Texas Updates Rule for Computer Hardware, Programs and Services

Texas has updated its sales tax rule based on previously enacted legislation and department policy for computer hardware, programs, services, and sales to include the following provisions:

• The sale, lease, rental or license of computer hardware and computer programs are taxable but may qualify for a resale exemption;
• A sale for resale includes the sale of a computer program to an Internet hosting provider, if the transaction meets certain criteria.
• Contract programming services are exempt, so long as the programmer transfers all rights, including intellectual property rights, to the computer program to the purchaser. Contract programming may result in the creation of tangible personal property, but it does not constitute the sale thereof;
• Repair, maintenance, or restoration of a computer program is taxable when performed by a person who sold the computer program. Computer program repair, maintenance, or restoration includes error correction, technical fixes, and technical support, whether provided over the telephone or online;
• Separately stated charges for instruction on how to use a computer program by the seller of the program are not taxable; and
• The sales price of a computer program, or a single license for a computer program, that is sold or used in Texas may not be allocated to other states based on the purchaser making copies of the program for use in another state, installing the program on hardware located in another state, or accessing the program in another state.

In addition, the amended rule includes definitions for “computer program,” “contract programming,” and “Internet hosting.” There are significant concerns with the Department’s position regarding the allocation of the price of a computer program that is used in multiple states. Since a computer program is defined as tangible personal property, the Department takes the position that cannot be concurrently used in multiple locations.  The Department did withdraw a proposed amended that would have assessed Texas tax on 100% of the price of a computer program installed on a computer outside of Texas if any use occurs in Texas but has indicated they will continue to look at this issue.  At this time, it is recommended that any company that has the option to install software outside of Texas should do so to avoid tax on 100% of the price.  It is expected that there will be challenges as states that tax based on user location may not provide a credit for the tax paid to Texas.  The new rule does not address Software as a Service but will likely be included in a future amendment. (34 TAC 3.308, Texas Comptroller of Public Accounts, Effective January 22, 2018)