How did Texas apply the October 1, 1987 software-tax change to licenses, rentals, and maintenance?

Plain-English summary

The Comptroller explained how an October 1, 1987 tax-law change applied to four custom-software arrangements.

A perpetual license sold for a one-time payment was not taxable if both the software transfer and payment occurred before October 1. Monthly amounts under a software-license rental were taxable to the extent they represented periods after October 1. A one-time annual maintenance payment spanning the effective date had to be prorated, with tax charged for the post-October 1 period. The same proration applied to prepaid maintenance covering one to five years.

What this means for you

The historical transition turned on when the transfer, payment, or covered use occurred—not merely when the parties signed the agreement. Completed pre-effective-date perpetual-license sales were treated differently from continuing rentals and maintenance extending beyond the change date.

Common questions

Was a perpetual software license taxable? Not if the software was transferred and the one-time payment was received before October 1, 1987.

What about a monthly software rental signed before October 1? Tax applied to amounts representing periods after October 1.

How was annual maintenance treated? The payment had to be prorated, with tax charged for the period of use after October 1.

Did the same rule apply to multi-year prepaid maintenance? Yes.

Citations and references

• No statute or rule number is cited in the ruling text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8709L0831F09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

September 14, 1987

Dear ****:

Thank you for your letter requesting information on the new legislation
as it relates to "custom software".

The following represent your questions with my answers immediately
following:

1) Sale of a perpetual software license under an agreement dated between
July 21, 1987 and October 1, 1987. This is a one-time payment.

Answer: So long as the software is transferred and payment is received
prior to October 1, 1987 no sales tax will be due.

2) Rental of a software license under an agreement dated between July 21,
1987 and October 1, 1987. This agreement would have a minimum rental period of
twelve months and would be billed on a monthly basis.

Answer: The tax is due on all amounts represented after October 1, 1987.

3) Sale of annual maintenance on a software license for a one-year period
beginning between July 21, 1987 and October 1, 1987. This is a one-time
annual payment.

Answer: The payment must be pro-rated and tax charged for the period of
use after October 1, 1987.

4) Sale of prepaid maintenance on a software license for a period of one
to five years. The maintenance period covered would normally be a period from
nine to twelve months from the date of the billing to one to five years
thereafter. Billing will be issued between July 21, 1987 and October 1, 1987.
This is a one-time payment.

Answer: Same as above.

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

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Policy Division.

Sincerely,
F. Wayne McDonald
Tax Policy Division