Could a Texas taxable-service provider buy maintenance agreements, transferred items, natural gas, or electricity tax-free for resale?

Plain-English summary

The Comptroller said the provider's computer hardware and software maintenance agreements were taxable and could not be bought with a resale certificate. They were not transferred to the customer as an integral part of the provider's taxable service under Rule 3.330(c)(2).

By contrast, a taxable information service bought specifically to become an integral part of the information service sold to a customer could be purchased tax-free for resale. Tangible items such as labels, envelopes, and paper could also be bought for resale when transferred to the customer as part of the taxable service.

Natural gas and electricity consumed in providing an information or data-processing service were not exempt. The letter distinguished utilities used to process, fabricate, or manufacture tangible personal property for sale, which it described as exempt.

What this means for you

Under the letter, an input qualified for resale when the purchased service or property was actually transferred to the customer as part of the taxable service. Costs consumed by the provider—such as its own maintenance agreements and utilities—did not qualify on that basis.

STAR now directs readers to amended Rule 3.285 for current guidance concerning care, custody, and control of tangible personal property when providing a taxable service.

Common questions

Could the provider buy its maintenance agreements for resale? No.

Could an information service incorporated into the customer's taxable service be bought for resale? Yes, when the entire purchased information service was transferred as an integral part of the service sold.

Could labels, envelopes, and paper be bought for resale? Yes, when transferred to the customer as part of the taxable service.

Were natural gas and electricity used to provide taxable services exempt? No.

Citations and references

• 34 Tex. Admin. Code Rule 3.330(c)(2), cited for the integral-transfer resale treatment.
• 34 Tex. Admin. Code Rule 3.285, identified in STAR's alert as amended November 1, 2017.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8805L0895E05

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale amended 11/01/2017.

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, AUSTIN, TX 78774

BOB BULLOCK
Comptroller May 4, 1988

Dear *:

Thank you for your letter of April 20, 1988, concerning the taxability of
purchases made by your business.

Maintenance agreements purchased on computer hardware and software are
taxable. You may not issue a resale certificate on these maintenance
agreements because they are not transferred to your customer as an integral
part of the taxable service you provide
as outlined in section (c)(2) of Rule 3.330. Here's an example of a
taxable service that is transferred as an integral part of a taxable service:

A customer asks you to provide the names and addresses of all customers
in the City of Dallas who reside in totally electric homes. You contact the
local electric utility company that runs a special program that compiles that
information for you. The information service provided by the utility company
may be purchased tax free because it will be sold as an integral part of the
taxable information service you provide to your customer. The entire
information service purchased is transferred as part of your information
service.

Items of tangible personal property (labels, envelopes, paper, etc.) that
are transferred to the customer as a part of a taxable service may be purchased
tax free under a resale certificate. However, natural gas and electricity may
not be purchased tax free under an exemption certificate. Natural gas and
electricity used to provide a taxable service (information service, data
processing service, etc.) are not exempt. Natural gas and electricity are
exempt when used in processing, fabricating, or manufacturing tangible personal
property for sale as tangible personal property.

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, you may call our
toll-free number
1-800-252-5555. The regular number is 512/463-4600. You may write me at
Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence