My company provides a menu of services to cable TV companies building or rebuilding systems — map verification, base map development, field surveying, quality control, CAD digitizing, system design, plotting, make-ready surveying, subscriber audits, and system audits. Which of these are taxable, and does it matter whether I bundle them or bill them separately?

Plain-English summary

An engineering firm serving cable television companies (helping them design new systems, or rebuild/extend existing ones) asked the Comptroller to evaluate the taxability of its full service menu: map verification, base map development, field surveying, quality control, CAD digitizing, system design, plotting, make-ready surveying, subscriber audits, and system audits. This is a dense, multi-part letter — best read as a reference framework.

The core distinction: draftsman vs. engineer

A draftsman who produces a drawing, blueprint, or delineation based on specifications the client already supplies is making a taxable sale of tangible personal property — collecting sales tax on the total charge for producing the graphics, regardless of whether the work is done with a pen, pencil, or CAD software (Rule 3.312(a)(1) on graphic artists).

An engineer who creates an ORIGINAL design using their own expertise and scientific/engineering principles (like calculating load factors using math and physics) is providing a nontaxable service — even though a drawing comes out of it, the essence of the transaction is the engineering work, not just drafting a client-specified drawing. An engineer isn't required to collect tax on charges for copies of the design they were hired to produce.

Service-by-service breakdown (stand-alone basis)

• Map verification, quality control, subscriber audits, system audits: not taxable on a stand-alone basis.
• Base map development, CAD digitizing, system design: it depends — nontaxable if the firm collects its own field data and produces an original design from it (engineering service); taxable as a sale of tangible personal property if the client supplies the data and the firm just drafts/digitizes it into a map, schematic, or drawing (a digitized drawing is still tangible personal property for this purpose). Merely scanning/converting a printed map into digital form is a separate taxable data processing service.
• Field surveying and make-ready surveying: as-built surveying is always taxable real property surveying under Rule 3.356(a)(9). New-build surveying is not taxable unless it involves determining/confirming property boundaries, or the location of structures/improvements relative to those boundaries (e.g., locating a right-of-way boundary or a fence relative to it).
• Plotting: taxable, unless it's performed as part of a nontaxable engineering service for the same client.

The bundling rules

If a firm bills taxable and nontaxable services together for one lump-sum price, the entire charge is taxable — separately stating each service is what lets the firm tax only the taxable portion. Even when separately stated, a charge connected to a taxable sale or taxable service (like a delivery charge on a taxable item) is itself taxable, similar to how shipping charges ride along with a taxable sale.

Follow-up scenarios addressed

• CAD digitizing as part of an engineering job: if an engineer performing a nontaxable design service pays a third-party draftsman for CAD digitizing, the engineer is the consumer of that digitizing and pays tax to the draftsman — the engineer can't give a resale certificate, because the engineer is selling a nontaxable engineering service, not reselling the digitizing itself.
• Out-of-state subcontract work: whether a Texas firm doing subcontract drafting/engineering work for an out-of-state engineering firm should charge tax depends on whether the Texas firm is providing nontaxable engineering services or taxable CAD drafting (sale of tangible personal property) — the out-of-state firm can't give a resale certificate if it's buying nontaxable engineering services. However, a draftsman who ships or delivers a taxable drawing to a purchaser outside Texas isn't required to collect Texas tax, provided there are shipping/delivery records proving the interstate delivery.

What this means for you

Engineering, surveying, and drafting firms serving any industry (not just cable TV)

Track whether each engagement is really "I designed this using my own expertise from data I collected" (nontaxable engineering) versus "the client gave me their specs/data and I drew/digitized/plotted it" (taxable sale of a drawing). The same CAD software and the same physical deliverable can fall on either side of that line depending on who did the underlying analytical work.

Businesses buying a mix of engineering and drafting services

Insist on separately stated line items for taxable versus nontaxable services — a single lump-sum invoice combining both makes the Comptroller tax the whole thing.

