The function and utility of computers has changed and evolved at an exponential rate over the last several years, and will likely continue to do so, particularly as advancements like artificial intelligence become integrated in more industries. Unsurprisingly, current Texas sales and use tax authority surrounding the use of computers is complex and can create problems for taxpayers who provide computer programs and software, and perform related services. The following types of transactions involving software and computer programs are discussed briefly below:
- Sale of a computer program to a customer;
- Providing "contract programming" services; and
- Providing repair, maintenance, and restoration services for a computer program
Sales of Computer Programs or Software
Comptroller Rule 3.308(c)(1) provides that "[t]he sale, lease, or license of a computer program is a sale of tangible personal property. Tax is due when the computer program, or a license to use the computer program, is transferred for consideration in Texas, or stored, used, or consumed in Texas, in electronic form or on physical media." 1 This stems from the Comptroller's treatment of software as "tangible personal property", the sale of which is generally taxable in Texas. 2
Computer Program or Software Repair, Maintenance, or Restoration
The Comptroller also considers the repair, maintenance, or restoration of a computer program or software to be taxable. 3 Rule 3.308 does not provide a full definition of these services, but does state "[c]omputer program repair, maintenance, or restoration includes error correction, technical fixes, and technical support, whether provided over the Internet or over the phone." 4
Contract Programming Services
In contrast to the above, "contract programming" is considered a nontaxable service. 5 "Contract programming" is defined in Comptroller Rule 3.308(a)(2) to mean "[s]ervices to create or develop a new computer program, or to repair, maintain, modify, or restore an existing computer program, when the person performing the services did not sell, and retains no rights in, the computer program being created, developed, repaired, maintained, modified, or restored." 6 This rule also includes the following examples of "contract programming":
- Writing a new computer program to perform a particular function for the customer where all rights in the program are transferred to the customer;
- Customizing a computer program owned by the customer or licensed to the customer by a third party; or
- Modifying a computer program or performing repair, maintenance, or restoration on a computer program that the programmer wrote for the customer under a prior contract programming agreement. 7
Potential Texas Sales and Use Tax Issues
As the above framework makes clear, the Comptroller's rules regarding computer programs and software are nuanced and contain the potential for confusion between taxable and nontaxable transactions. Both the sale and repair, maintenance, and restoration of a computer program are generally subject to Texas sales tax. And although "contract programming" is not subject to tax, its definition includes elements that reference both the sale and the repair, maintenance, or restoration of computer programs. As is often the case, the tax treatment of a particular transaction will rely on a detailed analysis of the facts.
Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.
Footnotes
1. 34 Tex. Admin. Code § 3.308(c)(1)(A).
2. See Tex. Tax Code §§ 151.051, 151.010.
3. 34 Tex. Admin. Code § 3.308(c)(2).
4. Id.
5. 34 Tex. Admin. Code § 3.308(c)(4).
6. 34 Tex. Admin. Code § 3.308(a)(2).
7. 34 Tex. Admin. Code § 3.308(a)(2)(A)(i)-(iii).
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