An engineering/CAD services company asked about eight separate activities: (A) revising client drawings, (B) creating new designs, (C) scanning documents, (D) plotting, (E) computer consulting/installation/troubleshooting, (F) software training, (G) furnishing employees to clients, and (H) accepting direct pay permit numbers. Which of these are subject to Texas sales tax?

Plain-English summary

An engineering/CAD services company serving oil-and-gas and other industries asked the Comptroller to sort out the taxability of eight distinct service lines (labeled A through H in the letter):

(A) Revising client drawings & (B) creating new designs. The dividing line is who develops the underlying specifications. If the client supplies schematic drawings, specifications, and requirements and the company just drafts/revises from them, the company is acting as a "draftsman" and its charge is a taxable sale of tangible personal property (Rule 3.312(a)). But if the company works WITH the client to develop the original specifications/schematics itself (or develops them independently) as well as producing the design, that's professional engineering services — not taxable, even if a finished design is ultimately delivered.

(C) Scanning. Converting paper documents to electronic media (with digital enhancement/correction) is taxable data processing (Rule 3.330(a)).

(D) Plotting. Printing an existing CAD data file to paper, mylar, or other media via a plotting device is a taxable sale of tangible personal property.

(E) Consulting, installation, and troubleshooting. Pure consulting not tied to selling a taxable item is not taxable. But: computer assembly (connecting CPU/monitor/keyboard/printer and installing system software) is taxable even if the company didn't sell the hardware/software; installing software or external hardware is taxable ONLY if the company sold that software/hardware; installing internal hardware that becomes part of an existing system is taxable as repair/remodeling (Rule 3.308(a)(4)); software troubleshooting/error correction is taxable only if the company sold the software (Rule 3.308(b)(3)); and troubleshooting/repairing computer hardware is always taxable (Rule 3.308(a)(4)).

(F) Training. Separately stated charges for training clients' employees on AutoCAD/Intergraph software are not taxable.

(G) Furnishing employees. Whether furnishing employees to clients is taxable turns on Sec. 151.057: if the company qualifies as a temporary help service (employees under the client's direction/control, using the client's supplies/equipment, supplementing the client's own workforce temporarily), those services are not taxable — even if the client's contract paperwork says otherwise, since the Comptroller looks at actual practice, not contract language. If the company does NOT qualify as a temporary help service, the services ARE taxable (though separately stated professional services like engineering/architectural work remain exempt). Separately, the letter addresses invoice language: a statement that "the stated price includes sales tax, if any sales tax is due" is not specific enough to shift tax responsibility — Rule 3.286(d)(3)/3.285(a)(3) require a more specific statement that tax is actually included.

(H) Direct pay permits. A client's purchase order simply listing a direct pay permit NUMBER is not enough to excuse the company from collecting tax — the client must provide a properly completed direct pay certificate (Rule 3.288), though a blanket certificate can cover all future taxable purchases from that vendor once on file.

What this means for you

Engineering, drafting, and CAD services firms

The single most important line in this letter: drafting FROM a client's own specifications is a taxable sale of tangible personal property, but genuine professional engineering (where you develop the specifications and design, not just execute someone else's) is not taxable — even for the identical finished deliverable. Structure and document your engagements to make clear which category applies.

Firms combining IT consulting, installation, and repair

Whether you sold the hardware/software determines whether your installation or troubleshooting charge is taxable — track this carefully, since the same type of work (e.g., software troubleshooting) can be taxable or not depending on that one fact.

Staffing and professional-services firms

If you place employees with clients, check Sec. 151.057's temporary help service criteria against ACTUAL practice (who directs/supervises, whose equipment is used), not just your contract language — a contract clause claiming your company retains direction/control doesn't control if the facts say otherwise.

Accountants and tax professionals

This is a dense, multi-issue letter worth keeping as a reference for CAD/engineering/drafting classification questions, the data-processing-vs-tangible-property line for scanning/plotting, and the temporary-help-service exemption mechanics.

Common questions

Q: Is drafting work taxable in Texas?
A: If you're drafting from a client's own specifications, yes — it's a taxable sale of tangible personal property. If you develop the original specifications and design yourself, it's nontaxable professional engineering, even if you deliver a finished design.

Q: Is scanning paper drawings into electronic form taxable?
A: Yes, as data processing services.

