Are a digital marketing agency's software sublicense fees, SEO service, Google AdWords consulting (SEM), and Facebook inventory integration (FIM) service each taxable in Texas, and if so, as what kind of taxable item?

Plain-English summary

A digital marketing company offers a bundle of four distinct services and asked how each is taxed under Texas sales tax. (1) It sublicenses a mobile app (owned by a third-party developer) that lets users post photos/videos to multiple social media channels at once, for a monthly fee. (2) It runs search engine optimization (SEO), editing client websites with keywords and meta tags to boost search rankings. (3) It runs search engine marketing (SEM) — consulting clients on which keywords to add to the client's own Google AdWords account and placing the ads through that account. (4) It runs a "Facebook Inventory Migration" (FIM) service for car dealers, either just monitoring an existing third-party inventory feed to Facebook, or actually purchasing that third-party service and reselling it to the client with a 30% markup.

The Comptroller sorted the four into three different tax buckets. Software sublicensing is a taxable sale of a computer program — straightforward, since Texas taxes the sale, lease, or license of any computer program regardless of who wrote it. SEO is a taxable data processing service: editing a website to alter its computerized information for search-ranking purposes fits squarely within the "computerized data manipulation" definition (with the standard 20% data-processing exemption knocking down the taxable base). SEM is not taxable at all — advising a client which keywords to use in the client's own existing ad account, and placing the order, isn't on the list of taxable services in § 151.0101; it's consulting/ordering, not a data processing or other listed service. FIM splits down the middle: pure monitoring of a client's inventory feed as it displays on Facebook isn't a taxable service, but when the company purchases the third-party dealer inventory management service and resells it to the client (with its markup layered on top), that whole resale — inventory storage/manipulation service plus markup — is a taxable data processing service (though the company can buy the underlying third-party service itself tax-free using a resale certificate).

What this means for you

Digital marketing agencies bundling multiple service lines

Don't assume your whole invoice gets one tax answer — this ruling shows genuinely different services in the same bundle (software licensing, SEO, SEM, inventory feed monitoring) can land in three different tax categories on the same bill. Separately stating each service line, as this taxpayer did, is what let the Comptroller analyze — and tax — each one independently rather than defaulting the whole thing to taxable.

Companies reselling third-party SaaS/data services with a markup

If you buy a third-party data-processing-type service and resell it to your client (even bundled with your own monitoring/management fee), the whole resale amount — including your markup — becomes taxable as a data processing service, per § 151.007(b)'s inclusion of markup in "sales price." You can use a resale certificate to buy the underlying third-party service tax-free yourself, but you must collect tax on what you charge the client.

Accountants and tax professionals

The SEO holding leans on Comptroller's Decision No. 44,736 (2005) (website creation/hosting/maintenance = data processing), a useful anchor for other website-modification service disputes. Watch Rule 3.330's presumption: if the monitoring fee and the resold third-party service charge aren't separately stated, the entire combined charge is presumed taxable — separate line-item billing (as this taxpayer used) is what preserves the split treatment.

Common questions

Q: Is all software licensing taxable in Texas, even if the seller doesn't own the software?
A: Yes — sublicensing (reselling a license you're authorized to grant) is still a taxable sale/lease/license of a computer program, regardless of whether the licensor owns or merely resells rights to the software.

Q: Why is SEO taxable but SEM isn't, when both involve search engine work?
A: SEO involves editing and manipulating the client's own website/data (a data processing service). SEM here is pure keyword consulting and ad placement within the client's existing Google AdWords account — it doesn't involve data manipulation of the client's own property and isn't on the list of taxable services.

Q: If I just monitor a client's existing data feed without reselling any underlying service, is that taxable?
A: Not on these facts — pure monitoring of information as it's displayed elsewhere (here, on Facebook) isn't itself a taxable service, as long as you're not also purchasing and reselling the underlying data storage/management service.

