United States: Texas ALJ Holds Software Delivered To Texas Is Taxable Use

On July 2, 2015, a Texas Comptroller Administrative Law Judge (ALJ) denied a taxpayer's refund request for a multistate exemption on the purchase of software licenses and software maintenance services.1 The taxpayer claimed that sales and use tax was erroneously paid on the purchase of software licenses used on computers located outside Texas and software maintenance services that benefited computers located outside Texas. This ruling upholds the Comptroller's long-standing interpretation of software licenses as tangible personal property, and the policy that a multistate benefit of use exemption is only applicable to certain taxable services which benefit an identifiable segment of the business.

Procedural Background

The taxpayer, a provider of telephone and data services, originally filed a refund claim in 2012 for the September 30, 2003 – December 21, 2006 period, for sales and use tax paid on software and software maintenance that was invoiced as delivered to Texas, but for which the taxpayer contended was for use outside Texas. The Comptroller Audit Division initially denied this refund claim based on expiration of the statute of limitations. Ultimately, the Comptroller upheld the denial of the refund claim, but rejected the Audit Division's argument that the statute of limitations had run. The taxpayer subsequently filed a second refund claim in 2013, covering the April 1, 2005 – December 31, 2006 period, again based on the argument that the taxpayer erroneously paid sales and use tax on the purchase of software and software maintenance services used on computers located outside Texas. The Audit Division rejected this claim as well, on the grounds that such claim was a prohibited "second refund claim," without addressing the taxability argument.2

Sales Tax Treatment of Software

Before analyzing the ALJ's decision, a review of how Texas treats software for purposes of the state's sales and use tax is appropriate. The taxability question often turns on the location to where the software is delivered, the ability to allocate use of the software within and outside Texas, and the potential applicability of the multistate benefit exemption.

Software Shipped to Texas

When software is delivered or downloaded to a Texas location, Texas sales or use tax is due, regardless of where use of the software occurs. The basis for this determination is the presumption that a purchaser who brings tangible personal property into Texas purchased the property for use in Texas.3 Software is considered tangible personal property in Texas.4 Therefore, a Texas sale has occurred and Texas tax is due.5 In 2001, the Texas legislature added language to the existing statute to clarify that the form in which a taxable item is sold does not alter the item's tax status.6 A book sold in electronic form is still a book and tangible personal property that is subject to tax. Likewise, software delivered electronically in Texas is considered tangible personal property. It should be noted that the temporary storage exemption from the sales and use tax may be available, but only if the software is purchased from an out-of-state vendor and the first use is not in Texas.7

Software Shipped Outside Texas

Software purchased outside Texas that is delivered, downloaded or installed on a server located outside of Texas, is subject to Texas use tax for the portion of use in Texas only. An allocation can be made for the licensed Texas users or sites. For example, a taxpayer located in California and Texas purchases software that is installed on a server in California. The California license is not subject to Texas tax.8

One ALJ decision highlights the need for the taxpayer to show that an out-of-state use of the software is being made. In the decision, an auditor assessed tax on a software license purchased from an out-of-state vendor and placed on an out-of-state server owned by a third party. The Texas taxpayer performed testing in Texas and used the software in Texas. Since no other use was documented or proven, the software was subject to Texas tax and no allocation was made. The ALJ ruled the taxpayer did not prove any out-of-state use occurred. Therefore, 100 percent of the purchase price was subject to Texas tax.9 However, had use occurred in other states, the amount subject to Texas tax would be limited to the use of the Texas license.

Multistate Benefit Exemption

Texas offers a multistate benefit exemption for certain services that are performed both within and outside Texas, to the extent the services are for use outside Texas. Services are presumed to be used at the customer's principal place of business. If a service is used to support a separate, identifiable segment of a customer's business, the service is presumed to be used at the location where that part of the business is located. The taxpayer may use any reasonable method for allocating non-Texas use that is supported by business records.10

However, the exemption applies only to services that became taxable on or after September 1, 1987, and does not apply to tangible personal property.11 Therefore, with respect to software sales, only the maintenance of custom created software will qualify for the multistate benefit exemption. Effective October 1, 1987, the legislature amended Tex. Tax Code Ann. Sec. 151.009 to include custom computer programs in the definition of tangible personal property.12 As a result of this amendment, the repair, maintenance or restoration of custom computer programs became a taxable service as the repair of tangible personal property on or after September 1, 1987.13 The repair of tangible personal property became an enumerated taxable service in 1984 when Tex. Tax Code Ann. Sec. 151.0101(a)(5) was enacted. Therefore, before the multistate benefit test can be applied, it must be proven that the software is a custom created program.

