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In Texas, SaaS (software as a service) and cloud computing are recognized as taxable data processing services. The Texas Comptroller has ruled that providing access to software hosted on a remote server via the internet. Where a customer may input, retrieve, and manage data is a taxable data processing service.
Data processing is a service performed with a computer using the customer's data. Entering, storing, manipulating, or retrieving a customer's data is taxable. But merely using the computer as a tool to help perform a professional service is not taxable.
Charges for computer program repair, maintenance, or restoration by a person who sold the computer program are taxable. Computer program repair, maintenance, or restoration includes error correction, technical fixes, and technical support, whether provided over the Internet or over the phone.
Texas Sales Tax for Software as a Service: Texas is one of these states that considers SaaS as a taxable data processing service. Data processing is 20% exempt from sales tax.
Under Texas law, computer software is treated as tangible personal property for purposes of Texas sales and use tax. As such, software licenses are treated the same as a sale of goods, and support and maintenance fees can be subject to sales tax.
Charges for maintenance of real property are not taxable. You must pay sales tax on all taxable items bought for use in providing nontaxable real property maintenance service. In addition, you must have a contract or other documentation to prove that the services are scheduled and periodic.
Texas Sales & Use Tax While the sale or licensing of software is subject to the Texas sales tax, creating a custom software program or modifying a client's existing software program is not, as long as the client has exclusive rights to the software program.
Internet access service enables users to connect to the internet in order to access information, email and other content online. Texas does not impose sales tax on separately stated internet access charges due to the Internet Tax Freedom Act (ITFA) of 2016, effective July 1, 2020.
Texas also provides a 20% exemption for SaaS. Depending on the facts and circumstances, reducing the Texas sales tax on SaaS could be possible. For instance, data processing service providers can purchase tax free for resale any tangible personal property when the care, custody, and control transfers to their customer.