A CPA asked about three new clients: a coin-operated apartment laundry business, an advertising/marketing firm, and an internet-based construction-tracking software company — what's taxable for each?

Plain-English summary

A CPA asked the Comptroller to assess the sales/use tax treatment of three unrelated new clients in one letter.

Client 1 — coin-operated apartment laundry: revenue from coin-operated washers and dryers is not subject to sales tax. But the business owes Texas use tax on its purchase of the washers and dryers themselves (bought from an out-of-state company); if the out-of-state vendor isn't permitted to collect Texas tax, the business must self-assess and remit the use tax directly. If the machines also dispense cleaning agents (soap) via a vending mechanism, sales tax must be collected and reported on those soap sales.

Client 2 — advertising/marketing firm: producing an advertising script (to be read on radio or TV) is not taxable. But sales tax is due on the firm's purchase of physical props or employee-fabricated property used in an advertising campaign, per Rule 3.321(b)-(d) governing advertising agencies.

Client 3 — internet-based construction-tracking software: this gets the most detailed answer. A charge to a Texas customer for downloading the software is taxable as a sale/lease/license of tangible personal property (Texas treats software as TPP) — but the same charge is not taxable if the customer's use is outside Texas, so documentation of where the software is used/where the customer is located matters. If instead the customer merely uses the software online (inputting, storing, manipulating data on the company's Texas-based server, with no download), that's a taxable data processing service — but two mitigating rules apply: (1) Rule 3.330's multi-state benefit-of-use exemption lets a customer with no Texas benefit certify accordingly and owe no Texas tax, and (2) new Senate Bill 441 (effective October 1, 1999) provides a flat 20% exemption on data processing/information services, so only 80% of the charge is taxable going forward.

What this means for you

Coin-operated laundry/vending machine operators

Don't collect sales tax on coin-drop laundry revenue, but do pay Texas use tax on the machines you buy (especially from out-of-state vendors who may not collect it for you) — and separately collect tax on any vended consumables like soap.

Advertising and marketing agencies

Scripts are nontaxable creative work, but physical production items (props, fabricated pieces) you purchase or make for a campaign are taxable purchases on your end.

Internet/SaaS software companies serving Texas customers

Track whether your product is delivered as a download (taxable TPP sale/license, sourced to where it's used) or accessed purely online (taxable data processing service, subject to the multi-state benefit-of-use exemption and, as of October 1, 1999, the 20% SB 441 exemption reducing the taxable base to 80%). Keep location/use documentation for both paths.

Common questions

Q: Is coin-operated laundry revenue taxable in Texas?
A: No, but the operator owes use tax on the washers/dryers purchased to provide the service.

Q: Is an advertising script taxable?
A: No — but props or fabricated items used in the ad campaign are taxable purchases.

Q: Is downloadable software sold to a Texas customer taxable?
A: Yes, as a sale/lease/license of tangible personal property, unless the customer's use is outside Texas.

Q: Is online-only software use (no download) taxable?
A: Yes, as a data processing service — but only 80% of the charge is taxable (per the new SB 441 20% exemption effective October 1, 1999), and a multi-state customer with no Texas benefit of use can certify out of Texas tax entirely under Rule 3.330.

Q: Can other CPAs rely on this letter for similar clients?
A: Only the taxpayer who requested it can use it for detrimental reliance, and each answer is based on the specific facts presented for that client.

Citations and references

Rules and legislation:

• 34 Tex. Admin. Code Rule 3.321(b), (c), (d) — Advertising Agencies
• 34 Tex. Admin. Code Rule 3.330 — Data Processing Services; multi-state benefit-of-use exemption
• Senate Bill 441 — 20% exemption for data processing/information services sold on or after October 1, 1999

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911848L

Original ruling text

November 1, 1999

Subject: Sales Taxable Items

Dear **:

This is in response to your request for a ruling on the following fact
situation and questions:

I am a CPA and have three new clients that I would like to specifically find
out if they are selling taxable goods or services.

Client 1:

Is buying Coin Operated Washing Machines and Dryers from an out of state
company. All machines will be placed in Apartment Complexes Washateria's for
residential use.

Response: Sales tax is not due on the revenues from your client's
coin-operated laundry. Texas use tax is due the purchase of the washing
machines and dryers. If the vendor is not permitted to collect and report the
tax, your client must self-assess and report the use tax directly to the state.
Your client would need to report sales tax on any sales of cleaning agents
(soaps) dispensed through vending machines.

Client 2

Is a Marketing/Advertising Firm and will provide services in the production of
items to be used in advertising campaigns. The production items will be either
physical items (props) or simply an advertising script to be read on radio or
TV.

Response: The production of an advertising script is not taxable. Sales tax
is due on the purchase of props or employee-fabricated property used in an
advertising campaign. See subsections (b), (c), and (d) of section 3.321 -
Advertising Agencies.

Client 3

Is a Software company offering an Internet based software program for customers
to track individual construction jobs. There will not be any physical software
provided to the customer. All activity will be done on the Internet connected
to a server based in Texas. Also, customers will be from all over the country
or world.

Response: A charge by your client to a customer for downloading the software
for use in Texas is taxable as the sale, lease or license of a software
program. The Texas Tax Code treats a software program as tangible personal
property. A charge to a customer for use of the software outside of Texas is
not taxable. Your client should keep documentation that reflects where the
software is used and/or where the customer is located. If your client charges a
customer for using software online, i.e., inputting/storing/manipulating data,
this is taxable as a data processing service.

Rules 3.330 regarding Data Processing Services provides an exemption for
customers with multi-state operations based on benefit of use. A customer
issuing your client such a certificate and deriving no benefit of service in
Texas would owe no Texas tax.

Senate Bill 441, passed in the recently concluded legislative session provided
for a 20% exemption for data processing and information services sold on and
after October 1, 1999. Therefore, only 80% of your client's charges to a
customer for data processing would be subject to Texas sales or use tax.

Sales tax rules are available on the Internet at:

Enter 34 for the Title Number, 1 for the Part Number and the last three digits
of the Rule number, i.e., 322 for Rule 3.322, after Rule)

The State Tax Automated Research system may be accessed on the Internet at:

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