When claiming the multistate benefit exemption, the burden is placed on the taxpayer to prove by clear and convincing evidence that the taxpayer operates in more than one state, and that the purchased service supports a separate, identifiable segment other than general administration or operation of the business. The mere existence of out-of-state offices, divisions or stores is not sufficient by itself to establish a separate, identifiable business segment.14 The term "separate identifiable segment" is not defined in any of the rules containing the service benefit location test.15 One must look to existing policy letters and Comptroller hearing decisions to determine the agency's construction of the test. "Identifiable segment" has been defined as a part of a business that has its own identity apart from and must perform a function that is separate from the general administration or operation of the company.16

Treatment of Software as a Service

One software purchase that normally should qualify for the multistate benefit exemption is the purchase of software as a service (SaaS). SaaS is purchased when a license to access a software application is owned, operated, and maintained by a SaaS provider. The consumer accesses the application over the Internet. The software is located on a server that is owned or leased by the SaaS provider. The software is not transferred to the customer, and the customer does not have the right to download, copy, or modify the software. The Comptroller's office has deemed this to be the provision of taxable data processing services.17 Such services are taxed at 80 percent of the tax rate normally applicable to taxable sales,18 and are eligible for the multistate exemption.19

ALJ's Substantive Analysis

In reviewing the validity of the taxpayer's refund claim, the ALJ summarily refuted the Audit Division's "second refund claim" argument, since the Audit Division failed to demonstrate that the refund claim submitted in 2013 was identical to the prior refund claim advanced in 2012.

Moving to the substantive analysis, the taxpayer argued that it erroneously paid sales and use tax on software licenses used by employees in offices outside Texas, even though the licenses may have been temporarily stored in Texas. In rejecting this argument, the ALJ noted that the software was shipped to the taxpayer's office in Texas based on invoices. In this circumstance, the ALJ held that the item is presumed to be used in Texas, and since a software license is taxable as tangible personal property, no allocation is available for the use of license in other states.20 The ALJ referenced a 2012 hearing decision to support his ruling that software purchased for a Texas location is subject to Texas sales and use tax, even if it provides support to an out-of-state location.21

The ALJ then rejected the taxpayer's attempt to utilize the multistate benefit exemption. The taxpayer contended that it was a separate, identifiable business segment of a larger company and should be entitled to the multistate benefit exemption for that reason. The ALJ disagreed as the purchases in the refund claim were not made by the larger company for the benefit of a segment of the business. Rather, the specific taxpayer made the purchase for its general business operations.


Software licenses shipped out of state by a Texas or out-of-state vendor are available to be allocated based on location of users. Historically, in audit situations, Comptroller auditors have been willing to allow an allocation of software delivered into Texas by an out-of-state vendor, only assessing tax on the licenses used in Texas. However, this ALJ hearing decision strictly construes the requirements necessary to allow for an allocation, and may make it more difficult for a taxpayer to prove that an allocation is appropriate. This strict construction arguably differs from the approach taken in past Comptroller letter rulings, hearing decisions, and audit treatment.

Taxpayers may need to consider potential remedies to the consequences of the strict construction approach. For example, as a member of the multistate compact, Texas will allow an offset of any tax legally due and paid on the purchase in another state, preventing double taxation situations.22 Another area to consider is the delivery of software into a state that exempts electronic delivery, so that tax will only be imposed on the use of the software in Texas.


1. Decision, Hearing No. 111,499, Texas Comptroller of Public Accounts, July 2, 2015.

2. TEX. TAX CODE ANN. § 111.107(b). Since the taxability argument was not addressed, the facts in this decision are not well-established regarding the locations of the software vendors.

3. TEX. TAX CODE ANN. § 151.105(a).

4. TEX. TAX CODE ANN. § 151.009.

5. See Letter No. 9809798L, Texas Comptroller of Public Accounts, Sep. 8, 1998; Letter No. 200110565L, Texas Comptroller of Public Accounts, Oct. 19, 2001; Letter No. 2002062L, Texas Comptroller of Public Accounts, Feb. 18, 2000.

6. TEX. TAX CODE ANN. § 151.010.

7. TEX. TAX CODE ANN. § 151.011; see Decision, Hearing No. 39,101, Texas Comptroller of Public Accounts, July 28, 2003.

8. See Letter No. 9809798L, Texas Comptroller of Public Accounts, Sep. 8, 1998.

9. Decision, Hearing No. 44,040, Texas Comptroller of Public Accounts, Mar. 24, 2005.

10. 34 TEX. ADMIN. CODE § 3.330(f).

11. TEX. TAX CODE ANN. § 151.330(f).

12. TEX. TAX CODE ANN. § 151.009.

13. TEX. TAX CODE ANN. § 151.0101(a)(5).

14. See Decision, Hearing No. 46,844, Texas Comptroller of Public Accounts, June 15, 2007; Decision, Hearing No. 102,780, Texas Comptroller of Public Accounts, May 4, 2011.

15. 34 TEX. ADMIN. CODE §§ 3.330; 3.342; 3.343.

16. Decision, Hearing No. 36,649, Texas Comptroller of Public Accounts, Aug. 10, 1998.

17. Letter No. 200805095L, Texas Comptroller of Public Accounts, May 28, 2008.

18. TEX. TAX CODE ANN. §§ 151.0035; 151.351.

19. 34 TEX. ADMIN. CODE §§ 3.330(f).

20. TEX. TAX CODE ANN. § 151.105(a).

21. Decision, Hearing No. 104,615, Texas Comptroller of Public Accounts, Mar. 29, 2012.

22. TEX. TAX CODE ANN. § 151.303(c).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.