Q: Can another digital marketing company rely on this ruling for its own service bundle?
A: No. It binds the Comptroller only for the taxpayer and facts presented; different service definitions or billing structures could be analyzed differently.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (sales tax imposed); § 151.010 (taxable item); § 151.009 (tangible personal property includes computer programs)
• Tex. Tax Code § 151.0031 (computer program definition); § 151.0035 (data processing service definition); § 151.0101(a)(12) (data processing listed as taxable)
• Tex. Tax Code § 151.351 (20% exemption for data processing/information services); § 151.151 (resale certificate); § 151.007(b) (sales price includes markup)
• 34 Tex. Admin. Code § 3.308(c)(1) (sale/lease/license of computer program taxable); § 3.330 (data processing services — separately stated charge presumption)

Cited prior guidance:

• Comptroller's Decision No. 44,736 (2005) — website creation, hosting, and maintenance are data processing services

Source

• Landing page (STAR search): https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201903015L

Original ruling text

March 22, 2019

RE: Private Letter Ruling No. 20180314160029

**, Taxpayer No. **

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ENDNOTE: 1] We are responding to your request dated March 08, 2018. Additional information relating to the request was received on April 17, 2018, July 10, 2018, and Dec. 4, 2018. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability for the licensing of software applications and the provision of search engine optimization services.

Facts Presented

** (Taxpayer), offers a variety of services enabling their customers to improve their online presence. These services include search engine optimization (SEO), search engine marketing (SEM), and Facebook inventory migration (FIM). Taxpayer also sells licenses for */*** (MS/MA) software.

The MS/MA software is a mobile device application that allows users to take a photo or video and send it to all of their social media channels at the same time, saving the time and effort of posting the content to one social channel at a time. Taxpayer does not own the software. Taxpayer is authorized by the software developer to sublicense the software to Taxpayer’s customers. Taxpayer charges its customers a monthly licensing fee for the software.

The SEO service increases the visibility of a client’s website by incorporating keywords, known as “meta tags,” into the client’s websites. Incorporating these meta tags increases the search ranking of the website when a search engine user searches for those keywords. Taxpayer performs this service by researching relevant keywords, editing the client’s website to incorporate the keywords and meta tags, analyzing and recommending optimal website structure for SEO purposes, and creating traffic analysis reports. Taxpayer bills clients for SEO services on a monthly basis.

The SEM service involves consulting with clients regarding the use of the Google AdWords service, a service that allows advertisers to display search hits at the very top of a search results page. Taxpayer compiles and proposes a list of keywords that the client should input into its existing Google AdWords account. Taxpayer uses the client’s existing Google AdWords account to place such ads for them. The client is already paying Google for the ads, but Taxpayer would be merely advising client which keywords to use and ordering the ad through their AdWords system. Taxpayer bills these services on a monthly basis.

Facebook offers a marketplace that allows customers to advertise automobiles for sale. The FIM service helps automobile dealers integrate their inventories with their Facebook business pages. Taxpayer provides its FIM service through two different methods.

The first method involves monitoring client’s information from a third-party dealer inventory management service that is displayed on Facebook. Taxpayer’s creates a client account with a third-party service provider that integrates external information with the client’s Facebook account. Taxpayer then enables its client’s Facebook page to accept the information coming from the third-party service. Taxpayer will monitor their clients’ inventory feed and send it to their clients’ Facebook to display on the marketplace. Finally, Taxpayer ensures that the service is working correctly and resolves any issues with the third-party service provider.

The second method includes both the sale of the third-party dealer inventory management service and the monitoring of the information displayed on Facebook. Taxpayer purchases the third-party dealer inventory management service and resells it to its client. Taxpayer charges its customer for the price of the third-party service plus a 30 percent management fee. This fee is charged in addition to the FIM monitoring fee. The third-party service and monitoring fees are charged separately.

Taxpayer offers its MS/MA software separately and under a different agreement from its other services. The SEO, SEM, and FIM services are billed to clients on a single invoice and, when offered together, are separate line items.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: Are charges to license the MS/MA software taxable?

Ruling One: Yes. Taxpayer's charges to license the MS/MA software are a taxable sale of tangible personal property.

