Is computer consulting — system design, analysis, and estimating — taxable in Texas, and when does it become taxable because it's tied to a hardware or software sale?

Plain-English summary

This July 1992 letter from the Comptroller's Tax Administration Division answers a taxpayer's question about how Texas sales tax applies to computer-related consulting, sales, and installation.

The core rule: computer consultation charges (system design, analysis, estimating) are not taxable by themselves. They only become taxable when they're connected to a sale of hardware or software. The letter explains that consulting is presumed to be connected to a later sale if the consultant ends up selling some or all of the hardware or software they recommended in the consulting engagement. But if the client buys all the recommended equipment or software from a separate, third-party seller — not from the consultant — the consulting charge stays nontaxable.

Two related wrinkles are addressed:

• If consulting is billed as one lump sum together with taxable data processing services (under Rule 3.330(d)(2)), the whole lump sum becomes taxable — unless the taxable data processing portion is 5% or less of the total charge.
• Computer sales and installation charges are taxable, but a charge to install a computer you didn't sell is not taxable. Configuring a computer (placement of equipment, assigning ports, printers, function keys, etc.) is taxed the same way as consulting — taxable or not depending on whether it's tied to the installer's own sale.

The letter also flags a statutory exemption: Tex. Tax Code § 151.0101(a)(5)(D), effective October 1, 1989, exempts the "repair, maintenance, creation, and restoration of a computer program, including its development and modification, not sold by the person performing" the service. This covers custom software you build from scratch for a client's exclusive use, as long as the client keeps exclusive rights to it.

What this means for you

Computer consultants and IT service providers

If you're purely advising — designing systems, analyzing needs, estimating costs — and you don't sell the hardware or software you recommend, your consulting fee is not subject to Texas sales tax. The moment you sell some or all of the recommended equipment yourself, the consulting fee is presumed taxable too. Keep consulting and equipment sales cleanly separated (and documented) if you want the consulting fee to stay exempt, or make sure clients buy directly from third parties.

Businesses that bundle consulting with data processing services

Watch your invoicing. If you lump consulting fees together with taxable data processing services in a single charge, the entire lump sum can become taxable unless the taxable data processing piece is 5% or less of the total. Itemizing separately, or keeping the taxable share small, protects the nontaxable portion.

Installers and system configurators

Installation charges are taxable when you sold the computer; they're not taxable when you're just installing equipment someone else sold. The same logic extends to configuration work (setting up ports, printers, function keys, etc.) — it follows the general consulting rules above.

Custom software developers

If you build a custom program from scratch exclusively for one client, and the client retains exclusive rights to it, that development work can qualify for the § 151.0101(a)(5)(D) exemption for program creation not sold by the person performing the service.

Common questions

Q: Is my computer consulting fee taxable in Texas?
A: Not by itself. It becomes taxable if you (the consultant) end up selling the hardware or software you recommended. If the client buys that equipment from a separate third-party vendor, your consulting fee is not taxable.

Q: I billed consulting and data processing services together as one price — is that a problem?
A: It can be. A lump-sum charge combining consulting with taxable data processing services (under Rule 3.330(d)(2)) becomes fully taxable unless the taxable data processing portion is 5% or less of the total charge.

Q: Is installing a computer taxable?
A: Yes, if you sold the computer. If you're installing a computer someone else sold, the installation charge is not taxable.

Q: What about configuring a computer — setting up printers, ports, function keys?
A: That's treated the same as general consulting services — taxable or not depending on whether it's connected to your own hardware/software sale.

Q: Does writing custom software for a client get a tax exemption?
A: Potentially, yes. Tex. Tax Code § 151.0101(a)(5)(D) exempts custom program creation, repair, maintenance, and restoration when the program is not sold by the person performing the service and the client retains exclusive rights.

Citations and references

• Tex. Tax Code § 151.0101(a)(5)(D) — exemption for repair, maintenance, creation, and restoration of a computer program not sold by the person performing the service, effective October 1, 1989
• 34 Tex. Admin. Code § 3.308 — taxability of computer hardware and software sales/services
• 34 Tex. Admin. Code § 3.330(d)(2) — data processing services

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1192A01

Original ruling text

July 21, 1992

Dear ***:

Thank you for your letter postmarked June 15, 1992 concerning the taxability of
computer related sales and service.

Enclosed Rule 3.308 discusses the taxability of computer hardware and software
services and sales. Enclosed Rule 3.330 concerns data processing services.

Computer consultation charges are not taxable unless they are connected to a
sale of hardware or software. Consulting services are presumed to be connected
to a subsequent sale by the consultant of some or all of the hardware or
software that the consultant recommended in the consulting contract. The
consultant charges are not taxable if all of the equipment or software is
purchased from third-party sellers.

In addition, consultation that is billed lump-sum with taxable data processing
services (Rule 3.330 (d)(2)) is taxable unless the taxable services are 5% or
less of the total lump-sum charge.

Computer sales and installation charges are taxable. A charge to install a
computer that you did not sell is not taxable.

The configuration of computers, which I understand to include possible
placement of equipment and assigning of ports, printers, function keys, etc.,
may be considered taxable or nontaxable consulting services using the same
guidelines as consulting services.

Section 151.0101(a) (5) (D) of the Sales, Excise, and Use Tax law, effective
October 1, 1989, provides for an exemption for the "repair, maintenance,
creation, and restoration of a computer program, including its development and
modification, not sold by the person performing the repair, maintenance,
creation, or restoration service." This section exempts the sale of a custom
program that you create from scratch for the exclusive use of your client. The
client must retain the exclusive rights to the program developed for their
needs.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call me toll free at
1-800-252-5555, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Administration Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division