In a recent decision by Texas Comptroller, Glenn Hegar, the state clarified its sales tax position for out-of-state sellers of licensed software sold to state residents. The often cited 2018 South Dakota v. Wayfair decision where remote sellers are obliged to collect and remit state sales tax after economic thresholds are met—$500,000 in Texas— does not apply to those that sell licensed software in Texas.
Case Background
The out-of-state corporation petitioner in the tax hearing case collected and remitted Texas sales tax during an 11-month period from October 2018 to August 2019 when one of its employees resided in Texas. Prior to— and after—their employee lived there, they did not invoice, collect, or remit sales tax to the State of Texas or its local jurisdictions.
The state reviewed the petitioner’s transaction records from August 2015 to August 2019 and determined that sales tax was due for all sales transactions that took place during that time. All purchases of the software by Texas residents were completed through digital downloads of the program. The petitioner appealed the decision, resulting in the review in the tax hearing.
Final Decision & Reasoning
The software seller’s position hinged on their understanding that they had not met the economic nexus threshold of $500,000 in annual sales in Texas. Other than when they had an employee residing in Texas, they thought they were not obligated to assess taxes on their buyers and remit the proceeds to the state.
In Texas, sales of computer software (programs) are explicitly noted in Section 151.009 of the Texas Tax Code as being tangible personal property, and as such, are taxable. Similarly, the Texas definition of “data processing services” (Section 151.0035) includes word processing, data storage, and similar activities that fall within the same scope of being considered tangible personal property.
Many of us consider the terms “out-of-state seller” and “remote seller” to be interchangeable. The assumption is that they both mean that the company operations are outside of the given state. That’s not the case in Texas—and the same could be true in other states where you do business. Tangible personal property establishes physical nexus which has the immediate requirement to collect sales tax in the state of Texas.
If you have a physical presence in this state (i.e., business location, salespersons, representatives, etc.), you are not a remote seller.
Glenn Hegar, Texas Comptroller of Public Accounts
Implications
This Texas decision is a great reminder of the need to stay attuned to nuanced definitions and regulations that vary between states. Texas didn’t update their rules or descriptions here, instead it is us who evolved to delivering software-as-a-service—SaaS. As we change our processes, it’s incumbent on us—the taxpayers—to learn what triggers taxable events.
How products and services are delivered matters. Whether ‘canned’ software is downloaded electronically, used on a cloud-based app or is bought at a big-box store on a CD, it matters to many states. Treatment in Texas may have the same tax effect for all methods but in other states their taxation policies vary. Physical nexus must be understood and evaluated, rather than assuming that economic nexus is now our only guiding light.
If you’re new to charging and remitting sales tax on software in Texas, be aware that there is a 20% exemption of the value of information services and data processing services. The taxed amount is on 80% of the value of the services.
Texas Tax Statutes
Sec. 151.351
A Helping Hand
Keeping up with state and local tax regulations in every state is a daunting task and one that can’t be taken lightly. The REDW State and Local Tax group researches tax implications for industries and business operations in each state. We welcome your questions and the opportunity to review the facts and circumstances of your situation to ensure compliance in states where you have business activity. Using the How can we help? form on this page, contact our SALT experts today to start a conversation.
