USA – Texas comptroller finds software licensed to Texas customers created nexus for sales and use tax purposes

The Texas Comptroller of Public Accounts has recently determined that electronically downloaded software licensed by a Utah corporation to Texas customers constituted physical presence in Texas sufficient to establish sales and use tax nexus. According to the decision, nexus was established because the software was characterized as tangible personal property and the Utah corporation retained all property rights in the software, which was physically present and generating revenue in Texas. The Comptroller upheld an Administrative Law Judge (ALJ) determination that the corporation had an obligation to charge and collect use tax from customers, and denied refund claims of sales tax paid and an interest waiver. [201409970H; SOAH Docket No. 304-13-5657.26; CPA Hearing No. 106,632, Texas Comptroller of Public Accounts (9/19/2014)]​

In detail

A Utah corporation (Petitioner) licensed computer programs and digital content that was downloaded through the internet to Texas customers. The license agreements provided that the licensed products were property of and proprietary to Petitioner. Petitioner otherwise had no significant contacts with Texas. The Business Activity Research Team (BART), part of the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller), conducted an examination of Petitioner’s activities to determine whether it had nexus with Texas and should have collected and reported sales and use tax on its sales to Texas customers. BART concluded the licensing of software downloaded over the internet to Texas customers established substantial nexus for sales and use tax purposes because the software was tangible personal property and Petitioner retained title to the software, which was physically present and generating revenue in Texas.

Electronically delivered software is characterized as tangible personal property in Texas

The ALJ analyzed whether the licensed software and digital images constituted tangible personal property for sales and use tax purposes. In Texas, electronically downloaded software is statutorily categorized as tangible personal property. The ALJ noted that while this characterization is not in and of itself determinative that there is the requisite physical presence in Texas, what was ultimately determinative was that Petitioner did not challenge this characterization. Consequently, Petitioner’s software was treated as tangible personal property for the purposes of applying the Supreme Court’s bright-line test requiring substantial physical presence.

Petitioner retained property rights in the licensed software constituting substantial physical presence

The ALJ noted that “nexus is not automatically conferred by the statutory characterization of a computer program as taxable tangible personal property. The substantial physical presence requirement is determined by the character of the rights and interest Petitioner retained in the software and digital images downloaded by users located in Texas.” The ALJ concluded that the record established Petitioner had retained all property rights in tangible personal property, and as a result, the software established substantial physical presence in Texas.

The takeaway

In recent years, Texas has adopted increasingly assertive positions on software and computer servers for sales and use tax nexus purposes. Under Texas law, a retailer that owns or uses tangible personal property located in the state, including a computer server or software, is considered engaged in business within Texas and hence may be responsible for collecting and remitting Texas sales and use taxes. The Comptroller’s decision expands the scope of Texas sales and use tax nexus to specifically include taxpayers retaining property rights over software electronically delivered to Texas customers. The ALJ assumes that electronic software statutorily defined as tangible personal property for sales tax purposes also necessarily constitutes a ‘physical presence’ for constitutional nexus purposes. Further, the ALJ concluded Petitioner’s physical presence was substantial based on the (undisclosed) amount of revenue generated from the licensing agreements. Although this is an administrative level decision and likely subject to further proceedings, Texas may consider companies licensing software in any form to Texas customers to have established Texas sales and use tax nexus.

For more information on this topic, please contact Jennifer Jensen, Director of PwC US (email:, tel: +1 202 414 1741).

About Andras Salanki

Manager PwC Switzerland email: Office: +41587924536

Andras Salanki is an international VAT advisor with 7 years of relevant professional experience. He spent one year on secondment in California, US, where he advised US multinationals on global VAT projects and also gained experience with IT and Internet companies based in the Silicon Valley.