
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