Are charges for computer installation, training, troubleshooting, consulting, and network administration taxable in Texas?

Subject

Memory Card — Installation Of Internal Hardware As A Replacement Or As An Upgrade To Computer Is Repair Or Remodeling Service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9309L1257F01

Plain-English Summary

A taxpayer wrote in asking the Comptroller to address the taxability of several computer-related services, laid out as a series of numbered scenarios (the letter references "scenarios" 1 through 12, though the table itself wasn't reproduced in the ruling). The Comptroller's response walks through each category of service:

• Training (scenarios 1 and 2). A separately stated charge for instruction is not taxable, citing Section (b)(3) of Rule 3.308.
• Software and hardware installation (scenarios 3, 4, 5, and 10). Installation of software or external hardware is taxable only if you sold the software or external hardware. If you didn't sell it, the installation charge is not taxable — the letter gives the example of connecting a printer: taxable if you sold the printer, not taxable if you didn't. But if you're hired to assemble computer components into a functioning system and install the necessary system software, the assembly charge — including installation that's part of it — is taxable, even if you didn't sell the hardware or software. The example given: connecting the CPU, monitor, keyboard, and printer, and installing the system software, is taxable even without a sale of the hardware or software.
• Internal hardware installation. Installation of internal hardware that becomes a component of an existing computer system is taxable. Whether you're replacing a defective part or enhancing the computer's capability, the labor is either a repair or a remodeling service, citing Subsection (a)(4) of Rule 3.308.
• Consulting. Stand-alone consulting charges are not taxable. But if the client buys the hardware or software you recommended, the consulting charge becomes taxable as part of the sales price of the taxable items — even if separately stated. If the client buys the recommended items from a third party instead, the consulting charge is not taxable.
• Troubleshooting and error correction on software is taxable if you sold the software, and not taxable if you didn't, per Section (b)(3) of Rule 3.308.
• Troubleshooting and repairing computer hardware is taxable, per Section (a)(4) of Rule 3.308.
• Network administration for a lump sum charge is taxable, because the lump sum includes many taxable services (data processing, network assembly, technical support, among others).
• Software upgrades. Installing a newer version of existing software is taxable if you sold the update. If the upgraded software was bought from a third party and you just install it, the installation charge is not taxable.
• Pickup/delivery (scenario 12). If a customer has already ordered a taxable item from their own supplier and just asks you to pick it up and deliver it, that's a transportation/delivery service and no tax is due on your service fee — though you're responsible for paying tax on any materials you buy to provide the service, and the customer separately reimburses you for the item and its tax. But if the customer instead asks you to purchase the item for them (without arranging the purchase through their own supplier), you may buy the item tax-free using a resale certificate, and you must then collect sales tax on both the item's selling price and your fee for securing and delivering it.
• Billed expenses. Expenses you bill to a customer — long-distance calls, parking, gasoline, tolls, mileage — are part of the sales price of the underlying service, and are taxable if that underlying service is taxable.

The letter closes by noting the opinion is based on the facts presented in each scenario, and that additional or different facts could change the answer.

What This Means For You

Whether you sold the item is often the deciding factor. For installation of software and external hardware, and for troubleshooting/upgrading software, the letter repeatedly draws the line at whether you were the seller. Connect a printer you sold — taxable. Connect one you didn't — not taxable. Track who sold what before you decide how to charge and whether to collect tax.

Internal hardware installation is taxable no matter who sold it. Unlike external hardware, installing internal hardware that becomes part of an existing computer system is always taxable — the letter treats it as a repair or remodeling service under Rule 3.308(a)(4), whether you're replacing a defective part or upgrading capability.

Bundling consulting or assembly with a sale changes its tax treatment. Stand-alone consulting is untaxed, but the moment the client buys the recommended hardware or software from you, the consulting fee becomes part of the taxable sales price — even if you list it as a separate line item. Likewise, assembling a system and loading its software is taxable as a package even when none of the parts were sold by you.

Delivery/pickup services and billed expenses have their own rules. If you're just fetching an item your customer already bought elsewhere, your service fee is untaxed (though materials you use are taxable to you). If instead you're buying the item on the customer's behalf with a resale certificate, you must collect tax on both the item and your fee. And any expenses you pass through to a customer (mileage, tolls, phone calls) inherit the taxability of the underlying service.

Q&A

Q: Is a separately stated charge for computer training or instruction taxable?
A: No. The letter states a separately stated charge for instruction is not taxable, citing Section (b)(3) of Rule 3.308.

Q: I install a printer for a customer — is my installation charge taxable?
A: It depends on whether you sold the printer. If you sold the printer you connected, the installation charge is taxable. If you didn't sell it, the installation charge is not taxable.