Firms subcontracting drafting/CAD work to third parties

If you're providing a nontaxable engineering service to your own client, you're the consumer (not a reseller) of any taxable drafting/digitizing you buy from a subcontractor — you owe tax to that subcontractor and can't use a resale certificate.

Accountants and tax professionals advising design/engineering businesses

This letter is a comprehensive reference for the draftsman-vs-engineer distinction, the as-built-vs-new-build real property surveying line under Rule 3.356(a)(9), the lump-sum bundling trap, and the interstate-shipment exemption for taxable drawings shipped out of state.

Common questions

Q: Is a drawing I produce based on my client's own specifications taxable?
A: Yes — that's a taxable sale of tangible personal property under Rule 3.312(a)(1), regardless of the drafting method used.

Q: Is an original engineering design I create using my own expertise taxable?
A: No — that's a nontaxable engineering service, even if a drawing is part of the deliverable.

Q: Is field surveying always taxable?
A: As-built surveying is always taxable real property surveying. New-build surveying is only taxable if it involves determining property boundaries or structure locations relative to those boundaries.

Q: What happens if I bill taxable and nontaxable services together as one price?
A: The entire charge becomes taxable — separate line items are needed to tax only the taxable portion.

Q: Do I need to collect tax on a taxable drawing shipped to an out-of-state customer?
A: No — interstate shipments of a taxable drawing are exempt, provided you keep records showing the property was shipped or delivered out of state.

Q: Can I rely on this letter for my own engineering/drafting business?
A: No. This opinion is based on the facts you submitted, and other facts, though similar, may yield different results; it can be relied on only by the taxpayer it was issued to.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.312(a)(1) (graphic artists — taxable sale of drawings/graphics produced from client specifications)
• 34 Tex. Admin. Code Rule 3.356(a)(9) (real property surveying — as-built vs. new-build distinction)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9901204L

Original ruling text

January 26, 1999

Dear Mr. **:

Thank you for your letter requesting a ruling on the taxability of various
services provided by COMPANY A.

Situation: COMPANY A provides engineering services to cable television
companies that wish to construct new systems and to companies that wish to
rebuild and/or extend existing systems. These services include map
verification, base map development, field surveying, quality control, CAD
digitizing, system design, plotting, make-ready surveying, subscriber audits
and system audits. A typical transaction may include one, several or all of
the above services, depending upon the needs of the client. However, with the
exception of make-ready surveying, subscriber audits and system audits, all of
the above services are provided with the ultimate goal of facilitating a new
cable television system design. Following are detailed descriptions of the
services in question:

A. MAP VERIFICATION - Purpose: to verify the accuracy of a cable TV system's
existing system maps. Involves walking or driving out a cable TV system's
existing maps in order to determine whether or not the information can be used
to create an accurate system design. This step is usually performed before any
other services are provided.

B. BASE MAP DEVELOPMENT - Purpose: to create base maps on which the collected
field data is depicted, which is the basis for all of the work performed
thereafter. Usually involves converting previously digitized data to the
client's CAD specifications, creating base maps using a CAD program and then
plotting the base maps. If previously digitized data is unavailable, then hard
copies are acquired and digitized.

C. FIELD SURVEYING - Purpose: to gather the field data necessary to facilitate
an accurate system design. There are two types of field surveying: new-build
and as-built. New-build involves determining where new cable TV plant should
be located. As-built involves the identification and location of existing
cable TV plant. Both types are used to facilitate a new system design and is
depicted on the base maps.

D. QUALITY CONTROL - Purpose: to check the accuracy of the field data. Done in
the office prior to the CAD digitizing, this step involves troubleshooting the
field data for any missing or incomplete information provided by the field
surveyor.

E. CAD DIGITIZING- Purpose: to convert the field data to a state in which it
can be used by a computer-aided cable TV system design program. Involves
digitizing all field data using CAD software. Once digitized, the information
is then used to develop a schematic on which the final system design is based.

