Dino Marcaccio
President
Former Texas Comptroller State Tax Auditor
Taxable and Non-Taxable services billed as a single lump sum
Is this charge 100% Taxable? NOT ALWAYS!!!
Example: Lump sum single charge for taxable data processing and non-taxable services (Contract Programming or 3rd Party IT Services)
Related to:
34 Tex. Admin. § 3.330 – Data Processing
34 Tex. Admin. Code § 3.308 – Software / Hardware
34 Tex. Admin. Code § 3.281 – Required Records
As long as the service provider can apportion the taxable and non-taxable services using their books and records, this single sum co-mingled charge is not 100% taxable. Even the 5% threshold rule does not apply if the service provider can provide documentation regarding the amount of taxable and non-taxable services. The latest Administrative Hearing to provide this often misunderstood position is 202108018H – SOAH DOCKET NO. 304-21-0837.26 CPA HEARING NO. 115,774.
Of course, the Petitioner (the purchaser of the services) in this hearing did not have evidence of taxable and non-taxable services because they did not provide evidence to the hearings attorney or judge. It probably had to do with the Petitioner (the buyer of the mixed services) either not trying to and not being able to obtain any internal “cost/sales” documentation from their vendor. But at least the judge made it clear that they could have defended themselves if they did have the evidence. I call this the PLAN B defense for mixed service transactions (in this case involving both taxable and non-taxable services).
202108018H – SOAH DOCKET NO. 304-21-0837.26 – CPA HEARING NO. 115,774
…….However, if the charge for the taxable portion of the services is not separately stated at the time of the transaction, the service provider or the purchaser may later establish for the comptroller, through documentary evidence, the percentage of the total charge that relates to nontaxable unrelated services. Id. The service provider’s books must support the apportionment between exempt and nonexempt activities based on the cost of providing the service or on a comparison to the normal charge for each service if provided alone
Where nontaxable unrelated services and taxable services are sold or purchased for a single charge and the portion relating to taxable services represents more than 5.0% of the total charge, the total charge is presumed to be taxable. 34 Tex. Admin. Code § 3.330(d)(2). The presumption may be overcome by the data processing service provider at the time the transaction occurs by separately stating to the customer a reasonable charge for the taxable services. Id. However, if the charge for the taxable portion of the services is not separately stated at the time of the transaction, the service provider or the purchaser may later establish for the comptroller, through documentary evidence, the percentage of the total charge that relates to nontaxable unrelated services. Id. The service provider’s books must support the apportionment between exempt and nonexempt activities based on the cost of providing the service or on a comparison to the normal charge for each service if provided alone. Id. Petitioner’s evidence does not show what percentage of COMPANY B’s services are nontaxable. Therefore, Petitioner’s contention should be denied.
Petitioner contends it purchased nontaxable contract programming services from COMPANY B. The Comptroller defines contract programming as services to create or develop a new computer program, or to repair, maintain, modify, or restore an existing computer program, when the person performing the services did not sell, and retains no rights in, the computer program being created, developed, repaired, maintained, modified, or restored. Id. § 3.308(a)(2). Examples of contract programming include: writing a new computer program to perform a particular function for the customer where all rights in the program are transferred to the customer; customizing a computer program owned by the customer or licensed to the customer by a third party.
Dino Marcaccio, President (ex-Texas Comptroller Auditor, 16 Years)
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