The Sales Tax Institute published this update reporting that the Texas Comptroller of Public Accounts upheld a nexus determination for a Delaware-based corporation that sold licensed software in Texas, finding that the corporation owed sales and use tax for the entire period of its voluntary disclosure submission.
What Happened?
The corporation in this case had submitted a voluntary disclosure submission for the period of August 1, 2015 – August 31, 2019, but only remitted tax for the period of October 2018 – August 2019 because the corporation had an employee residing in Texas during this period. The corporation claimed that it did not have a sales tax nexus in Texas before October 2018 because it only sold and licensed software in Texas prior to its employees residing there.
However, the comptroller disagreed and concluded that the corporation had nexus starting in August 2015, because its sales of software applications into the state constituted doing business in Texas and were subject to sales and use tax as tangible personal property per Texas Tax Code §151.010.
In Texas, when you sell, lease, or license a computer program (like software), it is considered a sale of tangible personal property. This means that it is treated as if you are selling something physical, even if it’s just a digital file. As a result, you are required to pay taxes on the sale of the program when it is transferred to someone else for payment and is stored, used, or consumed in Texas.
The corporation appealed the comptroller’s decision to an administrative law judge, but the judge ruled against the corporation and upheld the nexus determination. The judge found that the corporation did not provide sufficient evidence to show that it was not engaged in business in Texas during the period in question.
What Does It Mean?
Even if a business does not have a physical presence in the state, nexus may still be established through business activities such as selling licensed software into the state. Therefore, if you are an out-of-state business of software applications, you should be aware of your sales tax obligations in Texas and other states where you make sales.