F. SYSTEM DESIGN - Purpose: to create the information necessary to construct
the most efficient and economical cable TV system possible. Using a
computer-aided cable TV system design program, the previously gathered data is
used to facilitate a new system design and bill of materials. The final design
is then delivered to the cable TV company via modem, disk and/or plotted
drawings.

G. PLOTTING - Purpose: to communicate finished design information. Involves
printing hard copy maps from CAD data.

H. MAKE-READY SURVEYING - Purpose: in new-build situations, to identify
locations where other utilities need to be relocated to make room for new cable
TV plant in order to conform to the National Electrical Code. This information
is shown on the final design maps provided by the cable TV company.

I. SUBSCRIBER AUDITS - Purpose: to identify which customers are currently
receiving service. Involves walking out the system and identifying
active/inactive drops within the cable TV plant. This information is shown on
the final design maps provided by the cable TV company.

J. SYSTEM AUDITS - Purpose: to verify whether or not a cable TV system was
built in accordance with the design specifications. This service involves
walking out the system and verifying that the new plant matches the final
design maps provided by the cable TV company.

Response: The sales tax law taxes the sale, lease, or rental of tangible
personal property including the fabrication or processing of tangible personal
property. A person (draftsman) who produces a delineation, blue print, or
drawing based on specifications provided by a client is required to collect
sales tax on the total price for producing the delineation, blue print, or
drawing (graphics). This is a taxable sale of tangible personal property
regardless of whether the draftsman uses a pen, pencil, or CAD technology to
produce the graphics. See Rule 3.312(a)(1) regarding graphic artists.

The sales tax law taxes certain services. Taxable services include data
processing services, information services, and real property services such as
real property surveying. A person (surveyor) who determines or confirms the
boundaries of real property or the locations of structures or other
improvements in relation to the boundaries of the property by the use of the
relevant elements of law, research, measurement, analysis, computation, mapping
and land description is performing a taxable service. See Rule 3.356(a)(9) on
real property surveying.

The sales tax law does not tax many services. An engineer who creates an
original design for a client using expertise and scientific engineering
concepts such as the principals of mathematics and physics (e.g., the
calculation of load factors for stress points) is providing a nontaxable
service. Although the engineer may provide a design as part of the service,
the essence of the transaction is the engineering service rather than just the
plotting or drawing of a graphic based on specifications provided by a client
as in the case of the draftsman discussed above.

Therefore, when you provide a variety of services in connection with a single
transaction it is important to remember what your client is actually
purchasing. Services connected to the sale of a taxable item are taxed as part
of the total price of the taxable item. For example, a draftsman is required
to collect tax on their "brain" labor to produce a taxable drawing. On the
other hand, tangible personal property that is transferred as part of a
nontaxable service is not taxed as a sale. For example, an engineer is not
required to collect sales tax when charging a client for copies of the
engineering design the engineer is hired to produce. The taxability of each of
the services you listed on a stand-alone basis follows:

A. MAP VERIFICATION - Not taxable on a stand-alone basis.

B. BASE MAP DEVELOPMENT - This depends on the circumstances. If you collect
the field data yourself and provide an original map based on the data you
collected, the service is nontaxable. If the client provides you the data for
the map and you merely draw a map, this is a taxable sale of tangible personal
property. A drawing of a map sold in digitized form is still considered the
sale of tangible personal property. A service to store or manipulate data
using a computer is a taxable data processing service. For example, if a
person takes a printed map and converts the map into a digital or electronic
image (such as scanning a document), that is a data processing service.

C. FIELD SURVEYING - The as-built surveying is taxable real property surveying
as described in Rule 3.356(a)(9). The new-build surveying is not taxable
unless it involves determining or confirming the boundaries of real property
(e.g., determining the boundary of the cable TV company's right-of-way) or the
locations of structures or other improvements in relation to the boundaries of
the property (e.g., determining the location of any structures or improvements,
such as a fence, in relation to the boundary of the right-of-way).

