An outsourced digital pre-press/asset management company runs a Texas photography studio plus several product lines (digital photography, 2D/3D digital illustration 'Liquid Graphix,' resold data-communication solutions called 'ViNET,' and custom/modified software) delivered to customers via mail, contract carrier, or the Internet. The company asked a long list of Texas sales/use tax questions covering nearly every one of its product lines and business practices.

Plain-English summary

A leading supplier of outsourced digital pre-press and asset management services — serving advertising agencies, consumer product/packaging companies, and retail advertisers, with a studio located in Texas — submitted an extensive, multi-part ruling request covering four distinct product lines: Digital Photography (large-format product/fashion photography shot at a Texas studio, delivered by mail, carrier, or Internet); Liquid Graphix (2D/3D digital illustrations, composites, and prototypes produced OUTSIDE Texas but delivered to Texas customers); ViNET (reselling data communication solutions, including selling/leasing communication equipment); and Software Products (custom development, modification of purchased/"canned" software for resale, installation, and service agreements).

The Comptroller answered ten distinct questions, establishing a comprehensive framework:

1. Yes, the company's Texas studio requires it to be permitted and to collect/report Texas sales/use tax on its taxable Texas sales.
2. Software sales are taxable tangible personal property — tax applies to the TOTAL charge including installation and service agreements when delivered to a Texas purchaser (though separately stated customer TRAINING charges are not taxable). Digital Photography and Liquid Graphix are taxable as graphic arts (Rule 3.312) when delivered to a Texas purchaser; an advertising agency incorporating the photos into finished art, or acting as a reseller, can issue a resale certificate instead. ViNET's tax treatment was left unresolved pending an active Comptroller working-group review of Internet-service taxation — a genuine currency flag on this specific product line. Multi-state customers can use Rule 3.342's exemption certificate for the out-of-state-benefit portion of information services, but must self-remit tax on their actual Texas-based use.
3. Mandatory vs. optional fees make no difference to taxability.
4. Services related to a taxable item's sale are taxable whether separately invoiced or bundled into one charge, per Tax Code Section 151.007(b).
5. Yes, the Texas studio itself creates nexus under Tax Code Section 151.107 — as would having a Texas-based service agent for maintenance agreements, or leasing tangible personal property in Texas (Rule 3.286).
6. Retaining title while the customer merely "approves" the item does NOT avoid tax — Tax Code Section 151.005's broad "sale" definition covers title/possession transfers, production to special order, and title retained merely as security for payment.
7. Yes, the taxability of the final printed matter carries through to prepress charges — the total charge including prepress is taxable absent a valid resale/exemption certificate.
8. No, the delivery method (mail, carrier, or electronic transmission) does not affect taxability — tax is due on taxable items delivered for use in Texas regardless of how they arrive.
9. Yes, additional charges for electronic transfer/delivery of a taxable product are themselves taxable.
10. Yes, a customer renting/leasing ViNET communication equipment from the company (rather than owning it) is subject to tax on that rental/lease under Rule 3.294.

What this means for you

Outsourced creative/pre-press/digital services businesses with a Texas presence

A single Texas studio or location creates nexus for your ENTIRE multi-state business, not just that location's local sales — and that nexus persists even for products developed or produced entirely outside Texas (like the Liquid Graphix line here) if they're delivered to Texas customers.

Businesses billing bundled services alongside taxable products

Don't assume separately stating a service charge from a product charge changes the tax result — Tax Code Section 151.007(b) taxes the TOTAL charge for a taxable item's sale, including related services, whether itemized separately or bundled. The one exception flagged here: separately stated customer TRAINING charges on software are not taxable.

Companies unsure how to classify emerging Internet/data-communication service lines

This letter is a useful historical marker: as of 1998, the Comptroller's own position on taxing certain Internet-delivered services (like the ViNET data-communication resale here) was still under active review by an agency working group — a reminder that novel service categories may carry more uncertainty and can shift as guidance develops.

Accountants and tax professionals advising multi-product, multi-state service businesses

This letter's ten-question format is a comprehensive template for nexus, delivery-method, bundling, and title-retention issues common to outsourced creative/technical service providers — useful as a checklist even outside the specific digital pre-press context.

Common questions

Q: Does having just one Texas studio location create sales tax nexus for a company's entire multi-state operation?
A: Yes — Tax Code Section 151.107 makes a retailer "engaged in business" in Texas by maintaining even one office, studio, or place of business here.

