Where does Texas source receipts from digital downloads and licenses for franchise tax?

The statute has no category for a download

The Texas franchise tax apportions margin by a single fraction: gross receipts from business done in Texas over gross receipts from the entire business (Tax Code section 171.106(a)). The numerator is built under section 171.103(a), which counts receipts from six things: each sale of tangible personal property delivered or shipped to a buyer in Texas; each service performed in Texas; each rental of property situated in Texas; "the use of a patent, copyright, trademark, franchise, or license in this state"; each sale of Texas real property, including mineral royalties; and "other business done in this state."

A download fits none of the first five comfortably: it is not tangible property delivered to a buyer or a service performed somewhere, and the buyer of a copy does not "use" the developer's copyright in the sense of exploiting it. The chapter speaks to two digital situations directly, in the apportionment section rather than in the list. A receipt from internet hosting, as section 151.108(a) defines it, "is a receipt from business done in this state only if the customer to whom the service is provided is located in this state" (Tax Code section 171.106(g)). And a broadcaster (a licensed television station, a broadcast or cable television network, or a television distribution company) includes licensing income from distributing film programming in its numerator "only if the legal domicile of the broadcaster's customer is in this state" (Tax Code section 171.106(h)). Everything else digital is left to the "other business" category and to the Comptroller's rule.

That rule is 34 TAC section 3.591, amended effective January 24, 2021 (46 TexReg 460) and again effective March 14, 2023 (48 TexReg 1450). Its paragraph (e)(3), "Computer hardware and digital property," is where the analysis starts.

Digital property: the delivery medium picks the rule

Paragraph (e)(3) sorts digital property by how it reaches the customer and by what the customer acquires. The rule describes digital property, in a parenthetical, as "computer programs and any content in digital format that is either protected by copyright law or no longer protected by copyright law solely due to the passage of time" (section 3.591(e)(3)(C)). That reaches software, audio and video files, e-books, fonts, design assets and similar content.

The subparagraphs then assign each transaction to another paragraph of the rule:

• Hardware sold with software installed is a sale of tangible personal property under paragraph (e)(29), and hardware leased with software installed is a lease under paragraph (e)(14)(B) (section 3.591(e)(3)(A), (B)).
• Digital property sold on "fixed physical media" is sourced as a sale of tangible personal property under paragraph (e)(29), which looks to where the property is delivered to the purchaser; a lease on fixed media follows the lease rule (section 3.591(e)(3)(C), (D)).
• "Gross receipts from the sale or lease of digital property that is transferred by means other than by fixed physical media are sourced as the sale of intangible property under paragraph (21)(B) of this subsection" (section 3.591(e)(3)(E)). This is the download rule.
• Digital property delivered as a service is sourced under the services paragraph, (e)(26), "unless otherwise provided in this subsection," and digital property delivered as part of an internet hosting service is sourced under the hosting paragraph, (e)(13) (section 3.591(e)(3)(F), (G)).
• "Gross receipts from the use (as opposed to the sale or licensing) of digital property are sourced under paragraph (21)(A) of this subsection," the location-of-use rule (section 3.591(e)(3)(H)).

The examples in subparagraph (I) show the sorting. In one, a software company licenses its program to a computer maker that preloads it, sells discs to a retailer, sells downloads to end users, and offers an online version for a periodic fee in which users enter and store data on the company's website. The license to the computer maker is a receipt "from the use of its digital product" sourced to the location of use; the disc sales follow the tangible property rule; the downloads are "from the sale of intangible property and sourced to the location of payor"; and the online version is internet hosting, sourced to the customer's location. In the other example, a film studio licenses a title to a theater chain, a cable company, two streaming and rental websites, a disc distributor, a kiosk operator and a download seller; the studio's receipts in every case are from "the right to use its copyrighted digital property" and are sourced to where the copyright is used, while each licensee's own receipts are sourced by what that licensee sells.

The paragraph is recent. The version of section 3.591 in effect through January 23, 2021 had no digital property paragraph. Its paragraph (e)(3) treated the sale of a computer program as the sale of an intangible asset apportioned to the legal domicile of the payor, without distinguishing a disc from a download, and sourced computer software services to where they were performed. Under the current text, a program shipped on a disc to a Texas buyer is a Texas receipt by delivery; under the earlier text, the same sale followed the payor's domicile. Paragraph (e)(3) carries no date of its own, and section 3.591(a) applies the rule to reports originally due on or after January 1, 2008, "except as otherwise noted."

