US Texas Sales Tax on Digital Products, SaaS & Cloud Services

Texas taxes many software and cloud-based digital transactions, but the treatment depends on the legal classification of the product or service.

Texas imposes a 6.25 percent state sales and use tax, and local jurisdictions may impose up to 2 percent additional tax, for a maximum combined rate of 8.25 percent. This applies to retail sales, leases, rentals of most goods, and taxable services.

Texas Classification of Software and Digital Services

Canned Software and Software Licenses

Texas treats the sale, lease, or license of a computer program as the sale of tangible personal property. Rule 3.308 states that tax is due when a computer program, or a license to use it, is transferred for consideration in Texas, or stored, used, or consumed in Texas, whether delivered electronically or on physical media.

This means that delivery method is not the decisive issue. A software licence delivered by download can be taxable in the same way as software delivered on physical media.

To explain this provision with more clarity, we are sharing a real example: 

A remote software vendor licenses prewritten accounting software to a Texas customer for USD 5,000. The software is downloaded or electronically activated for use in Texas. The licence is generally treated as a taxable sale of tangible personal property. If the seller has Texas collection responsibility, it should collect Texas sales or use tax on the taxable sales price.

Customized Software and Contract Programming

Texas distinguishes selling a computer program and providing contract programming. Rule 3.308 defines contract programming as services to create, develop, repair, maintain, modify, or restore a computer program where the provider did not sell and retains no rights in the program.

The rule gives examples such as writing a new program for a specific function where all rights transfer to the customer, or customizing a program owned or licensed by the customer from a third party.

Charges for contract programming are generally not taxable because they are charges for a service rather than the sale of a taxable item. The mentioned rule expressly states that contract programming may result in tangible personal property but does not constitute a taxable sale, and charges for contract programming are not taxable.

To explain this provision with more clarity, we are sharing a real example: 

A Texas business hires a foreign developer to build a bespoke internal workflow tool. The agreement transfers all intellectual property rights in the new program to the Texas customer, and the developer retains no licence or resale rights. On those facts, the charge may qualify as nontaxable contract programming. If the developer instead licenses a platform it owns and merely configures it for the customer, the result may be different.

Software Maintenance, Support, and Modification

Texas taxes software repair, maintenance, or restoration when performed by the person who sold the computer program. Rule 3.308 states that taxable computer program repair, maintenance, or restoration includes error correction, technical fixes, and technical support, whether provided online or by phone.

This is important for vendors that bundle support with a software licence. If support, maintenance, installation, or modification is included in the sales price of taxable software, Texas may treat the total amount as part of the taxable software transaction.

SaaS and Cloud-Based Services

SaaS as Data Processing

Texas generally treats SaaS and application service provider models as taxable data processing services. Texas Comptroller Publication 96 259 states that data processing includes using a computer for word processing, data entry, production, compilation, storage, or manipulation, and expressly says data processing service providers include sellers of SaaS and application service providers.

Rule 3.330 defines data processing service as computerized entry, retrieval, search, compilation, manipulation, or storage of data or information. It also provides that state and local sales and use tax are imposed on each sale or use of data processing services in Texas, except for small remote sellers.

Texas Tax Code Section 151.351 provides a partial exemption: 20 percent of the value of information services and data processing services is exempt from sales and use tax. This means that, in ordinary data processing cases, only 80 percent of the charge is taxable.

To explain this provision with more clarity, we are sharing a real example: 

 A remote SaaS provider charges a Texas customer USD 1,000 per month for cloud-based project management software. If the service is classified as taxable data processing, 80 percent of the charge, or USD 800, is subject to Texas sales and use tax. At an 8.25 percent combined rate, the tax would be USD 66. The remaining 20 percent of the service charge is exempt under the data processing exemption.

Cloud Storage, Hosting, and Remote Access

Texas also treats many remote cloud services as data processing. The Comptroller’s data processing publication lists taxable services such as entering, storing, manipulating, or retrieving customer data. It includes data storage and internet services such as creating web pages and providing server space as examples of taxable data processing.

Publication 96 259 similarly lists web hosting, website creation and maintenance, data storage, offsite backup of electronic files, data conversion, and similar activities as taxable data processing examples.

To explain this provision with more clarity, we are sharing a real example: 

A cloud backup provider stores Texas customer data on servers outside Texas. Even if the servers are outside Texas, Rule 3.330 provides that data processing performed outside Texas is subject to Texas use tax to the extent the service is for use in Texas, unless an exemption applies.

Multistate Use and Allocation

A special Texas issue for SaaS and cloud providers is multistate use. Rule 3.330 states that “use” means the derivation in Texas of direct or indirect benefit from the service. A data processing service performed outside Texas is subject to Texas use tax to the extent it is for use in Texas. 

The same rule allows a purchaser using a data processing service at business locations in multiple states to issue a multistate use certificate or substantially similar document and allocate the taxable portion by a reasonable and consistent method supported by business records.

This can materially reduce Texas tax where the customer is headquartered in Texas but uses SaaS across multiple states.

