If you`re a software vendor or user in Texas, you may be wondering whether software maintenance contracts are taxable. The short answer is that it depends on the specifics of the contract and the type of software involved.
In Texas, sales and use taxes apply to the sale or use of software, including prewritten software and custom software. The tax rate for software is the same as for other taxable items in the state, which is currently 6.25% (plus any local sales taxes).
In general, software maintenance contracts are taxable in Texas if they are sold in conjunction with taxable software. This includes both prewritten and custom software. The taxable portion of the contract is generally the portion related to updates, upgrades, bug fixes, and technical support. However, there are some exceptions.
One exception is for “nontaxable specified digital products.” This category includes certain types of software, such as software that is embedded in a device and cannot be downloaded or transferred separately. If a maintenance contract is sold in conjunction with a nontaxable specified digital product, it is exempt from sales tax.
Another exception is for “nontaxable services.” If a software maintenance contract provides only nontaxable services, such as training or consulting, it is not subject to sales tax. However, if the contract includes taxable services like technical support or updates, those portions of the contract are subject to tax.
It`s important to note that even if a software maintenance contract is exempt from sales tax, the vendor may still be required to collect and remit a tax under the Texas franchise tax. This tax applies to most businesses operating in Texas and is based on a percentage of the business`s taxable margin.
In summary, whether a software maintenance contract is taxable in Texas depends on the specifics of the contract and the type of software involved. If the contract is sold in conjunction with taxable software, the taxable portion of the contract is generally subject to sales tax. However, there are some exceptions for nontaxable specified digital products and nontaxable services. If you`re unsure about the taxability of a particular software maintenance contract, it`s always a good idea to consult with a tax professional.