The location of payor is a legal address, not a market

Paragraph (e)(21)(B) provides that "[e]xcept as otherwise provided in this section, gross receipts from the sale of intangible assets are sourced to the location of payor." The definitions make that a legal test: "Location of payor--The legal domicile of the payor" (section 3.591(b)(8)), and "[t]he legal domicile of a corporation or limited liability company is its state of formation. The legal domicile of a partnership, trust, or joint venture is the principal place of business of the partnership, trust, or joint venture" (section 3.591(b)(7)).

Three consequences follow.

First, where the customer's people are does not matter for an entity buyer. A corporation formed in Delaware with its headquarters and every employee in Texas is a Delaware payor. Downloads sold to it are not Texas receipts, and downloads sold to a Texas-formed LLC operating entirely in other states are.

Second, the payor is the party that pays, not the user. Where a company buys downloads or seats for its employees, the employer's legal domicile controls, not the employees' locations. Where a reseller or marketplace pays the developer, the analysis turns on who the payor is under the contract and the payment flow, which the rule does not address beyond the definition.

Third, the rule does not define legal domicile for an individual. Paragraph (b)(7) covers corporations, LLCs, partnerships, trusts and joint ventures, and stops there. For a consumer download, the rule supplies the test, the payor's legal domicile, without saying how a seller that holds only a billing address and an IP address is to establish it. No Comptroller guidance on that question was located as of October 14, 2026.

An example shows the effect. A publisher of downloadable design assets, organized and based outside Texas, sells to three groups: individual designers, whose billing addresses place a fifth of them in Texas; small agencies organized as Texas LLCs; and large companies, most formed in Delaware, some with Texas headquarters. The agency sales are Texas receipts because the agencies are Texas entities. The large-company sales are not Texas receipts, whatever the share of their staff in Texas, unless the company was formed in Texas. The individual sales are Texas receipts to the extent the individual payors are domiciled in Texas, and billing address is the evidence the publisher has, with the rule silent on whether it suffices.

Licenses: the use rule and its limits

A license is not one thing under section 3.591. The rule separates a sale or lease of a copy, which (e)(3)(E) treats as a sale of intangible property sourced to the payor, from a license of the right to exploit the intangible itself. The second kind falls under paragraph (e)(21)(A)(iii): "Gross receipts that the owner of a patent, copyrighted material, trademark, franchise, or license receives from licensing the use of the patent, copyrighted material, trademark, franchise, or license are sourced to Texas to the extent the patent, copyrighted material, trademark, franchise or license is used in Texas." That sentence tracks the statute's own category for "the use of a patent, copyright, trademark, franchise, or license in this state" (Tax Code section 171.103(a)(4)).

The line between the two is the one the rule's examples draw. An end user who downloads a program under a click-through license acquires a copy for its own operation, and the developer's receipt is from a sale. A computer maker that pays to install the program on machines it sells, or a streaming service that pays for the right to distribute a film, is exploiting the copyright, and the licensor's receipt is from use. Subparagraph (e)(3)(H) groups "the sale or licensing" of digital property together and sets "the use" apart, which supports reading the rule so that a license for a customer's own copy is not, by that label alone, a use receipt.

Two further rules narrow the use category. Patent royalties count "to the extent that the patent is utilized in production, fabrication, manufacturing, or other processing in Texas," and copyright royalties "to the extent that the copyright is utilized in printing or other publication in Texas" (section 3.591(e)(21)(A)(i), (ii)). And a label does not control: the rule's seismic data example treats a license of uncopyrightable data as a receipt "from the use of the underlying intangible property" sourced to the payor under (e)(21)(B) (section 3.591(e)(21)(C)(i)).

What the rule does not supply is a method. "To the extent" implies a proportional split for a licensed right used in Texas and elsewhere, but neither paragraph (e)(3) nor paragraph (e)(21) says what to measure: where a licensee reproduces the work, where it distributes the products, or where its end users are. A licensor of an engineering program to a manufacturer that installs it on equipment assembled in Texas and sold nationwide has two defensible measures, the place of installation and the place of sale, and the rule chooses neither.

