IT Services and IT Consulting are two distinct areas in the technology sector. IT Services is focused on the operational and technical aspects of managing and supporting the IT infrastructure of any organization. However, IT Consulting services are related to providing strategic advice and guidance to help businesses in leveraging technology to achieve their business goals. One of the common questions that arise at the time of running a tech-driven business in Texas is that “Are IT consulting services taxable in Texas?”. The answer to this question can be complex, as it depends on the nature of the provided services and the way it is billed. Nevertheless, it has become important to gain knowledge about tax implications with the increasing dependency of businesses on IT consultants for digital transformation.
Texas in the US is known for its vibrant economy and lack of a state income tax. The base state sales tax in Texas is 6.25%, whereas the local jurisdiction can add additional taxes. This led to a total of 8.25% sales tax for the companies operating in the economy of Texas. In this context, sales tax applies primarily to the sale of tangible personal property, along with certain taxable services. However, some professional services in Texas are free from tax, including legal or accounting services.
IT consulting services of the technology companies typically include the delivery of expert advice on aspects like systems architecture, technology strategy, cybersecurity, and software integration. A diverse range of channels is utilized for the services, including in-person strategy sessions, remote consultations as well as ongoing tech support. The taxability in Texas depends on the articulation of the services regarding what exactly is being delivered:
Pure consulting services, like only providing advice, planning, assessments, and strategy sessions, are not subject to sales tax in Texas. For example, services like hiring an IT consultant for evaluating the cybersecurity posture of a company and providing recommendations for improvement are considered tax-exempt in Texas.
The inclusion of services like resale of software licenses or the delivery of a custom or prewritten software product in the consulting agreement is considered taxable. However, when all these services are included with consulting, the taxable portion needs to be separated in the invoice, else the entire transaction can become taxable.
IT consulting services with the inclusion of installing or configuring software or hardware become taxable in Texas. The Texas Comptroller considers installation as a taxable service with the inclusion of tangible or off-the-shelf software.
Support services provided by the consultation companies can be considered a gray area. Help desk services or remote support without the involvement of installing or modifying tangible property are generally considered non-taxable. On the other hand, software maintenance agreements, which include updates or patches, can be counted as taxable in Texas, especially with the involvement of access to downloadable content.
You can break down the invoice into taxable installation, non-taxable consulting, and software licensing. This clarity comes with the benefits of avoiding tax on the entire invoice.
Tax laws in Texas frequently change. The Texas Comptroller of Public Accounts allow in offering of publications, rulings, and FAQs which help in the determination of the taxability of services.
It is important for you to collect sales tax from Texas clients if the services include taxable components. The lack of ability of the companies to maintain this activity can lead to penalties.
Myth 1: “All digital or remote services in Texas are tax-free.” False – If Texas tax software is not custom-built, it can be installed remotely or given online.
Myth 2: “If I don’t charge tax, I’m not responsible.” False – Even if you didn't charge your client, you are still responsible for unpaid taxes.
Myth 3: “Small freelancers don’t need to worry.” False – When it comes to Texas sales tax, small businesses are not exempt. Compliance is essential if you offer taxable IT services.
So, are IT consulting services taxable in Texas? The conclusion of this question is that not all the services, but some of the services in Texas, are taxable. You are likely safe from sales tax when you stick to pure consulting and advice. However, parts of your services can be taxable in Texas when you start installing software, performing tech setups, or selling licenses.