Q: Is installing internal hardware, like replacing a defective part or upgrading a computer's capability, always taxable?
A: Yes. The letter says installation of internal hardware that becomes a component of an existing computer system is taxable, and that this labor is either a repair or remodeling service under Subsection (a)(4) of Rule 3.308 — regardless of who sold the part.

Q: I'm hired to assemble a computer system out of parts I didn't sell and install the operating software — is that taxable?
A: Yes. The letter gives this exact example: connecting the CPU, monitor, keyboard, and printer, and installing the system software, is taxable even if you do not sell the hardware or software, because it's an assembly charge.

Q: Are stand-alone computer consulting charges taxable?
A: No, stand-alone consulting charges are not taxable. But if the client then buys from you the hardware or software you recommended, the consulting charge becomes taxable as part of the sales price of those taxable items, even if separately stated. If the client buys the items from a third party instead, the consulting charge remains not taxable.

Q: My customer asks me to pick up and deliver an item they already ordered from their own supplier — do I owe tax on my service fee?
A: No tax is due on your delivery/transportation service fee in that situation. You are, however, responsible for paying tax on any materials you purchase to provide the service, and your customer reimburses you separately for the item and its tax.

Original ruling text

September 13, 1993

Dear ***:

Thank you for your letter of August 4, 1993. The kind words regarding
our Tax Assistance section are certainly appreciated. I will pass your
comments on to them.

You asked us to address the taxability of several computer related
services. Unfortunately, the table provided with your letter does not
allow for a complete discussion of each situation.

Your first two scenarios deal with training. A separately stated
charge for instruction is not taxable. Please refer to Section (b)(3)
of Rule 3.308.

Scenarios 3, 4, 5, and 10 deal with software and hardware
installation. Installation of either software or external hardware is
taxable if you sold the software or external hardware. If you did not
sell the software or external hardware, a charge for installation is
not taxable. As an example, if you connect a printer you sold, your
installation charge is taxable. If you connect a printer you did not
sell, your installation charge is not taxable. On the other hand, if
you are hired to assemble computer components into a functioning
computer system and install the software necessary for the system to
operate, the assembly charge is taxable. Installation that is part of
an assembly charge is taxable. For example, a charge for connecting
the CPU, monitor, keyboard, printer, and installing the system
software is taxable even if you do not sell the hardware or software.

Installation of internal hardware that becomes a component of an
existing computer system is taxable. If you are replacing a defective
part or enhancing the computer's capability, your labor is either a
repair or remodeling service. Please refer to Subsection (a)(4) of
Rule 3.308.

Stand alone consulting charges are not taxable. However, if a client
buys from you the hardware or software that you recommended, the
consulting charge is taxable as part of the sales price of the taxable
items sold, even if the charge is separately stated. If the client
purchases the taxable items from a third-party, the consulting charge
is not taxable.

Troubleshooting and error correction on software is taxable if you
sold the software. The same charges would not be taxable on software
not sold by you. Please refer to Section (b)(3) of Rule 3.308.

Troubleshooting and repairing computer hardware is taxable. Please
refer to Section (a)(4) of Rule 3.308.

Administrating a network for a lump sum charge is a taxable. The
charge includes many taxable services including data processing,
assembly of the network, and technical support among others.

Upgrading existing software by installing a newer version is taxable
if you sold the update. If the upgraded software was purchased from a
third party and you install the software, the installation charge is
not taxable.

Regarding Scenario 12, if your customer has ordered a taxable item
from their supplier and requests your services to pick up and deliver
the item, you are providing a transportation or delivery service. No
tax is due on your service. You should pay for the item and the
included tax. Your customer will reimburse you for the item and tax
and pay a fee for your service under this transaction. You are
responsible for paying tax on any materials you purchase to provide
this service.

On the other hand, if your customers request your services to purchase
a taxable item for them and the customer does not arrange for the
purchase through their suppliers, you may issue a resale certificate
to the seller and purchase the item tax free. You are then required to
collect sales tax on both the selling price of the item and your fee
for securing the item and any transportation or delivery charges.

If you bill your customer for expenses such as long distance telephone
calls, parking fees, gasoline expenses, travel tolls, or mileage fees,
the expenses are included as a part of the sales price of the service.
The expenses are taxable if the service in which the expenses are
being billed is taxable.

This opinion is based on the facts as presented in each scenario. If
there are any additional or different facts, the opinion may change.

If you have any questions or need additional information, you may call
toll free 1800-531-5441, ext. 50037. The regular Austin number is
512-475-0037. You also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division

NOTE: Previous Accession Number 93070159L.4 and/or 9307159L