In Houston, how are telecommunications service charges, rented telecom equipment, PBX maintenance, and related software upgrade/training charges taxed, and at what combined state-plus-local rate?

Plain-English summary

A taxpayer with a direct payment certificate asked a batch of questions about telecommunications services billed in Houston, plus a separate question about software. On telecom rates: trunking service (Trunk SMR), air time, local telephone service, dispatch service for truck radios, and tower access billed in connection with telecom service are all taxable, citing Tax Code § 151.007's definition of sales price (the total charge, without deducting costs, and including any service that's part of the sale) — taxed at the combined 7.25% rate (6.25% state + 1% City of Houston), with no Houston MTA tax applying to telecommunications services specifically. Equipment rented as part of the telecom service provider's bundle is taxed the same way, at 7.25%. But equipment or PBX maintenance billed SEPARATELY — where the customer owns the equipment and pays a distinct maintenance charge, or buys equipment outright from the telecom provider on a separate invoice — is taxed at 8.25% (which reflects the Houston MTA rate applying to non-telecom tangible-property/equipment sales), unless that equipment is invoiced on the SAME document as the telecommunications services (in which case it follows the 7.25% telecom rate).

On the software side, the taxpayer asked about Tax Code § 151.0101's exclusion for repair, maintenance, creation, and restoration of a computer program (including development/modification) NOT sold by the person performing that service. The Comptroller confirmed: charges to modify a program from a vendor who didn't sell the original software are not taxable. But software upgrades produced by the SAME firm that created the original software being upgraded are not "maintenance" — they're taxable sales of software in their own right. Finally, on a specific example (a PeopleSoft-style HR/payroll software purchase bundling separately stated training credits), the Comptroller confirmed separately stated training charges are not subject to sales tax, even when bundled with an otherwise-taxable software purchase.

What this means for you

Telecommunications companies billing in Houston (or similar multi-jurisdiction cities)

Keep telecom services and any bundled equipment on the SAME invoice if you want the whole package taxed at the lower combined telecom rate (7.25% here) — splitting equipment onto a separate invoice, or billing PBX maintenance separately when the customer owns the equipment, pushes that portion to the higher combined rate that includes the local transit-authority tax (8.25% here).

Software vendors and IT departments buying upgrades/training

Upgrades sold by the ORIGINAL software creator are taxable software sales, not exempt maintenance — but modification/repair work by a third party who didn't sell the original program is excluded from tax. Separately state any training charges on your contract or invoice to keep them nontaxable.

Common questions

Q: What's the combined tax rate on telecom services and bundled equipment in Houston?
A: 7.25% (6.25% state + 1% city), with no Houston MTA tax on telecommunications services specifically.

Q: What's the rate on equipment or PBX maintenance billed separately from telecom services?
A: 8.25% — unless invoiced on the same document as the telecom services, in which case the 7.25% telecom rate applies.

Q: Are software upgrades from the original software's creator taxable?
A: Yes — they're treated as sales of software, not exempt maintenance.

Q: Are separately stated training charges taxable?
A: No, as long as they're separately stated in the contract or invoice.

Q: Can another taxpayer rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Statutes:

• Tax Code § 151.007 (sales price includes services that are part of the sale)
• Tax Code § 151.0101 (taxable services; exclusion for modification of software not sold by the modifier)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9709332L

Original ruling text

September 9, 1997

Dear Mr. **:

Thank you for your recent letter which is restated in part with response below.

a. Please clarify the taxability of the following questions in relation to
telecommunication services provided and billed in Houston, Texas. Please also
note that we are a direct payment certificate holder.

1) Does providing trunking service, air time, local telephone service, dispatch
service for truck radios, and tower access, all fall under telecommunication
services? Are these charges therefore only subject to state tax at 6.25% and
City of Houston Tax of 1 % for a total of 7.25%?

Response: Telecommunications services including charges for Trunk SMR, air
time, local telephone service, and dispatch service are subject to sales tax.
Tax Code 151.007 defines sales price to include "the total amount for which a
taxable item is sold... without a deduction for the cost of the taxable item
sold the materials used, labor or service employed, interest, losses, or other
expenses". The definition also includes a service that is part of the sale.
Accordingly, charges for tower access in connection with a telecommunications
service is subject to sales tax in the same manner as the service itself.

2) When we rent telecommunication equipment from a company that also provides
the
telecommunication services for this equipment, does the rental charge also fall
under
telecommunication service, and therefore taxed at a total of 7.25% in the City
of Houston?

Response: Equipment that is rented as part of the provision of a
telecommunications service is taxable in the same manner as the service itself.
Telecommunications services purchased in the City of Houston are subject to
state and city sales tax for the City of Houston, but not to the Houston MTA
tax. Equipment rented as part of such service is taxed at a rate of 7.25%.

3) Are charges for PBX maintenance of the telephone system taxable as
telecommunication services and therefore taxable at 7.25% in Houston?

Response: In our telephone conversation of September 9, 1997, you stated that
your firm owned the PBX equipment and that the maintenance charges are billed
separately from the telecommunications services. The maintenance should be
billed at 8.25%.

4) Are purchases of telecommunication equipment sold by the provider of the
telecommunication services the equipment relates to taxed as a
telecommunication service and therefore taxed at 7.25% in the city of Houston?

Response: The equipment should be billed at 8.25% unless it is invoiced on the
same document with the telecommunications services.

b. I also have a question concerning section 151.0101 "Taxable Services". This
section includes a list of exclusions including 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.

This exclusion leads me to my next concern. We currently pay for upgrades and
licensing renewals of software through vendors that are neither the
manufacturer nor the original seller of the computer program. I believe the
upgrades and product support would be considered maintenance as well as the
licensing fee since this allows you to continue to use the program and receive
these upgrades (enhancements to the original program). Please confirm that
these charges are therefore non taxable charges.

Response: Charges to modify a program not sold by the person doing the
modification are not subject sales tax. Sales of software upgrades that are
produced by the firm that created the software being upgraded are not
considered software maintenance but rather sales of software.

We also recently purchased a new software package to run our payroll and human
resource functions. We were charged $XXXX for each different module that we
purchased. Included with the software was 132 training credits that each cost
$**. These are part of the package that People Soft provides with
the new software and these credits are separately stated in our contract with
them. After review of the software rules I believe these separately listed
credits would not be subject to sales tax although all other charges would be.
Please address this issue.

Response: Separately stated charges for training are not subject to sales tax.

This opinion is rendered based on the facts presented. If there are additional
or different facts, the opinion may change.

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 Policy, Comptroller of Public
Accounts.

Sincerely,

Al Van Allen
Tax Policy Division