Q: Is plotting (printing CAD files) taxable?
A: Yes, as a sale of tangible personal property.

Q: Is furnishing employees to a client always taxable?
A: No — if the company genuinely qualifies as a temporary help service under Sec. 151.057 (client directs/supervises, uses client's supplies/equipment, supplements client's existing workforce temporarily), it's not taxable.

Q: Is a direct pay permit number on a purchase order enough to skip collecting tax?
A: No — the client must provide an actual, properly completed direct pay certificate (a blanket certificate can cover future purchases once filed).

Citations and references

• 34 Tex. Admin. Code Rule 3.312(a) (Graphic Arts or Related Occupations; Miscellaneous Activities)
• 34 Tex. Admin. Code Rule 3.330(a) (Data Processing Services)
• 34 Tex. Admin. Code Rule 3.308(a)(4) (computer hardware repair/remodeling)
• 34 Tex. Admin. Code Rule 3.308(b)(3) (software troubleshooting/error correction)
• Tex. Tax Code Sec. 151.057 (Services by Employees / temporary help service)
• 34 Tex. Admin. Code Rule 3.286(d)(3) (Seller's and Purchaser's Responsibilities)
• 34 Tex. Admin. Code Rule 3.285(a)(3) (specific statement required to show tax is included in stated price)
• 34 Tex. Admin. Code Rule 3.288 (Direct Payment Procedures and Qualifications)

Subject

Drafting Services — Draftsman Manually Produces Drawings/Blueprints From Schematic Drawings/Specifications Supplied By Clients

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9711949L

Original ruling text

November 17, 1997

Dear *****:

This is in response to your request for a ruling on behalf of your client
seeking guidance on the taxability under the Texas Sales and Use Tax. I have
restated your inquiry, facts, and transactions in question below, followed by
my response to each transaction:

Taxability Inquiry

For each of the inquiries set forth in (A) through (H) below, is the Company
required to
collect and remit Texas sales and use tax? If so, which one(s) and under what
authority?

Facts

A corporation you represent, ("the Company"), is in the business of providing
engineering,
computer-aided design and other related services to its clients who are located
in many industries, including oil and gas related industries. The Company's
services include:

(A) Developing and Revising Client Drawings. The Company's clients provide
equipment or pipeline drawings in either manual or electronic (CAD) form. The
client also provides the Company with instructions asking the Company to modify
the drawings from their original form using the client's revised specifications
as contained in the client's instructions. The Company uses its specially
trained personnel, which include engineers, designers and draftsmen who work
with CAD or Intergraph software to modify or revise the original drawings;

Response: For sales and use tax purposes, professional engineering services are
treated differently from sales of tangible personal property. If Company is
supplied with schematic drawings, specifications, and requirements for
equipment or a pipeline from which they create drafting work, they are
considered a "draftsman." Company's charge to their client is a taxable sale
of tangible personal property. See subsection (a) of Rule 3.312 - Graphic
Arts or Related Occupations; Miscellaneous Activities.

However, if the Company works with its clients to develop (or if the Company
independently develops) the original specifications, schematics, etc., as well
as to produce the actual design, the services would be considered professional
engineering services and would not be subject to tax even if a finished design
is delivered.

(B) Creating New Designs. The Company's trained personnel use design theory,
their own ideas and mathematical calculations to design from client sketches
new designs for their clients. These personnel use the CAD or Intergraph
software to perform this service. The personnel are applying the skills from
disciplines which include mechanical, structural, piping, civil engineering.
Some of the personnel performing this work are degreed engineers. Others do not
have engineering degrees, but have learned the necessary skill by experience;

Response: See response to (A).

(C) Scanning. The Company transforms information from paper media into
electronic media, by scanning documents using specialized equipment and digital
enhancing techniques. Often, the Company's equipment operator must enhance or
correct the transformed information to achieve better clarity or to correct the
item represented in the drawing.

Response: This would be taxable data processing. See subsection (a) of Rule
Section 3.330 - Data Processing Services.

(D) Plotting. In performing this service, the client provides the Company with
an existing electronic CAD file containing data. The Company inserts the data
disk into a computer, which then sends the electronic data to a plotting
device. The plotting device prints the image onto paper, mylar, or some other
type of tangible media.

Response: Plotting services as described above are taxable as the sale of
tangible personal property.

