Is a consultant/contract programmer's fee for helping a customer create an interactive multimedia training program taxable, when the customer will own the finished program?

Plain-English summary

A company provides consultants and contract programmers who help customers create multi-media, interactive computer-based training programs. The programs are created by, and become the property of, the end user/customer — the company's client never has any rights to them.

The Comptroller confirmed this arrangement is nontaxable computer programming. Tax Code 151.0101(5)(D) excludes "the repair, maintenance, creation, and restoration of a computer program, including its development and modification," from the list of taxable services, so long as the program isn't sold by the person performing that work. Because the client is only helping the customer create the interactive program (not selling it), the service charge is not taxable. That said, the client still owes tax on all materials, equipment, and supplies it uses to provide the service.

Two situations flip the outcome to taxable:

• If the client also sells software or hardware to be used in creating the programs, those sales — and any services associated with them — are taxable.
• If the interactive software the client is helping build is actually a modification of software the client itself sold, then the entire charge for the service becomes taxable.

The Comptroller noted this opinion is based on the facts presented, and different facts could produce a different answer.

What this means for you

Consultants and contract programmers

If you're helping a customer build custom software (including interactive multimedia/training programs) that the customer will own outright, your service fee for that programming work is not subject to Texas sales tax under the computer-programming exclusion. However, you must pay sales/use tax yourself on the materials, equipment, and supplies you use to deliver the service — that cost isn't passed through tax-free just because the end service is nontaxable.

Businesses that both consult and sell software/hardware

Watch the line between providing a nontaxable programming service and selling taxable goods. If you sell software or hardware components that go into the project, those sales (and any service tied to them) are taxable regardless of the nontaxable status of your programming labor. And if what you're building is really just a modification of software you sold the customer, the whole engagement — not just the software sale — becomes taxable.

Accountants and tax professionals

This letter is a useful illustration of Tax Code 151.0101(5)(D)'s "not sold by the person performing the service" condition: the exclusion protects programming services rendered on programs owned by the customer, but it doesn't extend to sales of software/hardware by the same provider, nor to work that amounts to modifying software the provider itself sold.

Common questions

Q: Is a fee for helping a customer build a custom interactive training program taxable in Texas?
A: No, not if the finished program is created by and belongs to the customer — this falls under the Tax Code 151.0101(5)(D) exclusion for computer program creation, development, and modification services.

Q: Does the service provider owe any tax at all in this arrangement?
A: Yes — the provider must pay tax on all materials, equipment, and supplies used in providing the service, even though the service charge itself isn't taxable.

Q: What if the consultant also sells software or hardware used in the project?
A: Those sales, and any services associated with them, are taxable.

Q: What if the "new" interactive software is really just a modification of software the provider already sold the customer?
A: Then the total charge for the service is taxable, not just the software sale.

Q: Can other businesses rely on this letter for their own arrangements?
A: This opinion is based on the facts presented, and different facts may result in a different answer, so businesses should confirm their own facts match before relying on it.

Citations and references

• Tax Code 151.0101(5)(D) (excludes computer program creation, development, restoration, and modification from taxable services when not sold by the person performing the 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/9607L1417G14

Original ruling text

July 8, 1996

Dear ****:

Thank you for your letter of June 24, 1996 concering the tax responsibilities
of a company that provides consultants and contract programmers who assist
customers in the creation of multi-media, interactive computer-based training
programs.

I understand that the programs are the creation of and property of the end
user. At no time does your client have any rights to the programs. Tax Code
151.0101(5)(D) excludes the following from the list of taxable services:

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;...

Your client is helping its customers create an interactive computer program,
which is not currently a taxable service. Your client should pay tax on all
materials, equipment and supplies used in the provision of the service.

You said that from time to time your client sells software and hardware to
be used in the creation of the programs. These sales and any services
associated with the sales are taxable. In addition, if the interactive
software is, in fact, a modification of the software sold by your client,
then the total charge for the service is taxable.

This opinion is based on the facts presented. Different facts may result in
a different answer.

My number is 1-800-531-5441, extension 3-4614.

Sincerely,

Adina Whittemore
Tax Policy Division

NOTE: Previous Accession Number 9607339L