The Texas Comptroller recently issued a decision that an out-of-state software company had nexus with Texas because it licensed software used in Texas.
The company was based out of Utah and sold computer programs and digital content over the Internet. The purchase and use of the company’s products was governed by license agreements, which granted customers licenses to use the company’s products. The license agreements prohibited customers from transferring the products to third parties and placed other restrictions on customers’ use of the products. The company retained all rights in, title to, and ownership of the licensed products. The company had no other significant presence in Texas.
Texas requires out-of-state retailers to collect Texas use tax if the retailers have nexus with Texas. “Nexus” is the amount of contact, as determined by state and federal law, that is sufficient for a state to legally require a person to collect and remit sales or use tax. Federal law requires that a person have physical presence in a state to have nexus with that state.
Texas considers prewritten software to be tangible personal property for sales tax purposes. The Comptroller decided that the company had nexus due to the presence of the company’s licensed software and digital content in Texas. Because the company kept property rights to the software, it had property in Texas. The software was tangible personal property owned by the company and located in Texas. The Comptroller decided that this was enough physical presence to create nexus. The company therefore had to collect Texas tax on its sales of software to Texas customers.
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