Did an out-of-state software company create Texas tax obligations by sending employees into Texas for customer training, and which software charges were taxable?

Plain-English summary

A California company licensed lightly customized systems software to Texas customers, delivered it by common carrier, provided annual support and enhancements, and occasionally sent employees to Texas for training.

The letter treated canned and custom software delivered to Texas, installation of the seller's software, and technical support or software maintenance as taxable. A separately stated training or instruction charge was not taxable.

The employee visits made the company engaged in business in Texas. It had to obtain a sales-and-use-tax permit and collect Texas use tax on taxable sales, although the 1991 letter said no $25 permit fee applied because the company had no Texas business location.

The same presence also triggered the letter's franchise-tax analysis under Rule 3.406 if the company was incorporated.

What this means for you

Even limited in-state employee activity created collection and registration duties under the law described in the letter. Different components of the customer relationship—software, support, installation, and training—received separate treatment.

Common questions

Were Texas software licenses taxable? Yes.

Were installation and technical support taxable? Yes.

Was separately stated user training taxable? No.

Did occasional employee training visits create Texas obligations? Yes.

Citations and references

• 34 Tex. Admin. Code Rule 3.406 — franchise-tax engaged-in-business standard cited by the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1127E07

Original ruling text

August 20, 1991

Dear **:

Thank you for your recent letter. At I understand it, your company
licenses systems software for ** and ****-compatible
mainframe computers. Some of your customers are located in Texas. Typically,
your software is installed with very little customization. Your customers
purchase only a license to use the software, and your company retains
ownership. Annually, you invoice requesting customers for support, maintenance
and enhancement.

You have only one office, in California, and all of your employees are
located there. You solicit only by telephone, and deliver the software to
Texas by common carrier. Your employees occasionally visit Texas companies to
provide training services.

Questions: Are our sales/services subject to Texas tax, and are we
required to register with the State of Texas?

ANSWER: Texas tax is due on sales of canned or custom software to Texas
customers. You must also collect tax on charges to install software that you
sell, And on charges for technical support (in-person or by telephone) and
other repair of maintenance of software.

You are not required to collect tax on a separately stated charge for
training or instruction in the use of the software.

The presence of your company's personnel or agents in Texas for the
purpose of training Texas customers in the use of the software you sell means
you are "engaged in business" in Texas. This makes you responsible for
obtaining a sales and use tax permit and for collecting and remitting Texas use
tax on all taxable sales into Texas (or obtaining exemption or resale
certificates from Texas customers in lieu of tax).

Under separate cover, I have transmitted a sales and use tax permit
application packet. I should note that you are notrequired to pay a sales tax
permit fee because you have nobusiness locations in Texas. You may ignore
theinstructions on the application to send the $25.00 fee.

I have enclosed a franchise tax questionnaire and information about the
Texas Corporate franchise tax. The presence of your employees or agents in
this State means you are "engaged in business" in Texas within the meaning of
enclosed Rule 3.406. If you are incorporated, you are also required to pay this
tax.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further questions, feel
free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration