Is a consultant's fee for auditing EDP controls, helping a client pick new computer hardware/software, or writing a software vendor's white paper subject to Texas sales tax?

Subject

Consulting Services (System Design, Analysis, Estimating) — Computer (Software/Hardware) Needs

Plain-English summary

An EDP (electronic data processing) consultant, whose identity is redacted in the letter, asked the Comptroller's Tax Policy Division whether Texas sales tax applies to three kinds of professional services. The Comptroller restated the requester's own description of each service and responded to each in turn:

• Service I -- EDP controls review. The consultant is hired to study a client's EDP controls, policies, and procedures against control objectives the client sets, and to write a confidential report (similar to a financial audit report) that cannot be resold and has no value to anyone else. Response: not subject to sales tax.
• Service II -- Computer needs-assessment consulting. The consultant studies a client's current operations to help determine what new computer hardware and software could help the business, producing a written list of measurable system requirements, an optional (non-endorsing) vendor list, a quantitative review of vendor proposals, help selecting and demonstrating finalist systems, help negotiating purchase price, a conversion/training schedule, oversight of the conversion, and help developing new policies and procedures. The results are confidential and cannot be resold. Response: not taxable, unless it is related to the sale of the computer hardware or software.
• Service III -- White paper for a software vendor. The consultant is hired by a software company to write a white paper describing how the consultant uses that company's product in an auditing and consulting practice, for distribution to the company's clients, prospective clients, and employees. The paper has no resale value. Response: not taxable.

The consultant explained that Service I had been performed since April 1995 (informally understood to be non-taxable after speaking with Comptroller staff) and that Services II and III were newly contracted and about to be billed, prompting the written ruling request. The letter closes with the standard caveat that the opinion is based on the facts presented and that different facts could change the result.

What this means for you

EDP and IT consultants

If your engagement is limited to producing a confidential analysis, audit-style report, or written recommendations for a client -- without selling any hardware or software as part of the deal -- this letter treats that kind of fee as not subject to Texas sales tax. That covers a controls/procedures review (Service I) and a computer needs-assessment/vendor-selection engagement (Service II), as long as the consulting is not tied to the sale of the hardware or software itself.

Businesses buying consulting alongside hardware or software

Watch the carve-out in the Service II response: needs-assessment and vendor-selection consulting is taxable when it is related to the sale of the computer hardware or software. If the same consultant (or an affiliated seller) is also selling you the equipment or software, the consulting fee may lose its non-taxable status.

Consultants writing content for software vendors

Writing a white paper for a software company that documents how you use its product -- for distribution to the company's clients and employees -- was ruled not taxable in this letter, because the paper itself has no resale value to the consultant or the client.

Common questions

Q: Is a fee for reviewing a client's EDP controls and writing a confidential report subject to Texas sales tax?
A: No. The letter states this service (Service I) is not subject to sales tax.

Q: Is computer needs-assessment consulting (helping a client evaluate and select new hardware/software) taxable?
A: Not by itself. The letter says this consulting (Service II) is not taxable "unless it is related to the sale of the computer hardware or software."

Q: Is writing a white paper for a software company about how you use its product taxable?
A: No. The letter states this service (Service III) is not taxable.

Q: Could the answer change if the facts are different?
A: Yes. The letter says the opinion is based on the facts presented, and other facts, though similar, may produce a different result.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1429A12

Original ruling text

August 8, 1996

Dear **:

This is in response to your request for a ruling on the taxability of
specialized professional services that you perform relating to electronic data
processing (EDP) and EDP consulting.

I have restated the facts you provided followed by my response below:

Professional Service I: I am retained by a client to study his company's EDP
controls, policies and procedures, to determine whether or not they are
suitably designed to meet a series of control objectives specified by the
client. (Note: typically, I will briefly consult with the client prior to
executing the engagement agreement, to help the client determine the control
objectives.) The report I write is specific to the client and, like a
financial audit report, is highly confidential. The report cannot be resold,
and would have no value to any other entity. Included with this letter are:

• An example of an engagement letter.

• An example of a report transmittal letter, which is a part of every report
  that I write.

• An example of an executive summary, which is a part of every report that
  I write.

Response: This service is not subject to sales tax.

Professional Service II: I am retained by a client to
study his current operations. The goal of this engagement is to help the client
determine what, if any, new computer hardware and software could help the
company grow and become more profitable. The output from this type of
engagement include the following:

I. A written list of measurable system requirements. I
will consult extensively with senior client management in creating this list.
The list will generally be used to submit a request for proposal (RFP) from
various hardware and software vendors.

II. If requested, I'll provide management with a list
of software and hardware vendors that they may choose to request bids from. I
do not endorse any of the vendors on the list. The list is only provided as
reference material for management's consideration.

III. I'll perform a quantitative review of the sales
proposals received from the hardware and software vendors. The results of my
review will be reported to management via a written document.

IV. I'll work with management to select two to four viable system alternatives,
and help to arrange on-site demonstrations of the viable alternatives.

V. I'll help management negotiate the purchase price for the hardware and/or
software.

VI I'll assist management in developing a written schedule for conversion
testing, employee training, and final system conversion.

VII. I'll help management oversee the actual hardware and/or software conversion(s).

VIII. I'll help management develop policies and procedures for the new systems.

The results of this consulting engagement cannot be resold by either myself or
the client, are highly confidential, and would have no value to any other entity.
Included with this letter is an example of an engagement letter.

Response: This consulting service is not taxable unless it is related to the
sale of the computer hardware or software.

Professional Service III: I am retained by a software
company to write a white paper, which will document how I use the company's
product in my auditing and consulting business. It's my understanding that the
company will distribute the paper worldwide, to both its current clients and to
its prospective clients, to provide the clients/prospective clients with
real-world examples of how their software products can be used. The paper will
also be distributed to the software vendor's employees, to give them additional
insight as to how the company's products are used.

The white paper has no resale value, by either myself
or my client. Included with this letter is the draft copy of the white paper.

I have been providing the services described in
"Professional Service I" since April of 1995. I spoke with several people at
the comptroller's office prior to starting my business, and it's my
understanding that these services are not taxable. But, as a precautionary
measure, I'm requesting written confirmation of this. The services described in
"Professional Service II & III" have not been performed by me in the past.
However, I recently executed contracts to perform both services, and I will be
sending my clients bills for these services this quarter. Accordingly, I need
to know whether or not to charge sales tax.

Response: The writing of the white paper documenting your insight into the
use of their product is not taxable.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct
line is 512/463-4502. You may also write to Tax Policy Division, Comptroller
of Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division

NOTE: Previous Accession Number 9608535L