Can a web design/Internet development company's consulting charges (client meetings, strategy discussion, marketing research) be sold tax-free and separately from its taxable HTML production and data entry work?

Plain-English summary

An Internet development company (Active Media) asked whether five categories of activity it books as "consulting" in its accounting system — client meetings about Internet solutions, meetings outlining development plans, meetings discussing revisions, interpreting statistics delivered by e-mail, and researching/discussing marketing options — are taxable. Everything else the company does falls under "design" or "HTML production" and is already treated as taxable.

The Comptroller confirmed: entering information and creating HTML documents are taxable data processing services. Consultation services that reflect the consultant's own expert or professional opinion are not taxable, if they're not related to the sale of the company's taxable services or property.

The letter then applies the mixed-transaction test from a recent Texas appellate decision, Rylander v. San Antonio SMSA Limited Partnership (and its companion case involving Dallas SMSA Limited Partnership): when a transaction that mixes a taxable and nontaxable element is "readily separable" into two elements of comparable value, each element is analyzed separately for tax purposes. Following that case, the letter sets out a three-part test for when consultation services count as genuinely "unrelated" (and thus nontaxable) rather than incident to the taxable HTML/data processing work:

1. The consulting is provided on a stand-alone basis — not required as a condition of buying the taxable item;
2. The price of the taxable item doesn't change based on whether the customer buys the consulting from this vendor or someone else; and
3. The consulting is also offered independently of any sale, and is performed outside of sales situations too.

If those three conditions hold, and the consulting is separately stated from the taxable service charge, the consulting charge is not taxable — because the "real object" of a genuine mixed transaction is understood to be two independently desired, independently provided things (the advice and the taxable service), not one thing incidental to the other.

What this means for you

Web design, IT consulting, and similar service businesses

If you bill for both strategic/advisory consulting and taxable data processing or design work (HTML, data entry), you can potentially keep the consulting portion nontaxable — but only if it passes all three parts of the San Antonio SMSA test: offered stand-alone, price-independent of the taxable work, and genuinely available outside any sales relationship. It must also be separately stated on your invoice.

Any business bundling taxable and nontaxable elements

This is a generally useful framework beyond web design: whenever you combine a taxable item/service with advisory or consulting work, ask whether a customer could realistically buy just the consulting elsewhere without affecting your price for the taxable piece. If the two are genuinely independent, separate them on the invoice to keep the nontaxable portion out of the tax base.

Accountants and tax professionals

This letter is a compact application of the mixed-transaction "readily separable" doctrine from the San Antonio SMSA case to a common modern fact pattern (web/IT consulting bundled with taxable data processing). The three-factor test (stand-alone availability, price independence, availability outside sales situations) is the operative checklist; failing any one folds the consulting charge back into the taxable transaction.

Common questions

Q: Is web design/HTML production taxable in Texas?
A: Yes. Entering information and creating HTML documents are taxable data processing services.

Q: Can I avoid tax on consulting fees by just calling them "consulting" instead of "design"?
A: No — the label doesn't matter. The Comptroller applies a three-part substantive test (stand-alone availability, price independence, and availability outside sales situations) to decide whether consulting is genuinely separate from the taxable work.

Q: Does the consulting charge need to be separately stated on the invoice?
A: Yes. Even consulting that passes the three-part test is only nontaxable when separately stated from the charge for the taxable service.

Q: What is the San Antonio SMSA case about?
A: It's a Texas appellate decision holding that when a mixed transaction is "readily separable" into two elements of comparable value, each element must be analyzed as a separate transaction for sales tax purposes, rather than taxing the whole bundle based on its dominant element.

Q: Can I rely on this letter for my own consulting/service business?
A: No. This opinion is based on the facts presented; other facts, though similar, may provide a different result.

Citations and references

Case law:

• Rylander v. San Antonio SMSA Limited Partnership (and companion case, Rylander v. Dallas SMSA Limited Partnership) — Texas appellate decision establishing the "readily separable" mixed-transaction test

No Texas Tax Code section or administrative rule is cited by number in the original 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/200005257L

Original ruling text

May 3, 2000

Dear ***:

Thank you for your letter request to INDIVIDUAL. Your fact situation is
restated below followed by my response.

You listed the following typical activities that fall under "consulting" in
Active Media's accounting system. You asked if any of these activities are
considered taxable.

Consulting:

1. Client meetings to discuss Internet solutions for client's business.
2. Client meetings outlining Internet development plans.
3. Client meetings to discuss success and revisions to development.
4. Interpretation of statistics delivered via e-mail.
5. Research and discussion of marketing options and efforts.

In general everything under "consulting" is discussing in person or via e-mail
all the work that you might do together. All other work for clients falls
under "design" or "html production." These items are taxable.

Response: Entering information and the creation of HTML documents are taxable
data processing services.

Consultation services that are the expert or professional opinions of the
consultant are not taxable if they are not related to sales of taxable services
or personal property.

In a recent court decision, Carole Keeton Rylander, Comptroller of Public
Accounts of the State of Texas; and John Cornyn, Attorney General of the State
of Texas, Appellants v. San Antonio SMSA Limited Partnership, Appellee & Carole
Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and John
Cornyn, Attorney General of the State of Texas, Appellants v. Dallas SMSA
Limited Partnership, the court found that when a mixed transaction is "readily
separable" into two elements of equal value the elements must be analyzed as
separate transactions for tax purposes.

Following the ruling in this court decision, your consultation services will be
considered unrelated if:

they are provided on a "stand alone basis" and not required with the purchase
of the taxable item,
the price of the taxable item is not affected by acquiring the services from a
different vendor, and
*the services are also offered independent of sale and are also performed
outside of a sales situation.

When the purchase of a nontaxable service is combined with the purchase of
taxable property, but each transaction is independently desired and
independently provided, there is a mixed transaction in which neither element
is "incident" to the other. The real object of the transaction was both the
advice obtained through the consulting services and the resulting taxable
service that was needed. The costs of the two elements of the mixed transaction
must be distinct and identifiable. If your consultation services meet this
criteria, they will not be taxable when separately stated from your charge for
taxable services.

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 Division