To explain this provision with more clarity, we are sharing a real example: 

A Texas-headquartered retailer pays USD 100,000 for SaaS used by employees in Texas and other states. If business records support that only 40 percent of use is in Texas, the Texas taxable base may be calculated on 40 percent of the service charge; then 80 percent of that Texas use amount is taxable as data processing. The seller may accept a multistate use certificate in good faith and be relieved of collection responsibility on the excluded portion.

B2B Versus B2C Scope

Texas sales and use tax rules are generally not limited to B2C transactions. The analysis focuses on whether the item or service is taxable, whether it is used in Texas, and whether the customer or seller has an exemption, resale certificate, direct pay permit, or other valid documentation.

SaaS sold to a corporation can be taxable as data processing. A software license sold to an individual can be taxable as a computer program. A cloud storage subscription sold to a business may be taxable to the extent used in Texas. A consumer online game may be taxable as an amusement service, since Texas lists online games among taxable amusement services.

In B2B contexts, the main differences are practical rather than conceptual. Business customers are more likely to provide resale certificates, exemption certificates, direct pay permits, or multistate use certificates. Consumers normally do not.

Who Is Responsible for Collection and Remittance?

In-State Sellers and Sellers Engaged in Business in Texas

A seller engaged in business in Texas should generally obtain a Texas sales and use tax permit, collect tax on taxable sales, file returns, and remit tax. Texas states that a business has sales and use tax responsibility if it is a remote seller with total Texas revenue greater than USD 500,000 in the preceding 12 calendar months, a remote marketplace provider with Texas revenue above that level, or a marketplace provider or marketplace seller engaged in business in Texas.

Remote Sellers

Texas provides a remote seller safe harbor. Remote sellers with total Texas revenue of less than USD 500,000 in the preceding 12 calendar months are not required to obtain a Texas tax permit or collect, report, and remit state and local use tax. Total Texas revenue includes gross revenue from taxable and nontaxable sales of tangible personal property and services into Texas, including handling, transportation, installation, sales for resale, and sales to exempt entities.

Once a remote seller exceeds the USD 500,000 safe harbor amount, it should obtain a permit and begin collecting and remitting state and local use tax on Texas sales no later than the first day of the fourth month after the month in which the threshold is exceeded.

Foreign sellers can register to collect Texas tax by emailing or faxing the Texas sales tax permit application. The Comptroller specifically states that a remote seller located outside the United States can register by emailing Form AP 201 to the sales applications address or faxing it to the Comptroller.

Marketplace Providers

Marketplace providers engaged in business in Texas should collect, report, and remit state and local sales and use tax on all marketplace sales. A marketplace includes a physical or electronic store, internet website, software application, or catalog used by marketplace sellers, and a marketplace provider is an entity that owns or operates the marketplace and processes sales or payments.

Marketplace providers should also certify to marketplace sellers that they will collect sales and use tax on their behalf.

Marketplace Sellers

A marketplace seller is not responsible for collecting and remitting sales and use tax on marketplace sales if the marketplace provider has certified that it assumes the responsibility. If no certification is issued, the seller should collect sales and use tax until it receives certification.

A remote seller that sells only through a certified marketplace provider is not required to hold a Texas tax permit, but it should keep required marketplace sales records for at least four years.

However, if a remote seller sells both through marketplaces and its own website, all Texas sales, including marketplace sales, count toward the USD 500,000 safe harbor calculation from 1 April 2020. If total sales exceed USD 500,000, the seller should collect and remit tax on non-marketplace sales. 

The Comptroller gives an example where USD 300,000 of website sales plus USD 300,000 of marketplace sales exceed the threshold, requiring collection on the seller’s own website sales.

Local Tax and Single Local Use Tax Rate

Texas has a state tax of 6.25 percent and local taxes of up to 2 percent. Remote sellers that exceed the safe harbor should collect local use tax unless they elect the single local use tax rate.

A remote seller may collect either local use tax based on the destination or the single local use tax rate. The Comptroller states that the current single local use tax rate is 1.75 percent, and remote sellers should file Form 01 799 to elect or revoke use of that rate.

The single local use tax rate is not available to marketplace providers.

Final Remarks 

Texas has a relatively broad tax framework for software and cloud-based digital services. Prewritten software and licences are generally taxable as computer programs. True contract programming can be nontaxable if the developer transfers all rights and does not retain rights in the program. SaaS, cloud storage, hosting, website maintenance, and similar remote access services are commonly treated as taxable data processing, with 20 percent of the charge exempt and 80 percent taxable.

For remote providers, including foreign providers, the critical threshold is USD 500,000 of total Texas revenue in the preceding 12 calendar months. Above that level, a remote seller should register and collect Texas state and local use tax. Below that level, the seller may be protected by the safe harbor, but the purchaser still owes use tax if the taxable transaction is not taxed by the seller.

For marketplace sales, the marketplace provider may collect and remit tax if it certifies responsibility. Sellers still need to monitor their total Texas revenue, keep records, and collect on direct sales when required.

Frequently Asked Questions