Texas Comptroller of Public Accounts STAR System
August 23, 2005
Thank you for your follow-up email which is restated in part with response
Our client (Company A) is in the international investment banking business. As
such, it provides a wide variety of professional investment and planning
solutions for customers around the world. Its Texas branch specializes in
providing professional advice to companies in the oil and gas exploration and
production business. Most of this advice centers around restructuring a
company's corporate legal entity structure to obtain certain business and legal
benefits. By restructuring their legal structure, Company A's customers are
able to hedge transaction risks and minimize tariffs and duties on transfers of
property and equipment between certain European countries. Company A has been
providing this type of service for its customers for approximately ten years.
These services clearly meet the Comptroller's definition of a non-taxable
The restructuring projects are very time intensive and typically require
anywhere from three to nine months to complete. The projects are performed by
both CPAs and attorneys employed by Company A that specialize in international
investment planning. Additionally, Company A's customers typically provide
project delivery support in the form of accounting assistance and
inside/outside legal counsel. Typical fees for these types of restructuring
projects are significant and are billed either on a fixed fee (lump-sum) or
time and expense basis.
Company A is developing a stand-alone Visual Basic application to assist its
customers in performing the internal accounting for these transactions but has
not completed or licensed the software yet.
Company A is considering setting up a separate legal entity (Company B) that
will sell the software once it is completed. Company B will sell the software
and collect Texas sales and use tax where appropriate. Company A's staff will
demo the software and market it, but will not actually sell the software (i.e.,
license, invoice or receive payment) to its customers or receive a commission
from Company B. Once a client purchases the software from Company B, Company A
will install and modify the software where appropriate.
Company A has some other non-tax business reasons for setting up this separate
legal entity; however, the primary motivation is to remain competitive with
other investment advisory firms that do not have to charge sales tax on the
third-party installation services.
You feel that Texas tax is not due on the installation and modification
services from Company A to its customers as these are non-taxable third-party
installation services. 34 Texas Administrative Code Section 3.308 (b) (4)
regarding the taxability of third-party modification provides that "(c)harges
to create a program or modify an existing program not sold by the person doing
the modification are not taxable." This subsection is directly on point with
the facts above.
RESPONSE: I agree with your analysis if Company A is able to transfer
ownership of the software to a separate legal entity Company B, without making
a sale of the software as defined in Tax Code Section 151.005. Otherwise,
Company A is a seller of the software and is responsible to collect sales tax
on its services to install, implement and support the product. I should also
point out that the client forfeits any manufacturing exemptions that it might
desire to claim as a software producer when it transfers the software to
Company B without making a sale of the software.
This opinion is based on the facts you presented. Other facts, though similar,
may yield different results.
Please feel free to call me with sales tax questions that you may have. I am
working from a remote location but will return your call. You may reach me
toll-free at 1-800-531-5441, ext. 3-4680. The direct line is (512) 463-4680.
You may also write to Tax Policy, Comptroller of Public Accounts. The email
address is email@example.com.
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Al Van Allen
Tax Policy Division
ACCESSION NUMBER: 200508887L
DOCUMENT TYPE: L
TAX TYPE: SALES