Perspectives

Texas Comptroller rules software rights create remote seller use tax nexus

Multistate Tax alert | November 21, 2014

The Texas Comptroller of Public Accounts (“Comptroller”) recently issued an Order¹ that upheld an Administrative Law Judge (“ALJ”) Decision, thus approving a use tax assessment against a Utah-based retailer (the “Taxpayer”) of computer programs and digital content.

Overview

The Texas Comptroller of Public Accounts (“Comptroller”) recently issued an Order1 that upheld an Administrative Law Judge (“ALJ”) Decision, thus approving a use tax assessment against a Utah-based retailer (the “Taxpayer”) of computer programs and digital content. The Taxpayer licensed its products to Texas users for a one-time fee, delivering these items primarily by digital download over the Internet but also by common carrier. In these transactions the Taxpayer retained all ownership rights and interests in the products, including intellectual property rights. The Taxpayer’s only other contact with Texas involved sending three employees in 2002 and one employee in 2009 to software industry conferences held in Texas. With respect to the conferences, the employees’ activities were for educational purposes only and were not directed at establishing or maintaining a market in Texas. Central to the ALJ’s Decision and the Comptroller’s Order was the ALJ’s finding that the Taxpayer failed to challenge the statutory characterization of software as tangible personal property for purposes of addressing the U.S. Supreme Court’s Commerce Clause requirement that substantial physical presence exist as a prerequisite for imposing use tax nexus on a remote seller.2 In this Tax Alert we discuss this issue and the related ALJ and Comptroller analysis and findings, and we provide some taxpayer considerations.

1 SOAH Docket No. 304-13-5657.26 (Sept. 19, 2014) (the “Order”), with all footnote references herein to the applicable Order page number.
2 Tex. Tax Code § 151.009 provides, in relevant part, “’Tangible personal property’ means personal property that can be seen, weighted, measured, felt, or touched or that is perceptible to the senses in any other manner, and, for the purposes of this chapter, the term includes a computer program . . . .”

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The Multistate Tax Alert Archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.

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