Texas Comptroller of Public Accounts    STAR System


August 23, 2005


Dear **************:

Thank you for your follow-up email which is restated in part with response 

Current Facts: 

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 
professional service.

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 tax.help@cpa.state.tx.us.

Our goal is to provide you with prompt, professional service.  Please take a 
moment to complete our on-line survey at 


Al Van Allen
Tax Policy Division

DATE: 08/23/2005