For Texas franchise-tax apportionment, when may software embedded in tangible personal property be treated separately from the property?

Plain-English summary

This short policy letter explains how to apportion a sale of tangible personal property (TPP) that has a software component for the pre-2008 Texas franchise tax.

The starting rule is that the sale is a receipt from the sale of TPP.

There is one exception. The software receipt can be broken out and apportioned separately only if all four of these are true:

1. The software is licensed separately from the TPP;
2. The software is priced separately from the TPP;
3. The software can be installed by the purchaser; and
4. The software is not all or part of the operating system of the TPP.

If - and only if - all four criteria are met, the receipt for the software may be apportioned to the location of the payor.

Currency note: This applies the pre-2008 franchise tax, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Businesses selling hardware bundled with software

Merely including software in tangible personal property did not make the software receipt separately apportioned. The software had to be separately licensed and priced, purchaser-installable, and not all or part of the property's operating system.

Accountants and tax professionals

Treat the four-part test as conjunctive. All four must be satisfied before the letter allows the software receipt to be apportioned to the payor's location.

Common questions

Q: Is software embedded in tangible personal property automatically apportioned separately?
A: No. The letter starts with the rule that the transaction is a receipt from the sale of tangible personal property.

Q: When does the software portion get sourced to the payor's location?
A: Only when the software is licensed separately, priced separately, installable by the purchaser, and is not part of the TPP's operating system - all four at once.

Q: What if the software is all or part of the property's operating system?
A: Then the fourth condition is not met, so the letter's exception for apportioning the software receipt to the payor's location does not apply.

Citations and references

This letter states the Comptroller's policy test directly and does not cite specific Tax Code sections or Comptroller rules in its text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200402483L

Original ruling text

February 4, 2004

Tangible Personal Property (TPP) with Software

The sale of TPP that has some component of software is a receipt for the sale
of TPP, unless the software:

(1) is licensed separately from the TPP;
(2) is priced separately from the TPP;
(3) can be installed by the purchaser; and
(4) is not all or part of the operating system of the TPP.

If all four criteria are met, the receipt for the software may be apportioned
to the location of the payor.