Software | What Is It? And Other Deep Thoughts to Disturb Your Sleep, Courtesy of the Texas Sales and Use Tax

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

Software can be taxed differently under the Texas sales and use tax, depending on the rights granted to the purchaser and method of delivery.  Or, at least, so says the Texas Comptroller of Public Accounts (or “Comptroller” for short). Let’s take a look!

Is it the taxable sale or repair of a computer program . . . ?

A computer program is tangible personal property for purposes of the Texas sales and use tax.[1]  A “computer program” is broadly defined as:

a series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information.  The series of instructions may be contained in or on magnetic tapes, punched cards, printed instructions, or other tangible or electronic media.[2]

Since a computer program is tangible personal property, the sale or use of a computer program in Texas is subject to sales or use tax.[3]  The sales price upon which the tax is based includes “all charges made in connection with the sale of the program, which may include charges for installation, modification, repair, maintenance, or restoration, whether or not separately stated.”[4]

The repair, maintenance, or restoration of a computer program by the person who sold the program also is subject to sales or use tax as the repair of tangible personal property.[5]  Taxable computer program repair includes “error correction, technical fixes, and technical support, whether provided over the Internet or over the phone.”[6]

Notice that the repair, maintenance, or restoration of a computer program by a person who did not sell the computer program isn’t subject to tax.[7]  This result may apply even if the person performing the repair, maintenance, or restoration is related to (or, indeed, created for the sole purpose of performing such repair, maintenance, or restoration by) the person that sold the computer program.[8]

Or is it the nontaxable sale of contract programming services . . . ?

On the other hand, contract programming is considered to be a nontaxable service that does not result in the sale of tangible personal property.[9]  “Contract programming” is defined as “[s]services to create or develop a new computer program, or to repair, maintain, modify, or restore an existing computer program, when the person performing the services did not sell, and retains no rights in, the computer program being created, developed, repaired, maintained, modified, or restored.”[10]

Examples of contract programming include creating a new computer where all rights in the program are transferred to the customer, customizing a computer program owned by the customer or a third party, or modifying, repairing, or maintaining a computer program that the developer had created for the customer under a prior contract programming agreement.[11]

Note that contract programming only occurs if the developer transfers all rights, including intellectual property rights, to the computer program being created, modified, repaired, or maintained to the purchaser.[12]  However, the developer can retain rights to an incidental program or component of a program under a contract programming agreement, including installers, drivers, macros,  and subroutines.[13]

Or is it a taxable sale of a data processing service . . . ?

To further complicate things, data processing is a taxable service and therefore subject to Texas sales and use tax.[14]  “Data processing” generally is defined as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.”[15]

The Comptroller has taken the position that software as a service (“SaaS”) is subject to Texas sales and use tax as a data processing service.[16]  The Comptroller defines SaaS as “a software application delivery model where a vendor develops a web-native software application and hosts and operates (either independently or through a third-party) the application for use by its customers over the internet.”[17]  Apparently, the distinction between SaaS and the sale of a computer program is that with SaaS “customers do not pay for owning the software itself but for using it.”[18]

Or is it all too much . . . ?

If all of this pondering is keeping you awake at night, we’re here to help.  Contact us to set up a free consultation.


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Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues. 

At Freeman Law, our experienced attorneys regularly guide our clients through complex state and local tax issues—issues that are frequently changing as states seek to keep pace with technology and the evolution of business. Staying ahead requires sophisticated legal counsel dedicated to understanding the complex state tax issues that confront businesses and individuals. Schedule a consultation or call (214) 984-3000 to discuss your local & state tax concerns and questions. 


[1] See Tex. Tax Code § 151.010.

[2] See Tex. Tax Code § 151.010, 151.0031; 34 Tex. Admin. Code § 3.308(a)(1).

[3] See Tex. Tax Code §§ 151.010, 151.051(a), 151.101(a); 34 Tex. Admin. Code § 3.308(c)(1)(A).

[4] See Tex. Tax Code 151.007(a); 34 Tex. Admin. Code § 3.308(c)(1)(B).

[5] See Tex. Tax Code §§ 151.0101(a)(5)(D), 151.051(a), 151.101(a); see also 34 Tex. Admin. Code § 3.308(c)(2).

[6] 34 Tex. Admin. Code § 3.308(c)(2).

[7] See Tex. Tax Code §§ 151.0101(a)(5)(D), 151.051(a), 151.101(a); see also 34 Tex. Admin. Code § 3.308(c)(2).

[8] See STAR Accession Nos. 201011082L (Nov. 2010), 200508887L (Aug. 23, 2005).

[9] 34 Tex. Admin. Code § 3.308(c)(4).

[10] 34 Tex. Admin. Code § 3.308(a)(2).

[11] 34 Tex. Admin. Code § 3.308(a)(2)(A).

[12] 34 Tex. Admin. Code § 3.308(a)(2)(B); see also Comptroller’s Decision Nos. 115.067 (2020), 103,863 (2011).  Maybe the best way (or at least one way) to think about the distinction between the sale of a computer program versus the sale of contract programming services is by analogy to the federal tax distinction between the transfer of substantially all copyright rights to a computer program (which is a sale or exchange of the copyright) versus the transfer of less than substantially all copyright rights in a computer program (which is treated as a license generating royalties) or the transfer of a copyrighted article (which is either treated as a the sale or exchange of the lease of the copyrighted article).  See 26 U.S.C. § 1.861-18 (discussed in more detail here).  At some point, the Comptroller seems to have made the determination that when all copyright rights in the computer program are transferred to the customer, what is involved is the sale of a copyright (i.e., an intangible), which is not subject to sales or use tax.  See STAR Accession No. 200104173L (Apr. 12, 2001) (discussing transfers of copyrights in photographs).  However, when less than all copyright rights are transferred, the Comptroller’s reasoning appears to be that the transaction is at most a mixed transaction involving the transfer of some copyright rights and the transfer of a computer program (i.e., tangible personal property), but that the tangible personal property aspect in the transaction predominates.  (Or at least, that’s my hot take for something that’s been a thing for a while now.)

[13] 34 Tex. Admin. Code § 3.308(a)(2)(B).

[14] Tex. Tax Code § 151.0101(a)(12).

[15] 34 Tex. Admin. Code § 3.330(a)(1); see also Tex. Tax Code § 151.0035(a).

[16] Comptroller’s Decision No. 115,086 (2020).  The Comptroller also has found that taxable data processing also includes such services as disk defragmentation, data and information storage, and website design, creation, hosting, modification, and maintenance.  See Comptroller’s Decision Nos. 107,961 (2018), 44,736 (2005).

[17] Comptroller’s Decision No. 115,086 (2020).

[18] Comptroller’s Decision No. 115,086 (2020) (citing STAR Document No. 200805095L (May 28, 2008)).  But (and maybe this is getting a tad too philosophical, apologies) what does ownership even mean here?  Isn’t ownership just the ability to use something to the (relative) exclusion of others?  See Tex. Tax Code § 151.005(a)(1) (defining a sale as “a transfer of title or possession of tangible personal property”); Comptroller’s Decision No. 116,506 (2020) (stating that a key element of possession is “operational control” and that “operational control” means ““using, controlling, or operating the tangible personal property.”). The distinction between the sale of a computer program and the sale of SaaS just seems kind of nebulous.  And this distinction should matter (in theory) because, for instance, a) data processing gets a 20% exemption from sales and use tax (Tex. Tax Code § 151.351), and b) the manufacturing exemption could apply to purchases of taxable items used to produce a computer program that is sold to others (Tex. Tax Code § 151.318(a), (p)).