(E) Consulting. The Company occasionally provides consulting services to its
clients. The services include assisting them with the set-up of their computer
systems and equipment.

The company also performs network installation and equipment troubleshooting
after
installation. The Company does not supply any of the computer or network
hardware or software;

Response: A charge for consulting services, that are not related to the sale
of a taxable item, is not taxable.

Installation of either software or external hardware is taxable only if Company
sold the software or external hardware. If Company did not sell the software or
external hardware, a charge for installation is not taxable. If Company is
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 company did not sell the
hardware or software.

Installation of internal hardware that becomes a component of an existing
computer system is taxable. If Company is 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.

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.

(F) Training. The Company trains its clients' employees in how to use AutoCAD
and Intergraph Software.

Response: Separately stated charges for training are not taxable.

(G) Professional Services. The Company furnishes employees to its clients to
perform services in several positions. The positions normally include: design
engineer, design coordinator, design and computer assisted, design, and
engineering support position. The Company pays the employees' salaries and
wages and performs tax withholding. The employees are under the sole direction
and control of the client. The employees perform their work using the client's
supplies and equipment. The client instructs and supervises them. The employees
perform services that, for purposes of this inquiry, are assumed to be taxable
under the Texas sales and use tax laws. After 90 days, the client may choose to
hire the employee on a permanent basis.

Some of the clients' contracts contain a provision stating that the employee
remains under the direction and control of the Company. However, as a matter of
fact, the employees are under the direction and control of the client and not
the Company. In this case, should the Company withhold Texas sales tax on the
services?

Also, some of the client's contracts contain a provision stating that the
'stated price includes sales tax, if any sales tax is due.' Is this language
sufficient to shift the sales tax obligation to the Company?

Response: Sec. 151.057 - Services by Employees, provides:

A service performed by an employee for his employer in the regular course of
business, within the scope of the employee's duties, and for which the employee
is paid his regular wages or salary, or a service performed by a temporary help
service for an employer to supplement the employer's existing work force on a
temporary basis, when the service is normally performed by the employer's own
employees, the
employer provides all supplies and equipment necessary, and the help is under
the direct or general supervision of the employer to whom the help is
furnished, is
not taxable under this chapter.

Emphasis added.

Therefore, if the Company qualifies as a temporary help service, taxable
services that its employees perform under the criteria set out in 151.057,
would not be taxable.

If the Company does not qualify as a temporary help service, taxable sales or
services performed by its employees for Company's clients would be taxable.
Separately stated charges for professional services (i.e., engineering,
architectural, etc.) would not be taxable.

With regard to the sales tax language in Company's billing, subsection (d)(3)
of Rule 3.286 - Seller's and Purchaser's Responsibilities, provides:

The amount of the sales tax must be separately stated on the bill, contract, or
invoice to the customer or there must be a written statement to the customer
that the stated price includes sales or use taxes. Contracts, bills, or
invoices merely stating that "all taxes" are included are not specific enough
to relieve either party to the transaction of its sales and use tax
responsibilities. The total amount shown on such documents will be presumed to
be the taxable item's sales price, without tax included. The seller or
customer may overcome the presumption by using the seller's records to show
that tax was included in the sales price. Out-of-state sellers must identify
the tax as Texas sales or use tax.

The statement "stated price includes sales tax, if any sales tax is due" is
not specific enough to inform Company's customer if any sales tax is indeed
included in the sales price. A more specific statement is required as set out
in Rule 3.285(a)(3).

(H) Direct Pay Permits. Some of the Company's clients provide a direct
payment permit number on their work orders or purchase orders. The clients do
not provide a copy of the direct pay permit. In these cases, is the Company
excused from withholding and remitting sales tax solely on the basis of the
direct payment permit number as shown on the work order or purchase order?

Response: Company's client must provide Company with a properly completed
direct pay certificate. See example in Rule 3.288 - Direct Payment Procedures
and Qualifications (copy enclosed). A copy of the direct pay permit is not
required and simply providing a direct pay number is not sufficient.
Subsection (k) of Rule 3.288, allows a direct pay permit holder to issue a
blanket direct pay certificate covering all taxable purchases from that vendor.
Subsequent purchase orders and Company invoices should indicate that a blanket
direct pay certificate covering taxable purchases is on file.

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

I hope this information answers your questions. If you need additional
information, please
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. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division