Analysis for Ruling One: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Tangible personal property is personal property that is perceptible to the senses in any manner and includes a computer program. Section 151.009 (“Tangible Personal Property”). The term taxable services includes only those services listed in Section 151.0101 (“Taxable Services”).

Sales tax is due on the sale, lease or license of a computer program. Rule 3.308(c)(1) (Computers—Hardware, Computer Programs, Services, and Sales). Section 151.0031 (“Computer Program”) defines a computer program as a series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information. The MS/MA software is an application that allows users to take a photo or video and send it to all of their social media channels at the same time. Taxpayer's monthly licensing fees for its MS/MA software are charges for the license of a computer program. Accordingly, Taxpayer must collect sales tax on the monthly licensing fees for its MS/MA software.

Question Two: Is the SEO service a taxable service?

Ruling Two: Taxpayer's SEO service is a taxable data processing service.

Analysis for Ruling Two: Data processing is a taxable service. Section 151.0101(a)(12). Data processing includes computerized data and information storage or manipulation. Section 151.0035 (“Data Processing Service”). Twenty percent of the amount charged for a data processing service is exempt from tax. Section 151.351 (Information Services and Data Processing Services).

Taxpayer’s SEO service involves altering a customer’s website to enhance visibility. Taxpayer incorporates meta tags into a website to increases the search ranking of the website when a search engine user searches for those keywords. This service meets the definition of a data processing service provided by Section 151.0035. Additionally, previous Comptroller guidance determined that website creation, hosting, and maintenance services are data processing services. Comptroller's Decision No. 44,736 (2005). Therefore, the SEO service is a taxable data processing service.

Question Three: Is Taxpayer's SEM service a taxable service?

Ruling Three: Taxpayer’s SEM service is not a taxable service.

Analysis for Ruling Three: The SEM service involves consulting with clients and developing a list of advertising keywords for the client to use in the client’s Google AdWords service. A charge to develop a list of advertising keywords and to order advertising using a client’s account with a search-engine advertising platform is not a service that falls into the list of taxable services under Section 151.0101. The SEM service is not subject to Texas sales and use tax.

Question Four: Is Taxpayer’s FIM service a taxable service?

Ruling Four: Taxpayer’s FIM service that involves only the monitoring of inventory feed is not a taxable service. Taxpayer’s sale of a third-party dealer inventory management service is a taxable data processing service.

Analysis for Ruling Four: Taxpayer’s FIM service involves setting up an account for a third-party service that feeds a client’s vehicle inventory to Facebook. Taxpayer’s clients purchase an account with a third-party dealer inventory management service to store their inventory data. After the account is set up, Taxpayer will monitor the inventory feed to Facebook to ensure clients’ inventory is displayed correctly. The act of monitoring client’s information as it is displayed on Facebook does not fall under the list of taxable services provided by Section 151.0101. The FIM service is not subject to tax when it involves only the monitoring of a client’s inventory feed.

The FIM service may also involve the purchase by Taxpayer of the third-party dealer inventory management service and the subsequent sale of that service to Taxpayer’s clients. The third-party service is used to store clients’ inventory data and meets the definition of a data processing service under Section 151.0035.

When Taxpayer purchases the third-party dealer inventory management service and resells it to its client along with a 30 percent management fee, the entire charge including the management fee is subject to tax as a data processing service. See Section 151.007(b) (“Sales Price” or “Receipts”). Twenty percent of the amount charged for a data processing service is exempt from tax. Section 151.351 (Information Services and Data Processing Services).

Taxpayer may issue the third-party service provider a resale certificate in lieu of paying tax when purchasing the dealer inventory management service. Section 151.151 (Resale Certificate).

If the charge for the monitoring service is not separately stated from the charge for the third-party service the total charge is presumed to be taxable. Taxpayer may overcome this presumption by separately stating to the customer a reasonable charge for the taxable services. Rule 3.330 (Data Processing Services).

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20180314160029.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Account

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.