If an IT services vendor asks a multi-state customer to issue a Texas multi-state benefit exemption certificate under a tax-included contract, is the customer required to issue one?

Plain-English summary

Company A operates retail stores and support facilities nationwide and contracted with a computer services company ("Company B") to manage its information technology operations — data processing, facilities management, programming, and other taxable and nontaxable services. The contract was a tax-included contract for Texas sales and use tax purposes, and the taxable services benefited both Company A's Texas locations and its out-of-state locations.

Because Company B was best positioned to know the technical details of the work, it asked Company A to issue a Texas sales and use tax exemption certificate asserting a multi-state service benefit exemption — this would shift responsibility for determining and paying Texas tax onto Company A itself, and relieve Company B of collection/remittance duty on those transactions.

Company A asked the Comptroller to confirm it was not required to issue such a certificate, relying on Tax Code § 151.330(e)-(f) (exempting services used outside Texas, or the out-of-state portion of services used both inside and outside Texas) and Rule 3.330(f)(3), which describes a multi-state customer's option to issue an exemption certificate and separately report/pay tax on the Texas-benefiting portion itself.

The Comptroller agreed: Company A was correct that it was not required to issue the certificate. But the ruling also clarifies the mechanics if Company A changes its mind: if Company A does issue the multi-state benefit certificate and Company B accepts it, Company B should refund the tax it already collected under the tax-included contract, so that Company A can take over determining and remitting the correct amount of Texas tax itself.

What this means for you

Multi-state businesses buying data processing or similar taxable services

Issuing a multi-state benefit exemption certificate under Rule 3.330(f)(3) is your option, not an obligation your vendor can force on you — even if the vendor would prefer you take on the tax determination work because you have better visibility into where the services are actually used.

IT services providers and vendors with tax-included contracts

You cannot require a multi-state customer to issue a multi-state benefit certificate. If your customer does issue one after already being billed under a tax-included contract, you need to refund the tax you collected so the customer can take over remitting the correct amount.

Accountants and tax professionals

This letter is a clean confirmation that the multi-state benefit certificate mechanism in Rule 3.330(f)(3) is purchaser-elected, and it also addresses the practical wrinkle of switching from vendor-collected to purchaser-remitted tax mid-contract via a refund-then-certificate sequence.

Common questions

Q: Is a multi-state customer required to issue a multi-state benefit exemption certificate if its vendor asks for one?
A: No. Issuing the certificate is the purchaser's choice under Rule 3.330(f)(3), not something a vendor can require.

Q: What happens if the customer decides to issue the certificate after already being taxed under a tax-included contract?
A: The vendor, upon accepting the certificate, should refund the tax it already collected so the customer can determine and remit the correct Texas tax on the Texas-benefiting portion itself.

Q: Who becomes responsible for the tax once a multi-state benefit certificate is issued and accepted?
A: The purchaser (Company A) becomes solely responsible for determining and paying the Texas tax on the covered transactions, and the seller (Company B) is relieved of collection/remittance responsibility for those same transactions.

Q: Can any multi-state company rely on this exact answer?
A: Not directly. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own contract terms with a tax professional.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.330(e), (f) (services used outside Texas / partly outside Texas)
• 34 Tex. Admin. Code § 3.330(f)(3) (multi-state benefit exemption certificate for data processing services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200011930L

Original ruling text

November 7, 2000

Dear **:

Thank you for requesting an administrative ruling on behalf of your client with
regard to the proper use of a Texas sales and use tax exemption certificate
asserting a multi-state service benefit exemption. The facts you wish us to
consider related to the request are outlined below.

Your client, Company A, operates retail stores and support facilities
throughout the United States. Company A has entered into a contract with a
well-known computer services company ("COMPANY B") to manage Company A's
information technology operations. The services provided under the contract
between Company A and COMPANY B include data processing services, facilities
management services, programming services, and other taxable and non-taxable
services. The contract is a tax included contract for Texas sales and use tax
purposes.

The taxable services provided by COMPANY B will benefit COMPANY A's Texas
locations as well as its out-of-state locations. Due to the nature of the
services provided, COMPANY B is best suited to determine the amount of tax due
under the contract because it is in possession of the detailed work
descriptions and other information necessary to make sales and use tax
determinations. Because of this multi-state benefit, COMPANY B has requested
that Company A provide COMPANY B with a Texas sales and use tax exemption
certificate asserting a multi-state service benefit exemption. COMPANY B
believes that such a certificate is necessary in order for COMPANY B to
determine its tax liability under the contract

You believe that Texas law provides an exemption from sales and use tax for
taxable services that benefit locations outside of Texas. Texas Tax Code Ann.
("TTC") 151.330, Interstate Shipments, Common Carriers, and Services Across
State Lines (Vernon's 1992, Supp. 2000), provides the following:

(e) Services performed for use outside this state are exempt from the tax
imposed by Subchapter C of this chapter.

(f) Services performed for use both within and outside this state are exempt to
the extent the services are for use outside this state and made taxable on or
after September 1, 1987.

(g) Additionally, you point to Comptroller's Rule 34 TAC 3.330 (f) that
provides the following with respect to taxable services that benefit both Texas
and out of state locations:

(3) A multi-state customer purchasing data processing services for the benefit
of both in-state and out-of-state locations is responsible for issuing to the
data processing service provider an exemption certificate asserting a
multi-state benefit, and for reporting and paying the tax on that portion of
the data processing charge which will benefit the Texas location. A data
processing service provider that accepts such a certificate in good faith is
relieved of responsibility for collecting and remitting tax on transactions to
which the certificate relates (Emphasis added).

In order to claim a multi-state service benefit exemption, a purchaser must
issue an exemption certificate asserting a multi-state service benefit
exemption to the seller of taxable services. By issuing such a certificate,
the purchaser legally becomes solely responsible for determination and payment
of Texas sales or use tax on the transactions covered by the certificate.
Additionally, by accepting the certificate, the seller is relieved of all
responsibility for collection or payment of Texas sales or use tax on the same
transactions.

You hereby request the following administrative ruling:

1. Company A is not required to issue an exemption certificate asserting a
   multi-state service benefit exemption to COMPANY B.

Response: You are correct. Under the facts presented, Company A is not
required to issue an exemption certificate. If Company A issues the exemption
certificate asserting a multi-state service benefit to COMPANY B and COMPANY B
accepts the certificate, it should refund the tax collected under the tax
included contract so that Company A can remit the appropriate amount of tax to
the Comptroller.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Policy Division, Comptroller of
Public Accounts. You may also e-mail our tax help section at:
.

Sincerely,

Tom Soto
Tax Policy Division