D. QUALITY CONTROL - Not taxable on a stand-alone basis.

E. CAD DIGITIZING - This depends on the circumstances. If you provide an
original design based on the data you collected, the service is a nontaxable
engineering service. If the client provides you the data and you digitize it
to produce a schematic or other drawing, this is a taxable sale of tangible
personal property.

F. SYSTEM DESIGN - This depends on the circumstances. If you provide an
original design based on the data you collected, the service is a nontaxable
engineering service. If the client provides you the data and you merely
produce a schematic or other drawing (design) based on the customers
specifications, this is a taxable sale of tangible personal property.

G. PLOTTING - Taxable unless it is for the client as part of a nontaxable
engineering service.

H. MAKE-READY SURVEYING - The new-build surveying is not taxable unless it
involves determining or confirming the boundaries of real property (e.g.,
determining the boundary of the cable TV company's right-of-way) or the
locations of structures or other improvements in relation to the boundaries of
the property (e.g., determining the location of any structures or improvements,
such as a fence, in relation to the boundary of the right-of-way).

I. SUBSCRIBER AUDITS - Not taxable on a stand-alone basis.

J. SYSTEM AUDITS - Not taxable on a stand-alone basis.

In summary, it appears that you generally provide engineering design services
to your client because you compile the data and produce an original design. No
sales tax is collected from a client for nontaxable engineering services. You
must pay sales tax to vendors when purchasing taxable items used in providing a
nontaxable service.

If you only provide one or a few of the services you listed, then you need to
identify whether your client is purchasing a nontaxable service (e.g., system
audit), a taxable service (e.g., as-built survey), or tangible personal
property (e.g., CAD drafting). Please review the explanations that are given
for each of the services you listed.

Additional Questions:

1) If the field surveying and CAD digitizing are necessary to facilitate a new
system design, would these services be considered part of the design process?
If so, would they be non-taxable?

Response: A person providing nontaxable engineering services does not collect
tax from the client on charges connected to the performance of the nontaxable
service. For example, an engineer hired to produce an original design
(nontaxable engineering service) is not required to charge tax on CAD
digitizing in connection with the nontaxable service. If the engineer pays a
third-party draftsman for CAD digitizing, the engineer is the consumer and pays
tax to the draftsman. The engineer may not give a resale certificate because
he is selling a nontaxable engineering service to his client rather than the
CAD digitizing purchased from the draftsman.

2) If you provide both taxable and non-taxable services, what happens when you
bill your invoices lump sum?

Response: Sales tax must be collected on the total charge if taxable services
and nontaxable services are included together for a single price rather than
separately stated. Please refer to the question above if you are asking about
a service in connection with a taxable or nontaxable service rather than tax on
unrelated services that are sold together for a lump-sum price.

3) If the services you perform are separately stated, do you just charge tax
on the taxable portion of the invoices?

Response: Yes. However, a separate charge for a service is taxable if
connected to the sale of tangible personal property or the performance of a
taxable service. Example: Although delivery services are nontaxable, a seller
of tangible personal property must collect sales tax on a separately stated
charge to the purchaser for delivery).

4) COMPANY A performs subcontract work in Texas for an engineering firm in
**. The ** company uses the information provided by
COMPANY A to create a design which they sell to their client, a cable system
operator who is also located in **. Should COMPANY A charge sales
tax to the engineering firm in ** or send them a re-sale
certificate as COMPANY A is supplying some of the work for the **
engineering firm's total charge to their client?

Response: There are not enough facts to answer this question. Is COMPANY A
providing nontaxable engineering services or taxable CAD drafting services
(i.e., sale of tangible personal property) to the ** engineering
firm? Engineering services are nontaxable services. If this is taxable CAD
drafting, the ** engineering firm may not give a resale certificate
because it is selling nontaxable engineering services. See the response to
question one above. However, a draftsman who ships or delivers a taxable
drawing to a purchaser outside Texas is not required to collect sales tax.
Interstate shipments are exempt provided the seller has records showing the
property was shipped or delivered out-of-state.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public
Accounts.

Sincerely,

David Somerville
Tax Policy Division