Were independent contract programmers taxable when creating a program from scratch or modifying software sold by someone else?

Plain-English summary

The Comptroller distinguished taxable completed software programs from independent “trouble shooters” who created a program from scratch or modified software sold by someone else. The latter contract-programming services were not taxable under this 1988 guidance.

An out-of-state software seller engaged in business in Texas under Rule 3.286 had to obtain a Texas use-tax permit and collect Texas tax. If the seller was not engaged in business in Texas, the Texas customer still owed use tax when the software was first used or stored in Texas, with possible penalty and interest for nonpayment.

The letter describes software law as it stood after an October 1, 1987 change. Because software taxation has evolved, current law should be checked separately.

Common questions

Was contract programming taxable? No under the letter.

What counted as contract programming? Creating a program from scratch or modifying a program sold by someone else.

Did buying from an out-of-state seller eliminate Texas tax? No. Either the seller collected or the Texas customer owed use tax under the stated nexus facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8812L0924G01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller December 5, 1988

Dear ***:

Custom computer software was included the definition of tangible
personal property and became taxable October 1, 1987. Prior to
that date "canned" software (pre-packaged) was taxable.

And, many software companies sold both custom software and canned
software. These companies had sales tax permits. Their tax
responsibilities became simpler as a result of the change in the
tax statute, because they no longer had to determine if software
was canned or custom.

However, we do recognize that some programmers are not selling
software, but are "trouble shooters". These folks help make
programs work for their customers. That's why we say "completed
software programs" are taxable.

That means that contract programming is not taxable. Contract
programming is either creating a program (writing it from scratch),
or modifying a software program sold by someone else. In other
words, independent trouble shooters are not required to collect
tax on their service.

You mentioned that a Texas programmer had complained about losing
business to an out of state software company. If the out of state
software company is soliciting business in Texas or has any other
activities in Texas listed under "engaged in business" in the
attached Rule 3.286, that company needs a Texas use tax permit.
And that out of state software company is responsible for col-
lecting Texas tax. We'll be happy to contact that company and let
them know their Texas tax responsibilities.

Even if the software company is not engaged in business in Texas,
the customer still owes Texas use tax on the software. If the
customer does not pay tax on the software when it is first used or
stored in Texas, penalty and interest may also be assessed.

If you have any questions or need more information, please call
our toll-free number 1-800-531-5441. The regular number is
512/463-4614. You may write me at the Taxability Section, Legal
Services Division.

Sincerely,
Adina Whittemore
Taxability Section
Legal Services Division