The Texas Comptroller of Public Accounts (“Comptroller”) recently updated its rule for computer hardware, programs, software, and sales. In its updated version, the rule states that the sale, lease, or license to use a computer program is subject to Texas sales tax when the program is “stored, used, or consumed” in Texas. Of particular note, the rule specifically states the sales price for a program cannot be allocated to other states even though other copies are used, installed, or accessed in another state.
In essence, 100% of the sales price of a program becomes taxable once the program is stored, used, or consumed in Texas, regardless of use outside of Texas. For example, a business has 100 software licenses sold to it for a total of $1,000, making each license having a sales price of $10. Ninety-nine of the software licenses are used in Louisiana. One of the software licenses is used in Texas. According to the new rule, the entirety of the $1,000 would be subject to Texas sales tax as soon as the one software license is used in Texas, even though $990 worth of software licenses are used in Louisiana. Such a position concerning the entirety of the sales price being subject to sales tax is extremely aggressive, and potentially challengeable. Affected businesses may want to request a letter ruling from the Comptroller on this issue, especially if the sales tax impact is substantial.
In addition to the Comptroller’s position on allocation, the rule goes into further detail on the repair or modification of computer programs, which are not subject to Texas sales tax when the person performing the repair or modification did not sell the program and retains no rights in the program, even after the program is adjusted. Therefore, even though a “new” program may be created, the changes are considered to be a nontaxable service. This distinction can provide sales tax planning opportunities for businesses when deciding between two vendors for a program repair
The new rule further discusses sales for resale. Specifically, the rule allows “internet hosting providers” the ability to purchase computer programs to resell in their business, so long as all of the rule’s criteria are met. By way of reference, an “internet hosting provider” is one providing unrelated user access over the internet to computer services by using property that may store or process the user’s data or use software. The criteria that must be met are:
|· the Internet hosting provider acquires the program from an unrelated vendor for the purpose of selling the right to use the program to an unrelated user of the provider's Internet hosting services in the normal course of business and in the form or condition in which the provider acquired the program;
|· the Internet hosting provider offers the unrelated user a selection of computer programs that are available to the public for purchase directly from an unrelated vendor;
|· the Internet hosting provider executes a written contract with the unrelated user that specifies the name of the computer program sold to the unrelated user and includes a charge to the unrelated user for computing hardware;
|· the unrelated user purchases the right to use the computer program from the Internet hosting provider through the acquisition of a license; and
|· the Internet hosting provider does not retain the right to use the computer program under that license.|
Interestingly, the revised rule does not speak to software as a service. The Comptroller appears to be carefully considering its position concerning software as a service before another rule change is made. However, it is worth noting an administrative decision was previously rendered stating where the user of software as a service is located in Texas, sales tax is owed on the transaction in Texas.
Businesses should carefully consider the new updates to the rule when conducting transactions involving computer hardware or software. With a bit of planning, potential tax savings may exist.
David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. David worked for the Florida Department of Revenue as a Senior Attorney before entering private practice. You can read his BIO HERE. For more information please call us at 888-966-8216.