Is cloud-based website hosting a taxable Texas data processing service, and does it matter where the customer or the underlying cloud data center is located?

Plain-English summary

The Texas Comptroller ruled that a Texas web-hosting company's full range of services — hosting a website in the cloud, deploying code, monitoring site health, performing maintenance, and providing bandwidth/processing — are all taxable data processing services, whether the company keeps running its own Texas servers or migrates entirely to a third-party cloud platform, and regardless of whether the customer has Texas nexus or where the cloud provider's data center physically sits.

Website hosting has been treated as taxable data processing since a 2014 Comptroller decision, because deploying and storing a customer's website code on a server is "data processing" under Section 151.0035. Because the hosting company itself is located and does business in Texas, its gross receipts are presumed taxable in Texas regardless of where its customers are — customer nexus in Texas is irrelevant to sourcing; what matters is where the service is used. A customer can overcome that presumption only by giving the hosting company a valid exemption certificate claiming multistate benefit (Section 151.330(f)) or entirely-out-of-state use (Section 151.330(e)); the location of the third-party cloud data center providing the underlying compute resources doesn't affect this analysis at all. When tax is due, only 80% of the charge is taxable — Section 151.351 exempts 20% of every data processing charge. Separately, the hosting company can buy its own cloud-computing inputs from its cloud vendor tax-free by presenting a resale certificate, since it's reselling that server capacity as an integral part of its hosting service.

What this means for you

Web hosting, cloud infrastructure resellers, and SaaS platforms with a Texas presence

If your company is based/operating in Texas and resells cloud infrastructure as part of a service (hosting, deployment, monitoring), expect the whole bundle to be taxed as data processing at 80% of the charge, regardless of where your underlying cloud vendor's servers physically live. Customer Texas-nexus status doesn't change this — you need an actual exemption certificate from the customer to reduce or eliminate tax on a given sale.

Businesses buying website hosting or cloud-based services from a Texas vendor

If you use the hosted service partly or entirely outside Texas, you may be entitled to reduce or eliminate the tax by giving your vendor a multistate-benefit or out-of-state-use exemption certificate — but you're responsible for the tax on any Texas-benefiting portion if you claim the multistate exemption.

Accountants and tax professionals advising SaaS/hosting businesses

The key holdings: (1) data-processing sourcing turns on where the vendor is located and does business, not customer nexus (Section 151.054); (2) 20% of every data-processing charge is statutorily exempt (Section 151.351); and (3) a hosting reseller can use a resale certificate on its own cloud-infrastructure purchases (Section 151.302, Section 151.006(a)(1)) even though the end customer receives a "service" bundle, because the underlying server space is an integral, resold component.

Common questions

Q: Does moving from owned Texas servers to a third-party cloud platform change the tax treatment of website hosting?
A: No. All aspects of the service remain taxable data processing whether hosted on the company's own Texas servers or purchased cloud infrastructure, and the physical location of the cloud data center doesn't matter to the analysis.

Q: If my customer has no nexus in Texas, is my hosting charge to them exempt?
A: Not automatically. Nexus determines whether a state can require a business to collect tax; it doesn't determine sourcing of an already-taxable service performed by a Texas-based provider. The customer needs a valid exemption certificate (multistate-benefit or out-of-state-use) to reduce the tax.

Q: Can a hosting company buy its cloud-computing capacity tax-free?
A: Yes, when that capacity is resold as an integral part of a taxable hosting service, the hosting company may give its cloud vendor a resale certificate and buy that portion tax-free.

Q: Can another hosting company rely on this ruling?
A: No. It's binding on the Comptroller only for the specific taxpayer and facts presented and cannot be relied on by any other taxpayer.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101 (Taxable Services); § 151.0035 (Data Processing Service, definition)
• Tex. Tax Code § 151.330(e), (f) (out-of-state and multistate-benefit exemptions)
• Tex. Tax Code § 151.351 (20% data-processing exemption)
• Tex. Tax Code § 151.054 (gross receipts presumed taxable); § 151.302, § 151.006(a)(1) (sale for resale)
• 34 Tex. Admin. Code § 3.330 (Data Processing Services); § 3.285 (Resale Certificates)
• Comptroller's Decision No. 106,595 (2014) (website hosting is data processing)
• STAR Accession No. 200001990L (Jan. 18, 2000) (data processing occurs on deploy/store of customer data)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201807010L

Original ruling text

July 10, 2018

RE: Private Letter Ruling No. 2017010121

*, Taxpayer No. *

Dear ***:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[ENDNOTE: 1] We are responding to your request dated July 13, 2016, and your supplemental submission dated July 19, 2016. Detrimental reliance relief is provided in accordance with Rule 3.10 (Taxpayer Bill of Rights).

You requested guidance on the taxability of cloud-based website hosting services sold to in-state and out-of-state clients.

Facts Presented

*** (Taxpayer) is a Texas corporation that provides website hosting services. Taxpayer provides its services using its own servers in Texas. Taxpayer began decommissioning those servers as part of a plan to offer its services using cloud-computing resources purchased from COMPANY A. In time, Taxpayer’s services will be entirely cloud based.

Cloud computing is a type of internet-based service that provides shared processing resources and data to computers and other devices on demand. Taxpayer purchases the cloud-computing resources offered through COMPANY A’s cloud-services platform, PRODUCT A.

PRODUCT A is a platform for building, deploying, and managing cloud-based applications and services through a cluster of COMPANY A data centers. PRODUCT A’s cloud services in the United States use four regional data centers, including one in Texas. The terms of Taxpayer’s agreement with COMPANY A do not specify which of these four data centers provides the resources purchased.

