How did Texas tax computer hardware and software support sold through a subcontractor?

Plain-English summary

Hardware support and maintenance performed in Texas was taxable. Software support was taxable only when performed on software the service company had sold to the customer; maintenance on software sold by someone else was not taxable.

Taxable and nontaxable service charges had to be separately stated. A lump-sum bill combining hardware and software work was presumed fully taxable.

Tax was not meant to be paid at both the subcontractor and customer levels. For taxable subcontracted work, the prime contractor could give the subcontractor a valid resale certificate and then collect Texas tax from its Texas customer.

Common questions

Was hardware maintenance taxable? Yes, when performed in Texas.

Was all software maintenance taxable? No. The letter taxed it only when the service company had sold that software to the customer.

What happened to a lump-sum hardware-and-software charge? The entire amount was presumed taxable.

Could the prime contractor give the subcontractor a resale certificate? Yes, for taxable services resold to the customer.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8908L0958D12

Original ruling text

August 18, 1989

Dear **:

Your letter of August 10, 1989, regarding the taxability of computer support
and maintenance services, has been referred to me. As I understand your
situation, your company provides both hardware and software support and
maintenance. You have contracted out support and maintenance services to a
subcontractor for a particular group of your customer base. For services
performed in Texas, the sub-contractor is billing you for their charges plus
applicable sales tax. In turn, you are billing the customer for the
support/maintenance charges plus applicable sales tax. Specifically, you wish
to know if the sub-contractor should be charging you sales tax.

Initially, I would like to establish which of your services are taxable.
Support and maintenance services performed on hardware are always taxable when
the services are performed in Texas. Support and maintenance on software is
taxable only when these services are performed on software that you sold to the
customer. If you are providing maintenance services on software that you did
not sell to the customer, your services are not taxable. Because you may be
performing both taxable and non-taxable services, it is very important that
these charges be separated on the invoice or billing. If charges for services
on hardware and software are billed on a lump-sum basis, the entire charge for
your services will presumed to be taxable.

In regard to your subcontractor's charges to you, sales tax should not be
charged at both levels. When your subcontractor performs taxable services, he
should bill you for these services including the proper amount of sales tax.
Accordingly, you should give your subcontractor a valid and properly completed
resale certificate rather than paying the sales tax. You should continue to
charge Texas tax to your Texas client when you bill them for the taxable
services.

I have enclosed copies of Sales Tax Rules 3.308 and 3.385 which will provide
you with further information on computer services and resale certificates. I
have also enclosed a copy of Sales Tax Rule 3.330 on data processing services
should your services ever involve this activity.

This opinion is based on the facts presented. Any changes to these facts may
cause this response to change. If you have any questions, please contact Tax
Correspondence. You may call toll free 1-800-252-5555. My extension is 34608.

Sincerely,

Brad Gabbart
Tax Correspondence