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Texas: Nexus by Electronic Download of Software and Digital Content


 Texas: Sale of digital downloads found to establish nexus.

A Utah corporation that sells computer programs and digital content primarily through the Internet was found by the Texas Comptroller to have nexus with Texas and was assessed sales tax for the period January 1, 2002 through June 30, 2010. Why?

The facts as presented in the Commissioner’s ruling:

  • The company sells computer programs and digital content over the Internet; “programs and content are usually licensed to the customer, allowing the customer the limited right to use the program or content on a limited number of computers and perhaps to make limited backup copies in the event there is a problem with the original. These licenses usually run for an indefinite period without requiring renewal.”
  • The company delivers products via USPS, UOS and Federal Express to customers in Texas.
  • Employees attended a week-long education conference in Texas in 2002, but the company was not an exhibitor at the conference. The purpose of the conference was educational, not to solicit orders or “drum up” sales.
  • One employee attended a conference in Texas in 2009, also for educational purposes.

Under Texas law, nexus is defined as “sufficient contact with or activity within this state, as determined by state and federal law, to require a person to collect and remit sales and use tax.” The burden of proof first rests on the comptroller’s staff to “make a PRIMA FACIE showing that the requisite nexus exists for the imposition of the tax.” Once that has been done, the burden falls on the Petitioner to prove “by a preponderance of the evidence” that there is no nexus.

The Comptroller determined that the presence of employees at the two conferences was not sufficient to trigger nexus. However, the Comptroller notes that the Petitioner “earned more than $*********** in the sale of licensed software and digital downloads to Texas users.” As a result of those sales, and the fact that the corporation licenses software in Texas and retains “title to tangible personal property that was physically present and generating revenue in Texas,” the Comptroller contends that there is nexus.

The software and digital downloads are treated as tangible personal property—a fact not contested by the Petitioner. The license agreements “expressly provide that Petitioner retained all other property rights to its products.” This is the lynchpin. According to the ruling, “it is this reservation of all property rights that ultimately militates against Petitioner’s claim that it lacks the requisite physical presence in Texas.”

In other words, the company has nexus in Texas.

As a result of the Comptroller’s ruling, the Utah corporation was assessed sales tax for the period January 1, 2002 through June 30, 2010.

This ruling could be a game changer; other states looking to collect sales tax from out-of-state sellers of software and digital content could adopt the Texas standard if it holds.

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photo credit: lastquest via photopin cc


Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.