If I test or stage computer hardware/software in Texas before exporting it out of state, does that testing count as a taxable 'use' of the property in Texas, even if I hold a direct payment permit?

Subject

Testing And/Or Modification Of Equipment/Tpp (Including Software) Prior To Oos Shipping Is A Use — Temporary Storage Exclusion Does Not Apply

Plain-English summary

This is an internal Comptroller memo, not a letter addressed to a taxpayer. David Somerville of Tax Administration wrote to Sandi Skaggs of Revenue Accounting to correct the answer to a recurring question: if a purchaser "tests" or "stages" tangible personal property in Texas before exporting it out of state, does that testing count as a taxable "use" of the property in Texas?

The memo states plainly that testing prior to export by a purchaser is a "use" in Texas, and that this holds true regardless of whether the transaction is a sales tax transaction or a use tax transaction -- the previous distinction drawn between the two was wrong. Because a "use" occurs in Texas, the purchaser who tests the property before exporting it must pay Texas sales or use tax. The memo goes further to say this applies even to direct payment permit holders, who must also pay Texas sales or use tax on property they test in Texas prior to export.

Notably, this memo explicitly corrects the author's own two prior memos on the same subject, dated December 15 and December 17 (years not stated in the text), which had given an incorrect answer distinguishing between sales tax and use tax transactions. Readers are told to disregard those earlier responses. The memo also references a prior Accession Number, 9603617L, apparently tied to the earlier (superseded) guidance.

What this means for you

Businesses that test or stage equipment, hardware, or software in Texas before shipping it out of state

If your company brings computer hardware or software (or other tangible personal property) into Texas to test, stage, configure, or otherwise use it before exporting it to a customer or facility outside Texas, that in-state testing is treated as a taxable "use" of the property in Texas. Texas sales or use tax is owed on the property even though it ultimately leaves the state.

Direct payment permit holders

Holding a direct payment permit does not change this outcome. A permit holder who tests tangible personal property in Texas prior to exporting it must still pay Texas sales or use tax on that property.

Accountants and tax professionals

Be aware that the sales-tax-vs-use-tax distinction some may have relied on for this scenario was expressly repudiated by the Comptroller's own Tax Administration staff in this memo -- there is no meaningful difference between the two transaction types for this purpose. If you are relying on earlier informal guidance (including anything tracing back to prior memos referencing Accession Number 9603617L or earlier December memos on this topic), treat this March 24, 1993 memo as the corrected, controlling position.

Common questions

Q: If I only test equipment in Texas and then ship it out of state without ever using it further, do I still owe Texas tax?
A: Yes, per this memo -- testing itself is a "use" in Texas, so tax is owed regardless of the property's ultimate destination.

Q: Does it matter whether my purchase was structured as a sales tax or a use tax transaction?
A: No. The memo specifically corrects prior guidance that tried to draw a distinction here; testing prior to export is a "use" in Texas "regardless of the type transaction (sales tax or use tax)."

Q: I hold a direct payment permit -- does that exempt me from tax on property I test and then export?
A: No. The memo specifically states direct payment permit holders who test tangible personal property in Texas prior to export must also pay Texas sales or use tax.

Q: Is this guidance new, or does it change something?
A: It corrects two earlier internal memos (December 15 and December 17) that had given an incorrect answer on this exact question, and it supersedes the position reflected in prior Accession Number 9603617L.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=
• Opinion: https://star.comptroller.texas.gov/view/9303L1228F13

Original ruling text

Date: March 24, 1993

To: Sandi Skaggs, Revenue Accounting

From: David Somerville, Tax Administration

Subject: Correction to Definition of "Use" -- Computer hardware and Software
"Staged" and/or Tested in Texas Prior to Being Exported

You previously asked whether "testing" tangible personal property in Texas by
a purchaser prior to export constitutes a "use" of that property in Texas.
My previous memos of December 15th and December 17th are incorrect. Please
disregard the previous responses concerning the difference between sales tax
transactions and use tax transactions. Testing prior to export by a purchaser
is a "use" in Texas regardless of the type transaction (sales tax or use tax).
The purchaser who tests tangible personal property prior to export must pay
Texas sales or use tax because a "use" occurs in Texas. Direct payment permit
holders who test tangible personal property in Texas prior to export must also
pay Texas sales or use tax.

I hope this corrected response answers your questions. Please let me know if
you need anything else.

NOTE: Previous Accession Number 9603617L