How did Florida tax peering, cross-connect, managed-router, colocation, equipment, and managed-maintenance services?

Plain-English summary

An Internet exchange provider offered several separately invoiced data-center services. Florida assigned different tax treatment according to what each charge bought:

• Peering, cross-connect, and managed-router services: Not subject to Chapter 212 sales and use tax because they transmitted data without selling or renting tangible personal property or real property. They were communications services under Chapter 202 and therefore subject to communications services tax.
• Colocation: Taxable under Chapter 212 as rent or a license for restricted facility space used to house customer equipment.
• Cages, cabinets, and racks: Taxable sales or rentals of tangible personal property.
• Managed services: Taxable service warranties because they maintained, repaired, installed, tested, stored, upgraded, and troubleshot equipment owned by the provider or leased to customers. The result did not depend on whether replacement parts were furnished.

The Department addressed sales and use tax in detail and identified the communications-services classification for routing services. Each service was separately listed and charged on customer invoices.

What this means for you

Unbundle and describe each charge accurately. Data transmission, facility space, physical equipment, and maintenance agreements can fall into different Florida tax regimes even when sold by one provider at one data center.

Common questions

Were peering and cross-connect charges sales-taxable? No under Chapter 212, but the TAA classified them as communications services subject to Chapter 202 tax.

Was colocation taxable? Yes, as use of real property for equipment storage.

Why were managed services taxable? They were agreements to maintain or repair tangible personal property and therefore service warranties.

Citations and references

• Fla. Stat. § 202.11(2) (routing data as a communications service)
• Fla. Stat. §§ 212.031, 212.05, and 212.0506 (real-property rent, tangible property, and service warranties)
• Fla. Admin. Code r. 12A-1.105(1)(b) (service-warranty definition)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 08A-014

Original ruling text

SUMMARY
QUESTION: Whether the peering, cross connect, managed router, and managed services are
subject to sales and use tax.
ANSWER: The peering, cross connect, and managed router services provide for the transmission of
data only, and do not include the sale or rental of any tangible personal property or real property;
therefore, these services are not subject to sales and use tax. The colocation services, consisting of
the lease of real property used for storage of a customer’s equipment, and sales of tangible personal
property are subject to sales and use tax. The managed services are subject to sales and use tax
under Chapter 212, F.S., as the sale of a service warranty.

May 22, 2008

XXX
XXX
XXX
XXX
Re:

Technical Assistance Advisement 08A-014
XXX
XXX
Peering, Cross Connect, and Managed Services
Sales and Use Tax
Sections 212.031, 212.05, and 212.0506, Florida Statutes (“F.S.”)

Dear XXX:
This Technical Assistance Advisement responds to your request dated September 5, 2007, which
asked the Department to determine the taxability of your client’s peering services, cross connect
services, managed router services, and managed services.
ISSUE
Whether the peering, cross connect, managed router, and managed services provided by Taxpayer
are subject to sales and use tax.
FACTS
XXX (hereafter “Taxpayer”) is a subsidiary of XXX, an Internet exchange provider. Taxpayer
operates Internet exchange points within Florida, from where the Taxpayer provides its services.
Taxpayer’s services provide customers with a means of exchanging information and Internet traffic
through routing equipment owned by Taxpayer. Taxpayer’s services include: 1) peering services,
2) cross connect services, 3) managed router services, and 4) managed services. Taxpayer’s

