By Derek Takehara and Andrew Appleby
The Texas Comptroller determined that a semiconductor manufacturer’s purchases of computer software-related services were subject to sales and use tax because the taxpayer failed to prove that such purchases qualified for the multistate benefit exemption. Taxable services performed for use in Texas are generally subject to tax. Because some services are performed for use both in and outside of Texas, legislation was created to provide an exemption—the multistate benefit exemption—for the portion of the taxable services performed for use outside of Texas. The Comptroller clarified such exemption applies only to services that became taxable after September 1, 1987, and a taxpayer must prove by clear and convincing evidence that it operates in more than one state and that the service supports a separate, identifiable segment of the business rather than the general administration or operation of the business. In 1984, Texas began to impose tax on repair, maintenance and restoration services of tangible personal property, including canned computer software. Texas did not include custom computer programs in the definition of tangible personal property until October 1, 1987. Given this timeline, only a small portion of the taxpayer’s purchases were even eligible for the multistate benefit exemption: purchases for repair, maintenance and restoration services of custom computer software. However, a 2007 Texas Comptroller’s Decision provided that such services constitute part of the original sale of the software when performed by the original vendor, and the taxpayer was further required to prove that the services it purchased were stand-alone services in order to claim the exemption. Based on the evidence proffered, the Comptroller determined that the taxpayer failed to meet its burdens and denied the taxpayer’s claim for refund. Tex. Comp. Decision 105,855 (Apr. 24, 2014).