When a software consultant charges for a business 'assessment or discovery service' that may (or may not) lead a customer to later buy software, is that assessment charge taxable, and what does it mean for the charge to be 'unrelated' to a taxable sale?

Plain-English summary

A software consulting company asked the Comptroller about the taxability of a "software consulting" charge, specifically for services it calls "assessment or discovery services" — engagements aimed at understanding the impact of implementing a corporate-wide strategic sourcing management program. The deliverable is a written report and interactive presentation; afterward, the customer can choose whether to purchase software, maintenance, and implementation services, but isn't required to.

The Comptroller first addressed the easier baseline rule: charges for installing or modifying software you sold, leased, or licensed to a customer are taxable, as are technical support charges on software you sold/leased/licensed to that customer. But a separately stated TRAINING charge is not taxable (Rule 3.308(b)(3)).

For the broader assessment/discovery service itself, the answer turns on whether the customer buys anything taxable from you at all:

• If the customer buys no taxable items or services from you, the assessment charge isn't taxed — full stop. You still owe tax on your own purchases of taxable items used to provide that nontaxable service.
• If the customer does buy taxable items (including taxable services), the assessment charge's taxability depends on whether it's a cost/expense related to that sale (i.e., baked into the taxable item's total price) or genuinely "unrelated" to it. The Comptroller will treat the separate charge as unrelated and untaxed only if TWO conditions both hold: (1) your records support that you sell the assessment/discovery service on a stand-alone basis in the regular course of business, and (2) you don't discount your taxable-item charges for customers who purchase the nontaxable assessment service.

What this means for you

Software and IT consulting firms offering pre-sale assessment services

Structure and document your assessment/discovery service as a genuine, independently offered service — sell it on a stand-alone basis, keep records proving that, and never discount your taxable software/implementation pricing for customers who buy the assessment. Those two facts together are what keeps the assessment fee out of the taxable base when the customer later buys taxable items.

Businesses bundling free-standing consulting with product sales

The core test generalizes beyond software: whenever you charge separately for advisory/assessment work that COULD lead to a taxable sale, keep it "unrelated" by (1) actually selling that service independently in your regular business, and (2) not using it as a disguised discount mechanism for the taxable product.

Accountants and tax professionals

This letter articulates a precise two-factor test for "unrelated service" status — a useful citable standard whenever a client's consulting/assessment fee sits adjacent to (but arguably separate from) a taxable sale.

Common questions

Q: Is a software installation or technical support charge always taxable?
A: Yes, when the software was sold, leased, or licensed by you to that customer. Training, however, is not taxable if separately stated (Rule 3.308(b)(3)).

Q: If my consulting client doesn't end up buying anything taxable from me, do I owe tax on my consulting fee?
A: No — if the customer purchases no taxable items or services from you, your assessment/consulting charge isn't taxed (though you still owe tax on your own taxable purchases used to provide that service).

Q: What two things do I need to prove to keep an assessment fee "unrelated" to a taxable sale?
A: (1) that you sell the assessment/discovery service on a stand-alone basis in the regular course of business, and (2) that you don't discount your taxable-item charges for customers who buy the assessment service.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.308(b)(3) (computer software — separately stated training charges not taxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005364L

Original ruling text

May 30, 2000

To: **

Subject: Ruling Request on Software Consulting

Dear **:

Thank you for your e-mail to Adina concerning the taxability of a charge for
software consulting. Adina forwarded your e-mail to me for a response.

Charges for installation or for modifications to software you sold, leased or
licensed to a customer are taxable. Likewise, charges for technical support
are taxable when the support is on software you sold, leased or licensed to the
customer. A separately stated charge for training is not taxable. See Rule
3.308(b)(3) on computer software. The rule is found on the Window on State
Government web site at by clicking on "The Sales Tax"
under Quick Links and then by clicking on "State Sales Tax" underneath Current
Tax Rules.

According to your facts, you provide services you call "assessment or discovery
services." The objective of the services is to understand the impact of
implementing a corporate wide strategic sourcing management program.
Information is collected and used to determine the current and future
requirements and the recommended solutions to achieve business objects. The
"deliverables" for such services is in the form of a final written report and
an interactive presentation. After the assessment, a customer can choose
whether or not to purchase software, maintenance and implementation services.
The customer is not required to purchase software.

If you provide the assessment or discovery services to a person who does not
purchase taxable items or taxable services from you, you do not need to collect
sales tax on the service. You must pay sales tax to vendors when purchasing
taxable items used in providing the nontaxable service.

If you provide the services to purchasers of taxable items (including taxable
services), the taxability of the separate charge for the service is dependent
on whether or not the charge is a cost or expense related to the sale (i.e.,
part of the total price of the taxable item). We will consider the separate
charge for the service unrelated to the sale of the taxable item and not
subject to tax if:

Your records support that you sell assessment or discovery services on a
stand-alone basis in the regular course of business; and your charges for
taxable items are not adjusted (discounted) for customers who purchase the
nontaxable service.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

I hope this information helps. If you have further questions, please e-mail me
at , or you may reach me by phone at 1-800-531-5441,
ext. 5-0030.

Sincerely,

David Somerville
Tax Policy Division