Is Texas sales tax due on software sold over the internet and downloaded from a Texas-hosted server, when the customer downloading it is located outside Texas — and what records does the vendor need to keep to support that?

Plain-English summary

This short 1998 e-mail-turned-letter answers a simple but important question for early internet software vendors: if software is sold over the internet and physically downloaded from a server located in Texas, but the customer doing the downloading is located outside Texas, is that sale subject to Texas sales tax?

The Comptroller's policy: no — software downloaded by an out-of-state customer is not subject to Texas tax, even though the file itself is hosted on and transmitted from a Texas server. What matters for taxability is the customer's location, not where the server happens to sit.

That said, the vendor carries the burden of proof. The letter requires the vendor to keep records showing the software was actually downloaded by an out-of-state customer. Conveniently, the address a customer enters on the software's own registration form is enough to satisfy this recordkeeping requirement, as long as that address shows an out-of-state location.

What this means for you

Software vendors and shareware distributors selling downloads over the internet

Hosting your download server in Texas does not by itself create Texas sales tax liability on sales to out-of-state customers — the customer's location controls. But you need to actually document that location; don't assume the sale is automatically exempt without records to back it up.

Businesses relying on customer-entered registration data for tax recordkeeping

A customer's self-reported address on a software registration form is sufficient proof of an out-of-state sale for this purpose — you don't need a more elaborate verification process, at least under the facts addressed in this letter.

Accountants and tax professionals

This is an early, simple example of destination-based sourcing for digital downloads — useful historical context, though modern software/digital-goods sourcing rules and economic nexus standards (post-Wayfair) may add additional considerations beyond this single-server-location question.

Common questions

Q: Does hosting my software download server in Texas create Texas sales tax liability on out-of-state sales?
A: No — the customer's location controls, not the server's location. Downloads by out-of-state customers are not subject to Texas tax.

Q: What records do I need to prove a customer was out of state?
A: The address the customer enters on the software's registration form is sufficient, as long as it shows an out-of-state location.

Q: Can I rely on this letter for my own software distribution business today?
A: No. This opinion is rendered based on the facts presented in 1998, and additional or different facts may change the result; it binds the Comptroller only as to the taxpayer it was issued to. Modern digital-goods sourcing and economic nexus rules should also be checked.

Citations and references

• No specific Tax Code section or Comptroller rule number is cited in the body of this letter; it states the Comptroller's general destination-based policy for internet software downloads and the associated recordkeeping requirement.

Subject

Software/Shareware Sold Over Internet — If Downloaded From Texas Server By Oos Customer Is Not Taxable — Vendor Must Keep Records

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9802116L

Original ruling text

From: Van Allen, Al on Thu, Feb 5, 1998 4:35 PM
Subject: Sales Tax
To: ***

February 5, 1998

Dear ***:

I have been asked to write to you regarding the tax treatment of software sold
via the Internet and downloaded from a Texas server by a customer located
outside Texas.

Our policy is that software downloaded by an out-of-state customer is not
subject to Texas tax. The vendor must keep records to show that the software
was downloaded by an out-of-state customer. The address put on the software
registration form will be sufficient for this purpose if it shows an
out-of-state location.

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. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division