How Texas Charges Sales Tax on SaaS and Other Computer-Related Items
Since 2020, Texas has become a focal point in the country’s tech industry with many software, IT, and growth sector firms relocating their headquarters to places like Dallas and Austin. While tech firms are certainly enjoying the benefits of affordable real estate and a talented workforce, they shouldn’t overlook how Texas sale and use tax could apply to their SaaS products and other computer software offerings.
SaaS is a complex item for sales tax purposes because of issues surrounding the sourcing of the tax—i.e., where the consumer accesses it or where the seller has a physical presence—as well as how states define it. Businesses that sell SaaS likely have multi-state sales tax compliance needs, and those in Texas will certainly need to stay aware of their reporting and payment obligations with the Texas Comptroller’s Office.
Texas Broadly Taxes the Sale of Computer Hardware, Programming, and Software
Most of Texas’ sales tax rules involving the sale or lease of computer-related services and property can be found in Texas Administrative Code, Rule § 3.308. Below is a summary of how Texas sales tax applies to specific items within this category of goods and services.
The Sale of Computer Hardware Is Taxable
Computer hardware, including items such as CPUs, monitors, and other parts are taxable as tangible personal property when sold or leased to a consumer. Beyond sales tax based on the price of the hardware sold, you could have other related charges also subject to Texas sales tax. For example:
- Labor or service charges to install or apply the computer hardware.
- Charges to remodel, repair, maintain, or restore the hardware.
- Installation charges for remote terminals and telephone lines.
The Sale of Computer Programs and Certain Related Services Are Taxable
The sale of programs, including a license to use a program, is also taxable in Texas. Sales tax applies to the entire purchase price, which could involve additional charges for installation, repair, or modification. However, your separately stated charges for instructions on using the computer program are nontaxable. TAC § 3.308(c)(3).
Contract Computer Programming Services Are Nontaxable Services in Texas
While most computer programming sales are taxable, Texas’ sales tax rules distinguish transfers of computer programming that occur from nontaxable contract services. TAC § 3.308(a)(2) defines contract programming as services to create, develop, repair, maintain, or modify a new or existing computer program where the programmer does not retain a right in the program.
In other words, you must transfer all intellectual property rights associated with the program transferred through the service. The only exceptions being rights to materials and methods used in performing the programming services as well as incidental programs or components (e.g., installers, drivers, macros, and subroutines).
How Texas Charges Sales Tax on SaaS as a Data Processing Service
Along with computer hardware and software, Texas sales tax also applies to data processing services (Publication 94-127) involving the use of a computer. This is different than the use of a computer to perform nontaxable professional services (e.g., consulting, analysis, tax return preparation, design work, etc.). See TAC § 3.330. Some examples of data processing services, include the following:
- A/P and A/R management
- Entering, editing, and formatting client data
- Data storage
- Internet services (i.e., webpage creation and providing server space)
Texas sales tax statutes and rules do not specifically consider sales tax on the purchase of SaaS, which is the sale of the ability to use a program as opposed to purchase of the program itself, usually through an internet connection and web application. The Texas Comptroller, through various rulings and hearings, considers the sale of SaaS as a type of data processing service. See Comptroller’s Decision No. 115,086 and STAR Document No. 200806095L.
Sourcing SaaS Transactions for Texas Sales Tax Purposes
Generally, Texas sales tax only applies to SaaS used within the state. This means SaaS companies must keep records of where their customers purchase or use their applications to avoid overpaying Texas sales tax on charges to out-of-state customers. You can request an exemption certificate form 01-339 signed by the customer to avoid the burden of collecting tax on the sale. Customers that use your SaaS in multiple locations need a reasonable allocation method for taxing the proportional share of the SaaS used in Texas.
Important Texas Sales Tax Exemptions for SaaS Companies
Because the Texas Comptroller defines SaaS as a form of data processing service, a portion of your taxable sales could be exempt from sales tax. Texas Tax Code Section 151.351 provides an exemption of 20 percent of the value of information services and data processing services. In other words, Texas sales tax only applies to 80 percent of the price charged for data processing services, which could include SaaS.
Key Takeaway on Sales Tax for SaaS Companies Relocating to Texas or Another State
SaaS businesses looking to relocate their headquarters to states with more favorable economic incentives will always want to double-check the impact the move could have on sales tax compliance. Because SaaS is a newer concept and budding industry, state laws and tax departments are behind in implementing these business models into existing tax structures. This can make it difficult for SaaS companies to know where their offerings categorically fit for sales tax purposes and what their obligations are when doing business all over the country and world. Consult with a sales tax professional when entering a new market or after receiving an audit notice or other correspondence from a tax revenue agency.Schedule a free consultation with Sales Tax Helper, LLC today.