Sales Tax Exemptions

This summary is intended as an informal educational tool. It is not a complete text of the law covering sales tax exemptions for computer and video game companies, nor is it written in the exact language of the law. These exemptions are covered in the Texas Tax Code, Section 151.318, and the Comptroller of Public Accounts Administrative Code Rule 3.300.

Under Texas law, computer and video game developers are recognized as software manufacturers. As a developer, you may claim sales tax exemptions on many of the items and services used in the manufacturing of your final product (i.e., a gold master). Exemptions apply to the entire amount of state sales tax (6.25 percent) and local sales taxes (usually 0.25-2.0 percent).

Eligible game projects include computer games, console games, online games, handheld games, mobile games or other software for which the company will be compensated and that is intended for commercial publication (even if publication is very limited, as in the case of serious games for training purposes). Student games and games not intended for publication (such as those made by hobbyists) are not eligible for these exemptions.

To qualify for an exemption, an item or service must be necessary and essential to the making of the gold master, and it must be used directly and exclusively in development. Items used indirectly in production (such as office supplies, accounting software, and soft drinks) are not exempt. Items are tax-exempt only if they are used exclusively in production and not retained for other use.

"Use tax," at the same rates as sales tax, is due on items purchased outside the state and used in Texas, but the State of Texas may allow credit for any sales or use tax that has been paid in another state. Items exempt from Texas sales tax are also exempt from Texas use tax.

Qualifying Tax Exempt Items and Services
You may claim exemptions on:

• qualified purchases;
• rentals or leases of qualifying equipment and machinery, provided that the rent/lease is for at least a one-year term;
• and qualified services performed during development.

Examples of Items: computers used solely for game production; software (i.e. Photoshop, 3D Studio MAX, Maya, etc.); monitors; Wacom tablets.

Examples of Services: motion capture; sound mixing; Foley services; repairs to qualifying machinery, equipment or supplies. (Also see "Exceptions," below).

NOTE: Server equipment can be sales tax exempt as long as it is solely used for game development. By claiming the exemption, you are stating that you will only use the equipment directly in production. Using the equipment for other uses, such as for general office use and word processing, may result in back taxes and penalties.

Still photography done for research purposes is not included in these exemptions, unless the still photograph is directly incorporated into the software (i.e., used in game cinematics). Location stills, texture and character references, casting photos and other still photographs are not exempt.

Non-Qualifying (i.e., Taxable) Items and Services
Examples of Items: office furniture; janitorial supplies; t-shirts and other gifts for employees; computers used in HR department; word-processing software.

Examples of Services: catering; landscape maintenance. These goods and services are not exempt because they are not used directly in development or production. (Also see "Exceptions," below).

Tax Code, Section 151.318 only covers the production process up to the creation of the master. Duplication is not exempt, except in the case of resale. For more information on Resale Tax Exemptions, contact the Comptroller of Public Accounts, 800-252-5555.

Exceptions
Under Texas law, certain items do not qualify for these tax exemptions, regardless of their use in software manufacturing. These include, but are not limited to: motor vehicles, whether rented or purchased; ladders; and battery chargers.

How To Claim Sales Tax Exemptions
You do not need a sales and use tax ID number to claim these exemptions. Just fill out the one-page Texas Sales and Use Tax Exemption Certification (Form 01-339) and give it to the vendor that is providing the goods or services. The vendor keeps the certificate on file to document why sales taxes were not collected on that transaction. If you have multiple purchases of exempt items with a single vendor, the vendor may keep one completed form describing the general nature of the taxable items on file for you, so you don't have to fill out a new form for each transaction.

You may make copies of the form as needed, and it is also available on our Web site. Incomplete forms are invalid, so be sure to fill out each section. In the section marked "Purchaser claims this exemption for the following reason," an appropriate entry would be, "These items are to be used directly in the development of [name of project], [a computer game/video game, etc.] for sale." If the project has not yet been named, you may call it "Untitled".

Provide a completed certificate to each vendor from which you are buying or renting qualifying goods or services. Even on exempt purchases, the vendor may include sales tax on your invoice; just deduct the sales tax from the total, pay the balance and include a completed certificate with your payment.

Most vendors, especially those that regularly deal with software manufacturers, will accept the certificates in lieu of sales taxes, but they're not required to do so. If the vendor refuses the certificate, your choices are to use another vendor, or to pay the tax and get it refunded afterward.

Refunds on Taxes Already Paid
If you've already paid tax on items that should have been exempt, you may go back to the vendor and give them a completed exemption certificate. It's a good idea to take a blank Assignment of Right to Refund form with you, because it may be needed.

The vendor may refund the tax to you on the spot and claim a credit on their next sales tax return. In that case, you're done; no further action is needed. But the vendor may also choose to assign their right to refund to you. In that case, and assuming the exemption is valid, your refund will be mailed from the Comptroller.

To start the process of obtaining a refund from the Comptroller, the vendor should fill out the Assignment of Right to Refund form and give it to you. Assemble the completed Assignment of Right to Refund form; photocopies of each receipt for which you're requesting a refund, showing the amount of tax paid; and a cover letter, which must include the following:

1. the reason for your request, for example, "Items were used in the production of the video game XYZ;"
2. your company's Federal Employers Identification Number (FEI), or your Social Security number;
3. the name, address and phone number of the person to be contacted if there are questions about processing the refund; and
4. the name of the person to whom or business to which the refund should be made, and the appropriate mailing address.

It's wise to include details on the use of items that might not be immediately understood to be "necessary or essential" to production. By answering questions before they're asked, you're giving the Comptroller every reason to quickly approve your request. Your refund request to the Comptroller must be made within four years from the date on which the tax that you paid was due to the State; that's usually the 20th day of the month following the month in which the item was purchased. After four years, refunds are not available.

Send the assignment form, letter and receipts to:
Comptroller of Public Accounts
ATTN: Sales Tax Refunds Verification Section
111 East 17th Street
Austin, TX 78774

OTHER TAXES

State Income Tax and Franchise Tax
Texas does not impose a personal income tax. However, if your operation is organized as a corporation or a limited liability company, it may have Texas Franchise Tax (Margin Tax) responsibilities. You may complete and submit a Texas Nexus Questionnaire (Form AP-114) to establish a franchise tax responsibility with the Comptroller. The form is available on the Web at www.window.state.tx.us/taxinfo/franchise/index.html. You may also need to obtain a Certificate of Authority from the Texas Secretary of State. You may reach the Secretary of State at (512) 463-5555.

Selling Items
Companies often sell items that are no longer needed after a project ends. However you sell these items, even by auction or rummage sale, you must collect state and local sales taxes on all sales. You'll need a sales tax ID number, and you'll need to report the amount collected on a Sales and Use Tax Return. For details, contact the Comptroller of Public Accounts, (800) 252-5555.

ADDITIONAL SALES TAX INFORMATION CONTACTS

For more information on Texas' sales tax exemptions for computer and video games, please contact:

Katy Daiger
Texas Film Commission
(512) 463-9200
game@governor.state.tx.us

or

Bryant Lomax
Tax Policy Division Manager
Comptroller of Public Accounts
(800) 531-5441 ext. 3-4987
(512) 463-4987
bryant.lomax@cpa.state.tx.us