Which custom programming, software changes, data recovery, hardware setup, installation, training, spreadsheet design, and consulting services were taxable?
Apply this to your situation
This page answers the general question as of 1988. Ezel answers yours, under current Texas tax law, with citations.
Plain-English summary
The Comptroller classified 17 computer-service scenarios.
Taxable work
- Preprogramming meetings and design were taxable when the software sold was taxable.
- Writing a custom dBASE III Plus program was taxable even though the client already owned and had paid tax on dBASE.
- Changes or maintenance to an existing program were taxable when the provider sold the program; maintenance was taxable when the modifications were taxable.
- Lotus 1-2-3 macros were taxable when the provider sold the client Lotus.
- Creating a startup menu was taxable when the provider sold the computer program.
- Tape-backup troubleshooting was taxable for a hardware problem; software work was taxable when the provider sold the program.
- Recovering deleted data with Norton Utilities was taxable.
- Restoring backed-up data with DOS commands was taxable data processing.
- Physical printer setup and cabling were taxable when the provider sold the printer; revisions to provider-sold software were taxable.
- Installing a program in connection with its sale was taxable.
- Changing a dBASE database structure was taxable when the provider sold dBASE.
- Troubleshooting network hardware and software settings was taxable.
Nontaxable work
- Laser-printer training was nontaxable when separately charged from the printer.
- Designing a receivables-aging spreadsheet without programming, using accounting and spreadsheet knowledge, was nontaxable.
- Teaching a client to perform WordStar mail merging was nontaxable.
- General tutoring in a PC software package was nontaxable, even if the instructor touched the keyboard to demonstrate features.
- Evaluating a client's computer needs and recommending purchases was nontaxable.
What this means for you
The historical answers often turned on whether the provider had sold the underlying product, whether the activity altered or restored software or data, and whether education was separately stated and genuinely instructional.
Common questions
Was custom programming taxable? Yes, in the described dBASE scenario.
Was deleted-data recovery taxable? Yes.
Was software training taxable? Not in the separately stated training and tutoring examples.
Was independent computer-needs consulting taxable? No.
Citations and references
- 34 Tex. Admin. Code Rule 3.308(a)(4), (b)(1), (b)(3), (b)(4) — historical computer hardware and software provisions.
Source
- STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
- Opinion: https://star.comptroller.texas.gov/view/8801L0855B07
Original ruling text
COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774
January 26, 1988
Dear **:
On behalf of Mr. Bullock, I hope you'll accept my apology for the delay
in
answering your question involving changes in the sales tax law. This
isn't
the way we normally do business.
Our people were, and still are, swamped by a deluge of inquiries as they
attempted to interpret provisions of the new law and draft rules which
would
not adversely impact businesses. In many instances, an answer to a
question
just wasn't available when the question arrived.
Below are the business transactions you referred to in your letter and
our
response as to their taxability.
- A client asks us to design a customized computer program for his
business to run a personal computer. Before we do any actual program-
ming, we bill them for our time relating to all meetings and the
program's design.
Answer: If the software you sell is taxable this fee is also taxable.
- We design the program using dBASE III Plus, a commercial software
program the person has already bought and paid tax on. We go back to
our office and write the program in dBASE's language and then present
to him the finished product.
Answer: Taxable. See Rule 3.308 (b)(1).
- A client already has an existing program, written by us or someone
else, and wants some changes made. We might make the programming changes
there at his site or back at our office. Either way, we would perform
this program maintenance.
Answer: This is taxable, if you sold the program to the client. See Rule
3.308 (b)(4).
If the modifications are taxable, the program maintenance is also
taxable.
- A client owns a spreadsheet program (say, Lotus 1-2-3) and wants
what they do automated through LOTUS 1-2-3 macros. Macros are commands
that you can store and later play back when you want to use the commands.
We design the macros.
Answer: Taxable, if your company sold Lotus 1-2-3 to the client. See Rule
3.308 (b)(1) and (b)(4).
- A client owns a PC and requests that we create a menu system so that
when the PC is turned on, the client sees an initial menu on their
screen.
This is not considered programming in any traditional sense, however, we
do sit down at their machine and revise the way their machine starts up.
Answer: Taxable, if your company sold the client the computer program.
See Rule 3.308 (b)(3).
- A client has a problem with their tape backup system. We're not sure
if the problem is hardware or software related. We check out their hard-
ware and their software that runs the tape backup. We correct the prob-
lem which may be either hardware or software related.
Answer: Taxable, if a hardware problem. See Rule 3.308(a)(4). If it was
a software problem, the work is taxable if your company sold the program
to the client. See Rule 3.308 (b)(4).
- A client accidentally deletes all data on their hard disk. We go to
their office and using the Norton Utilities software package retrieve
their deleted data.
Answer: This is taxable.
- A client accidentally deletes all data on their hard disk. They have
back up data on floppy disks, but don't want to do it themselves. We
perform the necessary DOS restore commands to put their data back on
their hard disk.
Answer: This is taxable data processing service.
- A client buys a new printer and wants us to hook it up. The installa-
tion requires two types of work; we must first physically take the print-
er out of the box and run the cabling. We must also revise their work
processing and other software to recognize and use the new printer.
Answer: If you sold the printer, physically setting up the printer and
running the cabling is taxable. See rule 3.308 (a)(4). Revisions to soft-
ware packages your company sold to the client are taxable. See Rule
3.308 (b)(1).
- A client buys a new software package and wants us to install it on
their PC. We perform the necessary steps, without any programming, to
install the program on their machine.
Answer: Installation in connection with the sale of a program is taxable.
See Rule 3.308 (b)(1).
- A client buys a new Laser Printer and doesn't understand how to use
it with their word processing package. We go into their office and show
them the commands to give in their word processor to get special effects
from the Laser Printer.
Answer: Not taxable, if the charge for the training is separated from the
charge for the printer.
- A client has a database package (say, dBASE III Plus) and isn't using
it correctly. She requests us to change the structure of her database. We
perform the necessary commands in dBASE III without writing a dBASE pro-
gram in 20 minutes.
Answer: Taxable, if your company sold the client the dBASE III Plus
package. See Rule 3.308 (b)(1).
- A client owns a spreadsheet and wants to design a spreadsheet to
age their receivables. We, without doing any programming, design the
spreadsheet for the client drawing on our knowledge of accounting and
computer spreadsheets.
Answer: Not taxable.
- A client has a word processing package (say WordStar) and doesn't
know how to do mail merging. We go to the person's office and tutor them
how to do it. No programming is involved, but, in order to show them how
to do mail merging, we set up their mail merge on their machine and ex-
plain the steps as we do them. Then, with the objective of reinforcing
the skill, we would have then repeat the commands.
Answer: Not taxable. See Rule 3.308 (b)(3).
- A client has a computer hardware network installed in their office.
They are having difficulty getting the network hardware and software to
work. We go to their office and troubleshoot the problem and correct it
by making two changes. The first change is to the hardware; we simply
find the network interface card switch settings are wrong and we flip
the switches into the correct positions. The second change is to the net-
work software program settings, and we simply make a change to the de-
fault settings to the software program.
Answer: This service is taxable.
- A client requests some tutoring in a PC software package. We go to
their office and teach them how to use the program. The tutoring session
may or may not involve us touching their keyboard to demonstrate the
software's capabilities.
Answer: Not taxable.
- A client requests us to come into their office, evaluate their
computer needs, and make recommendations as to what they should buy. We
bill them for the office visit and research time.
Answer: Not taxable.
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 our
toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may write
me
at the Tax Policy Division.
Sincerely,
Adina Whittemore
Tax Policy Division
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