customers include Internet Service Providers (“ISPs”) and other service providers seeking to
exchange information and data.
The peering services allow parties to exchange information through routing equipment owned by
Taxpayer. Peering services establish a connection between different customers, thereby allowing an
exchange of Internet information. The customers that purchase peering services do not purchase
equipment from Taxpayer. Rather, the customer uses its own equipment. Taxpayer merely
provides a connection into its routing equipment. Taxpayer, through its equipment, provides the
service of routing information between companies or networks. The amount of information allowed
to be routed through Taxpayer’s equipment depends upon the amount of bandwidth purchased by
the individual customers.
Cross connect services also allow customers to share data with other customers. However, the
customers have to be connected to Taxpayer’s Exchange Point Platform. This requires that the
customer’s equipment be housed at Taxpayer’s facility. Taxpayer states that the essential difference
between the peering services and cross connect services is merely the physical connection necessary
to provide each service, which requires the customers’ equipment to be housed at Taxpayer’s
premises.
Managed Router Services are provided on a hardware platform owned and managed by Taxpayer.
This service provides customers with access to the Internet without the necessity of the customer
owning his or her own router.
Managed Services consist of several individual services. These services include network monitoring
services, installation and testing of equipment at the customer’s premises, secure network storage,
routine maintenance, installation of new technology, and system troubleshooting. These services
specifically pertain to the equipment owned by Taxpayer or leased to customers by Taxpayer.
Therefore, customers who own their own equipment and store it at their own facilities cannot
purchase managed services. Rather, Taxpayer only provides managed services when it stores and
maintains equipment on its own premises.
Taxpayer generates revenue from its peering, cross connect, and managed router services, and the
management of such services. Taxpayer also rents the space and equipment necessary to store a
customer’s equipment, and the customer is charged a fee for this colocation service. The colocation
space is a restricted and supervised area providing several connection options for the customers’
equipment. In addition, Taxpayer sells items of tangible personal property such as cages, cabinets,
and racks, which are placed in the colocation space used to house the customer’s equipment.
Taxpayer is aware that the colocation services and the sale/lease of tangible personal property are
subject to sales tax, and it has been charging tax on such transactions. Therefore, Taxpayer’s
question is in reference to the tax consequences of the peering, cross connect, managed router, and
managed services only. Each service is listed separately on the invoice and charged separately.
Customers are billed for their connectivity during the month. Taxpayer has been collecting sales
tax on the peering and cross connect services. It is not clear from the documentation provided
whether Taxpayer has been collecting tax on its managed router services.

In communication with Department personnel, Taxpayer stated that it is seeking guidance regarding
only the sales and use tax liability of its transactions. Therefore, this advisement will not provide a
detailed explanation of any other possible tax consequences.
TAXPAYER’S POSITION
Taxpayer asserts that the peering, cross connect, managed router, and managed services provided
are not taxable because a sale of tangible personal property, as defined in Section 212.02(15)(a),
F.S., has not occurred. Even if the provision of services required a sale of tangible personal
property, Taxpayer argues that it would be an inconsequential element of the transaction, and thus,
the professional services exemption in Section 212.08(7)(v), F.S., would apply.
Taxpayer also references two court cases involving the sale of services and tangible personal
property, where the Courts applied the true object test to determine the taxability of the transaction.
In both cases, the transactions were predominantly found to be services; therefore, they were not
subject to tax.
APPLICABLE STATUTES AND RULES
Section 212.031(1), F.S., states in part:
(1)(a) It is declared to be the legislative intent that every person is exercising a
taxable privilege who engages in the business of renting, leasing, letting, or granting
a license for the use of any real property….

(c) For the exercise of such privilege, a tax is levied in an amount equal to 6 percent
of and on the total rent or license fee charged for such real property by the person
charging or collecting the rental or license fee. The total rent or license fee charged
for such real property shall include payments for the granting of a privilege to use or
occupy real property for any purpose and shall include base rent, percentage rents, or
similar charges.

Section 212.05, F.S., states in part:
It is hereby declared to be the legislative intent that every person is exercising a
taxable privilege who engages in the business of selling tangible personal property at
retail in this state, including the business of making mail order sales, or who rents or
furnishes any of the things or services taxable under this chapter, or who stores for
use or consumption in this state any item or article of tangible personal property as
defined herein and who leases or rents such property within the state.

(1) For the exercise of such privilege, a tax is levied on each taxable transaction or
incident, which tax is due and payable as follows:
(a)1.a. At the rate of 6 percent of the sales price of each item or article of tangible
personal property when sold at retail in this state, computed on each taxable sale for
the purpose of remitting the amount of tax due the state, and including each and
every retail sale.

