Is Texas sales tax due on satellite telecommunications services — including rental of outbound/inbound frequencies, hub monitoring services, and hardware/software maintenance — and if so, how is local sales tax apportioned across remote locations?

Plain-English summary

A company purchased satellite services that let it transmit and receive electronic data to and from remote locations across the U.S., billed monthly at its Texas headquarters. The company asked the Comptroller's office how several components of that monthly bill should be taxed.

The rental of outlinks and returnlinks covers the specified frequencies used to send data by satellite from the company's headquarters hub to numerous remote sites, and to receive data from those sites back at the hub. The company rented 5 outbound frequencies and 21 incoming frequencies, with the incoming frequencies carrying data to the Texas hub. The Comptroller responded that Texas sales tax is due on the charges for the 5 outbound frequencies, with local sales tax apportioned using a formula comparing the time spent transmitting to Texas remote locations against time spent transmitting to all remote locations — or, if that data can't be compiled, apportioned by the percentage of Texas remote locations out of all remote locations. The 21 incoming frequencies are taxable using the same time-based (or, alternatively, location-count-based) formula, with local tax computed the same way.

Hub services — on-site technicians monitoring the performance of the satellite and remote locations in transmitting and receiving data, not including actual maintenance/repair — are taxable as services connected with the sale of telecommunications services, taxed in the same proportion as those telecommunications services. It does not matter whether the monitoring is performed in Texas during normal business hours or out of state during off-hours.

Hub hardware and software maintenance charges are treated differently depending on location: maintenance on hardware and software located at the Texas hub is taxable, while maintenance on hardware and software located outside Texas is not subject to tax. Finally, maintenance services for satellite hardware and software located at remote sites throughout the country (performed either at the hub or at the vendor's out-of-state location) are taxable, and the Comptroller confirmed the tax can be apportioned based on the Texas sites only.

What this means for you

Businesses buying satellite telecommunications services

If you lease satellite frequencies to send and receive data between a hub and multiple remote sites, expect Texas sales tax on the outbound-frequency charges and on the inbound-frequency charges, with local sales tax apportioned based on the share (by time, or by count if time data isn't available) of your remote locations that are in Texas.

Businesses paying for hub monitoring or maintenance services

Monitoring services tied to your satellite/telecommunications system are taxed in the same proportion as the underlying telecommunications charges, regardless of whether the technician is working in Texas or from an out-of-state location. By contrast, maintenance on hub hardware or software is taxed based on where the hardware/software itself is located — taxable if it's in Texas, not taxable if it's outside Texas.

Accountants and tax professionals apportioning local tax

This letter illustrates the Comptroller's preferred apportionment method for multi-state satellite/telecom charges: a time-based formula (time transmitting to/from Texas locations versus all locations) as the primary method, falling back to a location-count formula (Texas remote locations as a percentage of total remote locations) only if the time data cannot be compiled.

Common questions

Q: Is Texas sales tax due on satellite frequency rental charges?
A: Yes. Texas sales tax is due on charges for the outbound frequencies, and the incoming frequencies are also taxable, both apportioned between state and local tax using the time-based (or location-count) formula described in the letter.

Q: How is local sales tax apportioned for these satellite services?
A: By a formula comparing time spent transmitting to Texas remote locations versus time spent transmitting to all remote locations; if that data cannot be compiled, by the percentage of Texas remote locations relative to total remote locations.

Q: Does it matter whether hub monitoring is performed in Texas or out of state?
A: No. Monitoring services performed by the satellite company's employees are taxed in the same proportion as the telecommunications services regardless of whether the monitoring is done in Texas or out-of-state.

Q: Is maintenance on satellite hardware and software always taxable?
A: It depends on location. Maintenance on hub hardware and software located in Texas is taxable; maintenance on hardware and software located outside Texas is not subject to tax. Maintenance for remote-site hardware and software is taxable and can be apportioned based on the Texas sites.

Citations and references

No specific statutes or administrative rules are cited in the text of this 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/9502L1345G02

Original ruling text

February 6, 1995

Dear **:

Thank you for your recent letters regarding the tax treatment of
satellite telecommunications and related services. Your letters are
restated in part with responses below:

** purchases satellite services that allows them to
transmit and receive electronic data to and from remote locations
across the U. S. The monthly billing for these services is received
at the Headquarters location. The following are components of the
monthly charges for these services.

1. Rental of outlinks and returnlinks: These charges are for use of
   specified frequencies which allow ** to transmit data
   via satellite from the headquarters hub to numerous remote
   locations sites across the country and to receive data via satellite
   from remote sites to the Headquarters hub. ** rents 5
   outbound and 21 incoming frequencies. The 21 incoming frequencies
   are used to transmit data to the Texas hub.

Question: Are the rentals of the satellite frequencies taxable? If
so, can the tax be apportioned based upon the number of locations
sited in Texas?

Response: Texas sales tax is due on charges for the 5 outbound
frequencies. Local sales tax is due for the above based on a
formula of time used transmitting to Texas remote locations to time
spent transmitting to all remote locations. However, if this data
cannot be compiled, local sales tax is due for the above based on the
percentage of Texas remote locations to total remote locations.

The 21 incoming frequencies are taxable based on a formula of time used
transmitting by Texas remote locations to time spent transmitting by all
remote locations. However, if this data cannot be compiled, Texas tax
is due for the above, based on the percentage of Texas remote locations
to total remote locations. Local sales tax on charges for incoming
transmissions may be computed using the criteria for local tax explained
above.

2. Hub services: These are services performed by on-site technicians
   who monitor the performance of the satellite and remote locations in
   transmitting and receiving data. Only a service is provided. The
   actual maintenance/repair is not included in this charge. The
   technicians provide these monitoring services at the **
   location during normal business hours; during off-business hours,
   these services are performed at the seller's out-of-state location.

Question: Are monitoring services taxable? If they are taxable, are
the monitoring services performed by the seller at his out-of-state
location during off business hours taxable also? If these services are
taxable, can they be apportioned since they benefit the total system?

Response: Monitoring services done by employees of satellite company
are considered services in connection with the sale of telecommunications
services and are taxed in the same proportion. It doesn't matter if
monitoring is done in Texas or out-of-state.

3. Hub Hardware Maintenance/Hub Software Maintenance: These are charges
   for maintenance of the hardware and software associated with the hub
   located in **. The software maintenance is performed by
   the vendor from his out-of-state location. The maintenance of the
   hardware is performed at the hub site in Texas.

Question: Is the software maintenance service taxable since it is being
performed out-of-state? If it is taxable, can the tax be apportioned
since the hub benefits all remote locations?

Response: Maintenance on hardware and software located in Texas is
taxable. Maintenance on hardware and software located outside Texas is
not subject to tax.

4. Hardware Maintenance/Software Maintenance - Remote Locations: This
   is for maintenance services for satellite hardware and software located at
   sites throughout the country. The maintenance is performed either at the
   hub site or at the vendor's out-of-state location.

Question: Are these maintenance services taxable? If they are taxable,
can the tax be apportioned based on Texas sites only?

Response: Yes.

This opinion is rendered based on the facts you submitted. Other facts,
though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Administration,
Comptroller of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9502065L