Q: Does the delivery method (mail, carrier, electronic) change whether a product is taxable?
A: No — tax applies to taxable items delivered for use in Texas regardless of the delivery method, and electronic delivery charges are themselves taxable when the underlying product is taxable.

Q: If I keep legal title to an item but the customer approves and effectively uses it, do I still owe tax?
A: Likely yes — Tax Code Section 151.005's definition of "sale" is broad enough to cover title/possession transfers, custom production to a customer's order, and even title retained merely as security for payment.

Q: Does separately stating a service charge from a taxable product charge avoid tax on the service?
A: No, generally — Section 151.007(b) taxes the total charge including related services, whether itemized or bundled (with an exception here for separately stated software training charges).

Q: Can I rely on this letter for my own outsourced digital services business?
A: No. It's based on the facts presented, and the letter notes other facts, though similar, may provide a different result. Note also that the ViNET/Internet-service portion of this ruling was explicitly flagged as subject to change pending a Comptroller working-group review.

Citations and references

• Tex. Tax Code § 151.005 (definition of sale/purchase)
• Tex. Tax Code § 151.007(b) (total sales price includes related services)
• Tex. Tax Code § 151.107 (retailer engaged in business in this state / nexus)
• 34 Tex. Admin. Code Rule 3.308 (computers — hardware, software, services and sales)
• 34 Tex. Admin. Code Rule 3.312 (graphic arts)
• 34 Tex. Admin. Code Rule 3.330 (data processing services, including subsection (g) on local tax collection)
• 34 Tex. Admin. Code Rule 3.342 (information services, multi-state benefit exemption certificate)
• 34 Tex. Admin. Code Rule 3.286 (seller's and purchaser's responsibilities — nexus)
• 34 Tex. Admin. Code Rule 3.294 (rental and lease of tangible personal property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9802593L

Original ruling text

February 27, 1998

Dear Ms. **:

This is in response to your request for a ruling on behalf of your client
("Client"), to obtain specific guidance regarding the state of Texas tax
implications of various transactions. I have restated your description of your
client's business, the specific transaction descriptions and your specific
questions below followed by my response:

Business Description:

Client is a leading supplier of outsourced digital pre-press and asset
management services to advertising agencies, consumer product and packaging
companies, and retail advertisers. Client provides comprehensive digital
pre-press services from its network of full service outsourcing centers as well
as services provided at multiple customer "on-site" locations.

Transaction (Product) Descriptions:

Digital Photography - Operation of fully equipped digital photography studios
in which the company shoots images at a size of over 100 megabytes for an
output size of up to 20X30". Product and fashion photography is the studio's
specialty. A studio is located in the state of Texas. The images are
transmitted to customers by regular U.S. mail, contract carriers, and through
electronic medium (Internet services).

Liquid Graphix - Production of 2D and 3D digital illustrations, digital
transparencies, image compositing and product illustrations/prototyping. The
company produces composite images and digital prototypes. These digital
creations are available in many different formats, including transparencies,
digital proofs, and conventional film. This service is provided through design
and production studios outside of the state of Texas and is delivered to Texas
customers by regular U.S. mail, contract carriers, and through electronic
medium (Internet services).

ViNET (Virtual Imaging Network) - Resale of data communication solutions to
customers. Client's involvement will be to sell the service and bill the
customer. Maintenance agreements will be offered to customers, but will be
contracted out to other service providers. This service will require Client to
purchase communication equipment for its customers. The equipment may also be
purchased or rented by its customers, with ownership retained at Client's site.

Software Products - Development of software for customers and modification of
purchased (canned) software for resale to customers. The company also installs
the software and provides service agreements.

Questions for each product line:

1.) Are any of the above services subject to Texas sales or use taxes?

Response: Yes. Client, by virtue of studio in Texas is required to be
permitted to collect and report Texas sales and use tax on its sales of taxable
items in Texas.

2.) Are any of the above sales of tangible personal property (software, images,
photographs) subject to Texas sales or use taxes?

Response: Yes. The sale of software is considered the sale of tangible
personal property. Sales tax is due on the total charge, including
installation and service agreements, for the software delivered to purchasers
in Texas. Subsequent charges for modifications by Client to software sold by
Client are also taxable. Separately stated charges for customer training on
the software would not be taxable. See Rule 3.308 - Computers - Hardware,
Software, Services and Sales, copy enclosed. Sales of software shipped or
delivered to a purchaser out of state would not be subject to Texas tax.
Client should retain documentation reflecting that the product was delivered
out of state.