When the digital product is hosting or a service

The download rule stops where the customer stops acquiring a copy. Internet hosting, as Tax Code section 151.108(a) defines it, means "providing to an unrelated user access over the Internet to computer services using property that is owned or leased and managed by the provider and on which the user may store or process the user's own data or use software that is owned, licensed, or leased by the user or provider." For reports originally due on or after January 1, 2014, hosting receipts are Texas gross receipts if the customer is located in Texas, and "[t]he customer location is determined by the physical location where the purchaser or the purchaser's designee consumes the service" (section 3.591(e)(13)). The rule allows a split: "Receipts from some services may be sourced to multiple customer locations or to multiple customers," and its examples apportion a law firm's access fee by the number of attorneys in each office.

The rule lists factors that mark access rather than a purchase of the property, among them that "the customer is not in physical possession of the property," that "the customer does not have a significant economic or possessory interest in the property," and that "the provider bears any risk of substantially diminished receipts" (section 3.591(e)(13)). Under the film example, subscription streaming and time-limited online rentals are hosting; a permanent download is a sale of intangible property. A developer that sells the same program both ways sources the subscription revenue by where customers use it and the download revenue by where customers are domiciled.

Other digital deliveries that are services follow paragraph (e)(26): "a service is performed at the location or locations where the taxable entity's personnel or property are doing the work that the customer hired the taxable entity to perform," and a single charge for work done inside and outside Texas is split "on the basis of the fair value of the services that are performed in Texas," with any cost measure limited to "the direct costs of doing the work that the customer hired the taxable entity to perform." The Supreme Court of Texas read the statute the same way in Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. Mar. 25, 2022), holding that section 171.103(a)(2) looks to where the service is performed, which for a service performed by technology is where the equipment does the work, and declining to give the Comptroller's receipt-producing, end-product act test any role in locating a service. The Court observed that the Legislature had chosen the buyer's location for tangible goods in section 171.103(a)(1) and had not done so for services. The Comptroller's theory that a satellite radio service was performed where subscribers decrypted the signal in Texas failed, and the case was remanded on the fair value question. A digital delivery the rule classifies as a service, rather than as hosting or as a sale, is sourced on that origin principle.

Why the sourcing also decides nexus

The sourcing rule does double duty. A foreign taxable entity with no physical presence in Texas has nexus for a federal accounting period ending in 2019 or later "if during that federal income tax accounting period, it had gross receipts from business done in Texas of $500,000 or more, as sourced under §3.591(e) and (f) of this title" (34 TAC section 3.586(f)(1)). An amendment effective January 7, 2026 adds that the threshold is measured by gross receipts even for an entity that apportions its margin by another method (section 3.586(f)(3)).

For a seller of digital products, that link changes the arithmetic: a developer whose downloads go mostly to Delaware corporations with Texas offices may stay under $500,000 of Texas receipts despite a large Texas customer base, while the same revenue from a hosted product consumed in Texas offices counts in full. A move from downloads to subscriptions can create Texas nexus without any change in the customer list, and a move between discs and downloads can carry receipts into or out of the Texas numerator. The library's article on Texas franchise tax nexus for a business with no Texas footprint covers the threshold and the filing consequences.

Practice notes

The sound sequence starts with classification, not customer addresses: each revenue stream is sorted into fixed media, electronic transfer of a copy, hosted access or streaming, a service, or a license to exploit the intangible, and a product called a "license" in its terms may be a sale of a copy under section 3.591(e)(3)(E). For download revenue, the data that matters is the payor's state of formation for entity buyers and principal place of business for partnerships, a data point an order system does not capture unless it is built to; for individual buyers, the rule gives no proxy, and a seller holding only billing addresses works from evidence the rule does not address. For hosting revenue, the data is where the customer's users consume the service, apportioned across locations where the customer has several. For exploitation licenses, the licensor fixes and documents a measure of Texas use, because the rule supplies none. A change in delivery model is tested against both the apportionment fraction and the nexus threshold before it takes effect. G&G State Tax Group provides Texas franchise tax apportionment and nexus analysis for software, content and other digital businesses alongside its state and local tax practice.