Section 212.0506, F.S., states in part:
(1) It is the intent of the Legislature that every person is exercising a taxable
privilege who engages in this state in the business of soliciting, offering, providing,
entering into, issuing, or delivering any service warranty.
(2) For exercising such privilege, a tax is levied on each taxable transaction or
incident, which tax is due and payable at the rate of 6 percent on the total
consideration received or to be received by any person for issuing and delivering any
service warranty.
(3) For purposes of this section, "service warranty" means any contract or agreement
which indemnifies the holder of the contract or agreement for the cost of
maintaining, repairing, or replacing tangible personal property. The term "service
warranty" does not include contracts or agreements to repair, maintain, or replace
tangible personal property if such property when sold at retail in this state would not
be subject to the tax imposed by this chapter, nor does it include such contracts or
agreements covering tangible personal property which becomes a part of real
property.

DISCUSSION
The peering, cross connect, and managed router services provide for the transmission of data only,
and do not include the sale or rental of any tangible personal property or real property. Therefore,
the Department agrees with Taxpayer’s assertions that these services are not subject to sale and use
tax under Chapter 212, F.S. However, these services are communications services under Chapter
202, F.S. The term “communications services” is defined as the routing of voice, data, audio, video,
or any other information or signals through electronic or other medium regardless of the protocol
used. See Section 202.11(2), F.S. Therefore, Taxpayer’s peering, cross connect, and managed
router services are communication services and would therefore be subject to the communications
services tax.
Based on the information available, the managed services constitute the sale of a service warranty.
Taxpayer’s original request for technical advice stated in part that it “maintains the equipment their

clients need to do business.” Pursuant to s. 212.0506(3), F.S., a service warranty “means any
contract which indemnifies the holder of the contract for the cost of maintaining, repairing, or
replacing tangible personal property.” Rule 12A-1.105(1)(b), F.A.C., reiterates the definition of
“service warranty” as provided by the statute and further adds the statement “whether or not the
contract provides for the furnishing of parts.” The facts do not indicate whether parts are provided
as part of the maintenance, but pursuant to Rule 12A-1.105(1)(b), F.A.C., this fact is irrelevant to
our determination. According to the facts as presented by Taxpayer, its customers purchase
managed services for the purpose of maintaining equipment. Therefore, the sale of these services is
subject to sales and use tax under Chapter 212, F.S., as the sale of a service warranty.
The Department agrees with Taxpayer that the colocation services, consisting of the lease of real
property used for storage of a customer’s equipment, and the sale of tangible personal property,
such as the cages, cabinets, and racks, are subject to sales and use tax under Chapter 212, F.S.
Section 212.031(1)(a), F.S., provides that every person engaging in the business of renting, leasing,
letting, or granting a license for the use of any real property is exercising a taxable privilege.
Section 212.05, F.S., provides that every person who engages in the business of selling tangible
personal property at retail in this state is exercising a taxable privilege. These privileges are taxed
at a rate of 6 percent of the sales price of the item of tangible personal property, or the total rent or
license fee charged for the use or occupancy of the real property. See Sections 212.031(1)(c) and
212.05(1)(a)1.a., F.S. In addition, the county in which the transaction occurs may levy a local
discretionary surtax, which would also be calculated based on the sales price or total rent or license
fee. See Sections 212.054 and 212.055, F.S.
CONCLUSION
The peering, cross connect, and managed router are not subject to sales and use tax under Chapter
212, F.S. The colocation services and sales of tangible personal property are subject to sales and
use tax under Chapter 212, F.S. The managed services are subject to sales and use tax under
Chapter 212, F.S., as the sale of a service warranty. The peering, cross connect, and managed
router services are subject to communication services tax under Chapter 202, F.S.
This response constitutes a Technical Assistance Advisement under Section 213.22, F.S., which is
binding on the Department only under the facts and circumstances described in the request for this
advice as specified in Section 213.22, F.S. Our response is predicated on those facts and the specific
situation summarized above. You are advised that subsequent statutory or administrative rule
changes, or judicial interpretations of the statutes or rules, upon which this advice is based, may
subject similar future transactions to a different treatment than expressed in this response.
You are further advised that this response, your request and related backup documents are public
records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions of
Section 213.22, F.S. Confidential information must be deleted before public disclosure. In an
effort to protect confidentiality, we request you provide the undersigned with an edited copy of your
request for Technical Assistance Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to identification of the taxpayer. Your
response should be received by the Department within 15 days of the date of this letter.
Sincerely,

Tammy S. Miller
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 488-9669
Ctrl # 35805