TX Tax Bite: Software as a Service

Posted by Mary Thomas on Aug 9, 2017 10:00:00 AM

software-2.jpgIt is popular to offer software with monthly access fees. Instead of selling the software itself, access to the software is sold. Some vendors incorrectly think this distinction renders the charge for access nontaxable. Instead, the access fees are deemed to be the sale of software as a service. The fees are subject Texas sales or use tax. However, twenty percent (20%) of the charge is exempt from sales or use tax because the charges are characterized as data processing by the Comptroller of Public Accounts.

Make sure invoices show the appropriate sales tax rate applied to the reduced tax base. Some taxpayers have asked if it is permissible to adjust the tax rate to “come up with the right amount of sales or use tax.” It is not permissible.  Make sure invoices show the correct rate applied to the correct tax base (if you show how the tax is calculated).

Texas consumers of software as a service must report use tax directly to the Texas Comptroller of Public Accounts if the vendor does not charge appropriate sales tax. Never “add” sales tax to an invoice and give it to the vendor. It is the position of the taxing authority that use tax should be accrued and remitted directly to the Comptroller by the purchaser via the “taxable purchases” section of the Texas sales and use tax return if the vendor does not charge the appropriate sales/use tax.

Topics: Sales Tax

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