A new computer hardware reseller is paying sales tax on components bought locally (rather than issuing a resale certificate), then charging its own customers sales tax again on the marked-up resale price — effectively taxing the item twice. Is that illegal, and how should it be handled? The reseller also does computer consulting, software installation, and system setup work — which of those are taxable?

Plain-English summary

A new computer hardware business asked two sets of questions. First: its out-of-state vendors ship merchandise without charging sales tax, and the business is permitted to collect/report Texas sales and use tax when it resells that merchandise. But occasionally it buys a component (like a disk drive or modem) locally and pays sales tax to the local retailer — then, when reselling that component marked up to its own client, it charges its client tax on the full price too, effectively taxing the item twice. The business wanted to know the correct procedure and whether double-taxing was breaking any law.

The Comptroller's answer: the business shouldn't be paying tax to its suppliers on components it plans to resell in the first place. It can issue a Rule 3.285 resale certificate to those local suppliers instead of paying sales tax upfront on resale inventory. For tax already paid in error on components it later resold, the business can request a refund from the supplier or take a credit against tax collected on a later return, per Rule 3.338(c). Paying tax twice wasn't illegal, just unnecessarily costly — the fix is using a resale certificate going forward.

Second, the business asked about its computer consulting work — advice and configuration of hardware/systems billed hourly. The Comptroller drew the same consulting-vs-information-services line as several other 1998 letters in this corpus: expert/professional consulting opinions unrelated to selling taxable items are not taxable, while consulting that's really information services (e.g., telling someone where to get the best deal on a product) is taxable under Rule 3.342. Beyond that general framework, three specific computer-service scenarios were addressed: (1) installing/configuring network operating system software, wide-area-network software, or off-the-shelf software the consultant did NOT sell is not taxable, under Rule 3.308(b); (2) the initial assembly of a new computer system — connecting monitor, mouse, keyboard, printer, and other components to the CPU — counts as taxable "assembly" under Rule 3.300(a)(5)/(b); but (3) connecting peripheral hardware to an ALREADY-EXISTING system is not taxable, as long as the consultant didn't sell that hardware.

What this means for you

Computer resellers paying tax to their own suppliers on resale inventory

Stop paying sales tax to suppliers on items you intend to resell — issue a Rule 3.285 resale certificate instead. If you've already overpaid, you can seek a refund from the supplier directly or take a credit against tax you've collected on a later return (Rule 3.338(c)), rather than continuing to double-tax the same item.

Computer consultants doing configuration, installation, and system setup work

Break your billing into the right categories: pure consulting/advice unrelated to selling taxable items is nontaxable; installing/configuring software you didn't sell is nontaxable; connecting peripherals to an existing system (that you didn't sell) is nontaxable. But assembling a brand-new computer system from its individual components IS taxable, regardless of whether you sold the hardware.

Accountants and tax professionals

This letter is a useful checklist for computer-services taxability lines under Rules 3.300, 3.308, and 3.342 — note that the taxability of "connecting components" hinges on whether the system is new (taxable assembly) versus already-existing (nontaxable peripheral connection), and on whether the consultant sold the hardware being connected.

Common questions

Q: My local supplier charged me sales tax on inventory I plan to resell, and I charge my customer tax again on the marked-up price. Is that illegal?
A: No, but it's not the correct or most cost-effective procedure. Issue a Rule 3.285 resale certificate to your suppliers instead, and seek a refund or credit for tax already paid in error under Rule 3.338(c).

Q: Is my computer consulting/advice work taxable?
A: Not if it's genuine expert/professional consulting unrelated to selling taxable items. It becomes taxable if it's really an information service, like telling a client where to get the best price on a product.

Q: Is installing software I didn't sell onto a client's system taxable?
A: No — installing/configuring network OS software, WAN software, or off-the-shelf packages you didn't sell is not taxable under Rule 3.308(b).

Q: Is assembling a brand-new computer system for a client taxable?
A: Yes — connecting the monitor, mouse, keyboard, printer, and other components to the CPU for a new system counts as taxable assembly under Rule 3.300.

Q: Is connecting a peripheral to a client's existing computer system taxable?
A: No, as long as you didn't sell that hardware.

Q: Can I rely on this letter for my own computer business?
A: No. It's based on the facts presented, and the letter notes other facts, though similar, may provide a different result.

Citations and references

• 34 Tex. Admin. Code Rule 3.285 (resale certificates)
• 34 Tex. Admin. Code Rule 3.338(c) (multistate tax credits and allowance of credit for tax paid to suppliers)
• 34 Tex. Admin. Code Rule 3.342 (information services)
• 34 Tex. Admin. Code Rule 3.308(b) (installing/configuring software not sold by the installer)
• 34 Tex. Admin. Code Rule 3.300(a)(5), (b) (computer system assembly)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9804496L

Original ruling text

April 20, 1998

Dear Mr. **:

This is in response to your request for a ruling regarding a small computer
hardware business that you have started. I have restated the information that
you provided and your questions below, followed by my response:

1. All of your vendors are located out of state and send the merchandise to
   you without charging you any sales tax. You are permitted to collect and report
   Texas sales and use tax and will resell the merchandise charging the
   appropriate sales tax. On occasion you have to buy something (disk drive, modem
   etc.) locally from a retailer. You have been paying sales tax on this
   merchandise, however when you resell it to your client you usually mark it up
   and charge them tax on the entire price. So the merchandise is being taxed
   twice. What is the exact procedure for doing this ? You want to do thing right
   however you cannot figure out how to get around taxing equipment this way
   unless you do it twice. You are asking if you are breaking any laws by doing
   this ? This problem seldom occurs, but you would think paying more tax is more
   appropriate than paying no tax.

Response: You should not be paying tax to your suppliers of components that
you will resell. You may issue a resale certificate to suppliers for these
components in lieu of paying sales tax on these items in the future. Rule
3.285, concerning resale certificates, sets out the information required on a
resale certificate. You may also request a refund from suppliers to whom you
have paid sales tax in error on components that you resold or take a credit
against tax collected on a subsequent return. See subsection (c) of Rule 3.338

• Multistate Tax Credits and Allowance of Credit for Tax Paid to Suppliers.
  What you are doing is not illegal.

2. You also asked if you do work as a computer consultant providing advice and
   configuration of hardware and systems, is this a taxable? You are aware that
   some professions do not incur a tax to their clients when they are consulting.
   An example of the work you may do would be to work 50 hours for $50/hour in
   consulting, configuration and such at the clients site. Would tax be due on
   this at the regular sales tax rate?

Response: Consultation services which are the expert or professional opinions
of the consultant are not taxable if they are not related to sales of taxable
items. Consultation services more in the nature of information services, such
as where to get the best price on a product, are taxable as information
services. Please refer to Rule 3.342.

A charge to install and configure local area network operating system software,
wide area network software, or off-the-shelf software packages that you did not
sell is not taxable. Rule 3.308 (b).

The initial set up of a computer system, i.e., connecting the monitor, mouse,
keyboard, printer, and other related components to the CPU, is considered
assembly of the computer system and is subject to sales tax. See subsections
(a)(5) and section (b) of Rule 3.300. However, a charge for connecting
peripheral hardware items on an existing system is not taxable provided you did
not sell the hardware.

You may download copies of the rules cited above at the following URL:

http://www.sos.state.tx.us/tac/34/I/3/O/index.html

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:

Gilbert Zamora
Tax Policy Division