If a software dealer earns a commission on a software vendor's sale and then separately installs and maintains that software for the buyer, is the dealer's installation and maintenance work taxed as part of the software sale?

Plain-English summary

This is an internal January 27, 1993 memo from Gilbert Zamora (Tax Administration) to Dennis Eastman (Audit), answering a policy question that came up in two ongoing audits of software dealers who install and maintain software sold by major software vendors.

Situation 1: The software vendor finds the customer, then brings in the dealer to demonstrate the software. The customer buys the software directly from the vendor, who pays the dealer a 30% commission and recommends the dealer to install and maintain it. The dealer has a dealer agreement with the vendor, and signs a separate agreement directly with the purchaser to install the software and make any necessary modifications.

Situation 2: The roles are reversed — the dealer finds the customer first and recommends they buy the software from the vendor. The dealer then installs and maintains the software, and again earns a commission on the sale.

In both situations, the memo concludes the dealer is still a third party as to installation and maintenance — that work is a separate transaction from the vendor's software sale and is not taxable, even though the dealer also profits from the sale via commission. Both answers cite an earlier ruling on microfiche, 9003L1018F08, as the basis for the conclusion.

What this means for you

Software dealers who install and maintain vendor-sold software

Earning a sales commission from the software vendor does not, by itself, pull your installation and maintenance work into the taxable software sale. What matters is that you have your own separate agreement directly with the purchaser to install and maintain the software — that separate agreement is treated as an unrelated, non-taxable transaction, regardless of whether you or the vendor found the customer first.

Software vendors who use dealer networks

If your dealers demonstrate, install, and maintain your software for customers under their own separate agreements — and you pay those dealers a commission for referring or facilitating sales — this memo indicates the dealer's installation/maintenance side of the arrangement is analyzed separately from your taxable software sale.

Accountants and tax professionals doing sales-tax audits

The memo treats the "third party" characterization as unaffected by (1) who initiates contact with the customer (vendor-first vs. dealer-first) and (2) whether the dealer receives a sales commission. The controlling fact is the existence of a separate dealer/purchaser installation-and-maintenance agreement, distinct from the vendor/purchaser software sale agreement.

Common questions

Q: Does receiving a commission on the software sale make the dealer's installation and maintenance work taxable?
A: No. The memo states the dealer/purchaser installation and maintenance agreement is "unrelated to the sale of the software by the software company" and not taxable, even where the dealer earns a commission on that sale.

Q: Does it matter whether the vendor or the dealer first contacts the customer?
A: No. The memo reaches the same "not taxable" / "third party" conclusion in both fact patterns it addresses — one where the vendor locates the customer and brings in the dealer, and one where the dealer locates the customer and recommends the vendor.

Q: What makes the dealer a "third party" rather than part of the sale?
A: The dealer signs a separate agreement directly with the purchaser to install the software and perform any necessary modifications, apart from the purchaser's software purchase agreement with the vendor.

Q: Can a taxpayer rely on this memo the way they could rely on a letter ruling issued to them?
A: No. This is an internal Comptroller staff memo answering an audit policy question, not a taxpayer-specific letter ruling, so it does not carry letter-ruling reliance protection under 34 Tex. Admin. Code Rules 3.1 and 3.10.

Citations and references

No statutes or rules are cited in the original memo text; it references an earlier internal ruling by microfiche number (9003L1018F08) as the basis for both conclusions.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301L1218G12

Original ruling text

DATE: January 27, 1993

TO: Dennis Eastman, ** Audit **

FROM: Gilbert Zamora, Tax Administration

SUBJECT: Taxability of Software Sales

SITUATION: There are currently two audits in progress in my office concerning
software dealers who maintain software sold by major software vendors. In the
first case, the software vendor locates the software customer and then contacts
the dealer to go and show the software to the customer. When the customer buys
the software, he buys it directly from the software company. The software
company then gives the dealer a 30% commission and recommends to the customer
that the dealer be allowed to install the software and maintain it. The dealer
has a dealers agreement with the software company. The dealer signs a separate
agreement with the purchaser to install the software and perform any necessary
modifications.

QUESTION 1. Is the dealer still considered to be a third party installing and
maintaining the software in spite of the fact that he is involved in the sale
and makes a commission?

RESPONSE: The dealer/purchaser agreement for installation and maintenance of
the software would be considered a transaction unrelated to the sale of the
software by the software company and would not be taxable. (See microfiche
9003L1018F08).

SITUATION: The second situation is very similar to the one stated above with a
few exceptions. In this situation, the dealer finds the customer and then
recommends that they buy the software from the software vendor. The dealer then
installs and maintains the software. Again, the dealer receives a commission on
the sale.

QUESTION 2. In this situation is the dealer considered to be a third party in
relation to the installation and maintenance of the software?

RESPONSE: The dealer would still be considered a third party in relation to the
installation and maintenance of the software. (See microfiche 9003L1018F08).