How the Texas Sales Tax Applies to Information Technology Services
Under certain circumstances, information technology and associated services may be subject to Texas sales and use tax. The specifics depend on how the Texas Tax Code and Texas Comptroller’s rules characterize a particular technology and/or service. Here’s a quick explainer.
Sale of a Computer Program
For starters, the sale, lease, or license of a computer program is subject to sales and use tax as the sale of tangible personal property. For purposes of sales and use tax, a “computer program” is 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 sales price of a computer program includes all charges in connection with the sale of the program, including charges for installation, modification, repair, maintenance, or restoration.
However, contract programming is not taxable. “Contract programming” means “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.”
Repair, Maintenance, or Restoration of a Computer Program
Charges for computer program repair, maintenance, or restoration by a person who sells a computer program are taxable as the repair of tangible personal property. Maintenance includes error correction, improvements, or technical support, whether provided over the internet or over the phone.
On the other hand, charges for the repair, maintenance, or restoration of a computer program by someone other than the person who sells the program are not taxable.
Data Processing Services
Data processing services are generally subject to sales and use tax. The tax is imposed on 80% of the value of the data processing service.
“Data processing” is defined as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.”
The Texas Tax Code specifically provides that data processing includes “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation.”
The Comptroller’s rule on data processing elaborates that data processing includes “entering inventory control data for a company, maintaining records of employee work time, filing payroll tax returns, preparing W-2 forms, and computing and preparing payroll checks.” Other items that the Comptroller has determined to be data processing include charges for software as a service and website design, creation, implementation, maintenance, and hosting.
But data processing services don’t include the transcription of a medical dictation by a medical transcriptionist, certain encryption services for electronic payment information, certain payment processing services.
Data processing services also don’t include “the use of a computer by a provider of other services when the computer is used to facilitate the performance of the service or the application of the knowledge of the physical sciences, accounting principles, and tax laws.”
Information services are subject to sales and use tax. The tax is imposed on 80% of the value of the information service.
The Texas Tax Code generally defines an “information service” as “furnishing general or specialized news or other current information, including financial information, . . . or . . . electronic data retrieval or research.” The Comptroller’s rule on information services clarifies that taxable information services include “information that is gathered, maintained, or compiled and made available by the provider of the information service to the public or to a specific segment of industry for a consideration . . .”
Information services may be distinguished from data processing services in that data processing services involve data provided by the customer, while information services tend to involve data provided by an unrelated third party (although this distinction is still up for debate).
SOURCE: JD Supra