The state of Texas levies sales tax on sale of tangible personal property and enumerated taxable services. Taxable services are defined in section 151.0101. Tangible personal property is defined on code section 151.009 as “the personal property that can be seen, weighed, measured, felt or touched or that is perceptible to the senses in any other manner, and for the purposes of this chapter, the term includes a computer program and a telephone prepaid calling card.”
Computer programs are considered tangible personal property in the state of Texas. Sale or use of a taxable item in electronic form instead of on physical media does not alter the tax status. In other words, unless specially provided, Texas taxes computer software delivered in tangible/physical format as well as digital format.
Data processing is a service performed with a computer using the customer’s data. Entering, storing, manipulating, or retrieving a customer’s data is taxable. But merely using the computer as a tool to help perform a professional service is not taxable.
Separately stated charges for instruction on the use of the computer program by a person who sold the computer program are not taxable.
Tax is collected at the rate of 6.25% (state tax) and applicable local tax of up to 2% for the sale of taxable services and tangible personal property. Nontaxable services if clearly distinct and identifiable then they must be billed to customers separately and no tax is collected.
To summarize most of the computer related services are taxable in the state with few exceptions. There are few avenues to curtail the sales tax liability which can be done by correcting the method of invoicing and drafting contracts/agreements for rendering software related sales and services.
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