As someone who regularly tunes into the Weather Channel, I keenly appreciate how meteorologists recognize dangerous patterns and potentially significant storms through analysis of weather hundreds of miles and days away from a location. This ability to predict weather emergencies allow us to prepare and “batten down the hatches” well in advance of the dangerous weather. Well, a recent Texas Comptroller’s decision that upheld a Texas ALJ Determination should be recognized by Multistate Tax meteorologists and prognosticators as a potentially dangerous nexus storm for all software providers.
In summary, the Comptroller’s Decision held that a Utah corporation had substantial nexus for sales and use tax arising from its Texas customers’ electronic downloading of software over which the Petitioner retained “all property rights” and title.
Comptroller’s Decision Key Facts and Findings
The Comptroller’s Decision was determined on the specific facts and findings pertaining to the Petitioner’s activities in Texas. Undoubtedly any potential software provider or multistate tax advisor with clients who may be affected by this decision should undertake a comprehensive review of the decision’s specific findings and analysis.
However, I thought it would be helpful to set forth, in excerpt format, some of the key facts and findings contained in the Comptroller’s Decision as set forth in the decision’s “III. FINDINGS OF FACT” and “IV. CONCLUSION OF LAW”
- Petitioner’s software and computer programs were deemed tangible personal property pursuant to Texas Tax Code Section 151.009.
- Petitioner sold computer programs and digital content primarily over the Internet and via such common carriers as the U.S. Postal Service (USPS), the United Parcel Service (UPS), and Federal Express during the period under review.
- Petitioner does not charge any ongoing maintenance or recurring licensing fees for any of its computer programs or digital images.
- Petitioner does not charge customers for updates to computer programs they have already purchased, but does charge customers for upgrades from an older version of a program to a newer version.
- The purchase and use of Petitioner’s products is governed by license agreements.
- All the license agreements granted the customer (or user) a license that entitled them to use Petitioner’s products.
- The user was either granted a personal non-exclusive, non-transferable license to use the 3-D Models, together with all accompanying written materials, images, and other data files or a license to use the product in accordance with the terms of the license.
- The license agreements set no fixed period for the customer’s use of the license.
- In some versions, the license agreements expressly provide that the license remains in effect only for so long as the user is in compliance with the terms and conditions of this agreement.
- The products licensed under these License Agreements are provided for the user’s exclusive use.
- The license agreements contain provisions specifically restricting the useof the products by third parties other than the user.
The Comptroller’s Decision also reviewed Petitioner’s other limited activities in Texas. The Comptroller’s Decision did not find that Petitioner had established sufficient physical presence by its employees’ attendance of a week long education conference in 2002.
Nor did the Comptroller’s Decision find that a Petitioner employee’s attendance at a 2009 Texas conference provided sufficient physical presence in Texas to establish sales and use tax nexus. It should be noted that the Petitioner was successful in establishing that its employee in 2009 “did not engage in any activities related to developing or promoting Petitioner’s sales. He did not sell, deliver or take orders for Petitioner’s products during his attendance at the conference. He did not visit any of Petitioner’s customers or vendors, offer technical support, or hold any outside meetings related to Petitioner’s business.”
“Prepare for the Worst” Is Best Advice for Storms and Nexus
The Comptroller’s Decision should sound Texas Nexus Storm warnings to all software firms that are not presently registered as a vendor for sales and use nor filing Texas sales and use tax returns. This Decision sets forth the Comptroller’s view of what constitutes substantial nexus for sales and use tax in the context of companies that license the use of their software to customers located in Texas or to customers that may use their software in Texas. My advice? Prepare for a “blizzard” and be happy if you only receive a “dusting” with respect to nexus. But be mindful, because for nexus in Texas a “dusting” may just be enough.