Sales of Digital Photography and Liquid Graphix are considered the sale of
graphic arts and are taxable when delivered to a purchaser in Texas. See Rule
3.312 - Graphic Arts, copy enclosed. An advertising agency may issue a resale
certificate in lieu of paying tax to Client, if they are incorporating the
photographs into finished art or if they are acting as a seller to their
advertising customer.

I am not quite clear as to what ViNET is, you may wish to provide a more
detailed explanation of this service. If this is in the form of Internet or
Intranet communications, we currently tax these as information services. An
agency-sponsored Internet working group composed of representatives from
several industries including Internet service providers, is currently
reviewing our position on the taxation of certain services provided via the
Internet. Therefore, this response is subject to change pending the outcome of
that group's findings.

Rule 3.342, regarding information services, provides an exemption for customers
with multi-state operations based on benefit of use. A customer with operations
inside and outside of Texas, may give the service provider an exemption
certificate claiming multi-state benefit, and the service provider is not
required to collect tax from that customer. The customer must remit tax
directly to the state based on the benefit the customer derives from the
service in Texas. A customer issuing such a certificate and deriving no benefit
of service in Texas would owe no Texas tax.

Texas is also a member of the Multi-State Compact and so recognizes sales tax
as having precedence over use tax. Accordingly, a legally imposed sales tax
due to Texas or another state would be due before the corresponding use tax
would be imposed. Subsection (g) of Rule 3.330 addresses the collection of
local taxes for data processing services.

3.) Would mandatory fees vs. optional fees have a different tax effect?

Response: No.

4.) Must the services be invoiced separately from the tangible personal
property in order to be excluded from the Texas sales or use taxes?

Response: Services related to the sale of taxable item are taxable whether
separately stated or included in a single charge. Subsection (b) of Texas Tax
Code 151.007, provides that "the total amount for which a taxable item is
sold, leased, or rented includes a service that is a part of the sale and the
amount of credit given to the purchaser by the seller."

5.) Does installing their products and providing a continuing maintenance
agreement for their customers located in Texas create sales or use tax and or
income tax nexus in Texas?

Response: Client's studio in Texas creates nexus for Client in Texas. Texas Tax
Code 151.107 - Retailer Engaged in Business in This State, provides that a
retailer is engaged in business in this state if he "... maintains, occupies,
or uses in this state permanently, temporarily, directly, or indirectly or
through a subsidiary or agent by whatever name, an office, place of
distribution, sales or sample room or place, warehouse, storage place, or any
other place of business." Also having an agent in Texas to service your
maintenance agreements and leasing tangible personal property in Texas would
create nexus for your client . See Rule 3.286 - Seller's and Purchaser's
Responsibilities, copy enclosed.

6.) If Client retains title to the tangible personal property, and the customer
merely gives
approval, is the property subject to Texas sales or use taxes?

Response: Texas Tax Code 151.005, defines "Sale" or "Purchase" to mean (in
part) any of the following when done or performed for consideration:

(1) a transfer of title or possession of tangible personal property;

(4) the production, fabrication, processing, printing, or imprinting of
tangible personal property for consumers who directly or indirectly furnish
the materials used in the production, fabrication, processing, printing, or
imprinting;

(7) a transfer of the possession of tangible personal property if the title to
the property is retained by the seller as security for the payment of the
price; or

(8) a transfer of the title or possession of tangible personal property that
has been produced, fabricated, or printed to the special order of the customer.

Therefore, tax would still be due if Client transfers title or possession of
the item or produces the item to the special order of the customer for
consideration.

7.) Does the taxability of the final printed matter have any bearing on the
taxability of the prepress items?

Response: Yes, the total charge to the customer, including prepress services,
for the final printed matter is taxable unless the customer provides a valid
resale or exemption certificate.

8.) Does the mode of transmission (U.S. mail, contract carrier, electronic
transmission) affect the taxability of the property?

Response: No, sales tax is due on taxable items delivered to purchaser's for
use in Texas.

9.) If the property is indirectly transferred electronically, would the
additional transfer charges incurred be subject to Texas sales or use taxes?

Response: Yes, a charge for delivery of the product is considered taxable if
the product sold is taxable.

10.) Concerning the ViNET (Virtual Imaging Network), would the customer
purchasing the communication solution be subject to Texas sales or use tax if
it did not own the necessary equipment, but instead rented or leased it from
our client?

Response: Yes, the rental or lease of tangible person in Texas is taxable, see
Rule 3.294 - Rental and Lease of Tangible Personal Property, copy enclosed.

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