Taxpayer purchases cloud-computing resources in bulk and resells them to host clients’ websites. Taxpayer charges clients a single web-hosting fee for its services. This fee covers Taxpayer’s services of advising clients of website hosting options, configuring cloud resources to accept the client’s website code, deploying that code to the cloud, monitoring the website’s health, and performing any necessary maintenance. Taxpayer plans to continue charging clients a single web-hosting fee under its cloud-based structure.

Taxpayer currently collects sales tax on its sales of website hosting services. Taxpayer states that a comptroller auditor previously advised that its services are data processing services and all sales to in-state and out-of-state customers are taxable because the websites reside on Taxpayer’s servers in Texas.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: For clients with nexus in Texas, which of the following aspects of Taxpayer’s services are taxable services?

Hosting a website on the cloud;·

Deploying website code to the cloud;·

Monitoring the website’s health;·

Performing any maintenance required; and·

Cloud-based bandwidth, processing, routing, etc.

Ruling One: All of Taxpayer’s services are taxable as data processing services. Taxable services are subject to tax in Texas unless an exemption applies. Section 151.330(e) and (f) (Interstate Shipments, Common Carriers, and Services Across State Lines) exempt taxable services sold for use entirely or partially out of state, respectively. Whether a client has nexus in Texas does not determine where the client uses the service.

Question Two: For clients without nexus in Texas, which aspects of Taxpayer’s services are taxable services?

Ruling Two: All of Taxpayer’s services are taxable as data processing services. Taxable services are subject to tax in Texas unless an exemption applies. Section 151.330(e) and (f) exempt taxable services sold for use entirely or partially out of state, respectively. Whether a client has nexus in Texas does not determine where the client uses the service.

Question Three: Is the location of a COMPANY A data center that provides the cloud resources relevant to the answers to Questions One and Two?

Ruling Three: No. The location of a third-party data center that provides the cloud resources is not relevant to the rulings for Questions One or Two.

Analysis:

Website hosting services are taxable as data processing services. Comptroller’s Decision No. 106,595 (2014). Section 151.0101 provides a list of services subject to tax, including data processing services. Section 151.0035 defines a data processing service to include computerized data and information storage or manipulation. Rule 3.330 tracks this language. Data processing occurs when deploying and storing a customer’s data (e.g., website code) on a server. STAR Accession No. 200001990L (Jan. 18, 2000).

All gross receipts of a seller are presumed to have been subject to sales tax unless the seller accepts a valid resale or exemption certificate. Section 151.054(a). Sellers that accept resale or exemption certificates in good faith are relieved of their responsibility to collect and remit sales tax on transactions covered by the certificates. See Rule 3.285; Rule 3.287(d).

Section 151.330(e) exempts sales of taxable services performed for use outside Texas. Section 151.330(f) exempts services performed for use both within and outside Texas to the extent the service is for use outside Texas.

A multistate customer purchasing data processing services for the benefit of both in-state and out-of-state locations may give the service provider an exemption certificate claiming a multistate benefit. The customer claiming the exemption is responsible for the tax on that portion of the charge which benefits the Texas location. Rule 3.330(f)(3).

Because Taxpayer is located in Texas and provides a taxable service, its gross receipts are presumed taxable in Texas regardless of the customer’s location. Section 151.054. Taxpayer may overcome this presumption by accepting an exemption certificate asserting the multistate-benefit exemption under Section 151.330(f) or by asserting that its services are performed for use entirely outside Texas under Section 151.330(e). If Taxpayer accepts the exemption certificate in good faith, it will be relieved of its responsibility for collecting and remitting Texas sales tax on the transaction.

In addition, Section 151.351, in relevant part, exempts from tax 20 percent of the charge for a data processing service. When Texas tax is due, Taxpayer should only collect tax on 80 percent of the charge.

Question Four: By default, COMPANY A charges Taxpayer Texas sales tax for the cloud resources. Should Taxpayer present COMPANY A with a resale certificate because it resells the cloud resources?

Ruling Four: Yes. Taxpayer may purchase cloud-computing resources used to provide its service tax-free under the sale-for-resale exemption in Section 151.302.

Analysis:

Section 151.302 exempts from tax a “sale for resale.” Section 151.006(a)(1) defines a “sale for resale” to include sales of a taxable service to a purchaser who acquires the service for the purpose of reselling it with or as a taxable item in the normal course of business as an integral part of a taxable service. Rule 3.285(b)(1)(A) tracks this language. Sales for resale are not subject to tax when the purchaser provides a valid resale certificate to the seller. Section 151.302(a); Section 151.054(b); Section 151.104(b); Section 151.151; Rule 3.285(c)(1).

Taxpayer has the option of providing COMPANY A a resale certificate since it resells the cloud computing resources as an integral part of its website hosting service. See Sections 151.006(a)(1),151.302(a); Rule 3.285(b), (c)(1).

Taxpayer purchases cloud-computing resources from COMPANY A. When Taxpayer purchases these resources, it purchases the right to use a certain amount of space on servers in COMPANY A’s data centers. Use of this server space is what Taxpayer “resells” to customers based on their website hosting needs. It is an integral part of Taxpayer’s website hosting service. Accordingly, Taxpayer may provide COMPANY A a resale certificate and purchase the cloud-computing resources tax-free.

Comptroller’s Decisions and STAR documents cited are available on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010121.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.