Can a SaaS logistics company buy the cloud hosting services it uses to run its software tax-free under Texas's resale exemption, since it charges customers a monthly access fee?

Plain-English summary

A company runs web-based, cloud-hosted transportation-logistics software — shipment tracking, freight payment, fleet accounting, supply chain management — and charges each customer a monthly access fee, which it correctly taxes as a data processing service. To run that software, the company itself buys cloud hosting (virtual servers, database software, storage, analytics, security) from a cloud provider, and pays Texas sales tax on those purchases too. The company asked whether it could instead buy those cloud services tax-free under the resale exemption, arguing the cloud costs are effectively passed through to customers based on their usage.

The Comptroller said no. Texas's resale exemption only applies when you buy something for the specific purpose of reselling it, in the same form, as a taxable item to your customer — not merely because the purchase helps you perform a contract or ends up baked into your pricing. Here, the company doesn't resell "cloud services" to its customers; it uses the cloud services internally to host and run its own software, and what it actually sells to customers is a data-processing service (access to the logistics platform). The company also hadn't shown that specific customer usage directly generated its cloud services bill, undercutting the "we're just passing this through" argument. Since the input (cloud hosting) and the output (a data-processing/SaaS service) are legally distinct things, buying the input isn't a "sale for resale" of the output.

What this means for you

SaaS and cloud-software companies

Buying underlying infrastructure (hosting, storage, servers) to run your own platform generally does NOT qualify for the resale exemption just because you charge customers to use the platform. Texas draws a hard line between "reselling a taxable item in the same form" and "using a taxable item to perform your own service" — and courts have specifically rejected the argument that "I needed this to perform my contract with my customer" is enough (Delta Air Lines v. Combs).

Accountants and tax professionals

This ruling is a clean illustration of the § 151.006(a)(1) vs. (a)(5)/(a)(6) distinction: "purpose of reselling" (resale exemption) is narrower than "purpose of performing a contract" (which does NOT qualify for resale treatment on its own). If a client wants to claim resale on infrastructure inputs, look for documentation tying specific customer usage directly to the specific charges — generalized cost allocation isn't enough, per this ruling.

Cloud providers and resellers

If you're structuring a cloud/hosting resale arrangement to pass the resale exemption through the chain, the paper trail matters: the Comptroller specifically faulted the taxpayer for lacking documentation from its own cloud provider tying customer-level usage to the invoiced charges.

Common questions

Q: Why doesn't charging customers based on usage make this a resale?
A: Because the company still didn't show that specific customer usage generated the specific cloud-service charges, and more fundamentally, it isn't reselling "cloud services" to customers in the same form — it's selling them a data-processing/logistics service that happens to run on cloud infrastructure.

Q: Does this mean the company is taxed twice on the same transaction?
A: No — these are two separate, independently taxable transactions: the company pays tax on its own cloud-hosting purchase (an input), and separately collects tax on its data-processing fee from customers (its output). Texas taxes both because neither exemption applies to convert one into a pass-through of the other.

Q: Does this ruling apply to my SaaS or cloud-hosting business?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts and documentation. A business with a genuine, documented resale arrangement (where a specific taxable item is resold unchanged) could reach a different result — consult a Texas tax professional about your own structure.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.0101(a)(12), § 151.0035 (data processing services)
• Tex. Tax Code § 151.302, § 151.006(a)(1), (5), (6) (resale exemption; resale purpose vs. performing a contract)
• Delta Air Lines, Inc. v. Combs, 318 S.W.3d 523, 525 (Tex. App.—Austin 2010, no pet.)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202411010L

Original ruling text

November 24, 2024

RE: Private Letter Ruling No. 20210226061035

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 Feb. 22, 2021 as well as multiple additional information provided as of Aug. 19, 2024. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on whether your client’s purchases of cloud computing services qualify for the resale exemption.

Facts Presented

** (Taxpayer) provides services it refers to as transportation logistics solutions. The services are provided via web-based software modules stored in the cloud (Online System). The modules perform several transportation and logistics related functions including individual shipping, shipment tracking, freight payments and fleet accounting, and full supply chain management.

Each of Taxpayer’s customers has its own database of data, activities, and functions within the Online System. These databases populate into the module that corresponds to the customer’s needs, allowing Taxpayer to provide its transportation logistics services.

Taxpayer charges its customers a monthly fee for access to its logistics services provided through the Online System. Taxpayer collects and remits Texas sales tax on this charge as data processing services.

To provide its services, Taxpayer purchases cloud services for the hosting and storage of the Online System and customer databases from an authorized reseller of cloud services (Cloud Provider). Taxpayer uses the services to install and operate its Online System on cloud servers to provide the require shipping tracking, freight payment, fleet accounting, and supply chain management information to its customers.

The Cloud Provider invoices Taxpayer monthly and lists line-item charges for each of the cloud services, including access to virtual servers, database software, data storage, analytics, security, and software development tools. Taxpayer pays Texas sales and use tax on its purchase of cloud services as data processing services.

Taxpayer states the charges it pays for the cloud services are generated based on its customers’ use of the Online System. Taxpayer therefore contends the cloud services are purchased for resale to its customers.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Can Taxpayer purchase the cloud services used to host and operate its Online System tax free for resale?

Ruling: No.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term taxable item includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Data processing services are included in the list of services subject to sales and use tax. Section 151.0101(a)(12) (Taxable Services).

Data processing includes word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation. Section 151.0035. The cloud services purchased by Taxpayer are services for the computerized storage and manipulation of data and are taxable as data processing.

Taxable items that are purchased for resale are exempt from sales and use tax. Section 151.302 (Sale for Resale). A “sale for resale” means a sale of tangible personal property or a taxable service that is acquired for the purpose of reselling it as a taxable item as defined by Section 151.010 in the normal course of business in the form or condition in which it is acquired or as an attachment to or integral part of other tangible personal property or taxable service. Section 151.006(a)(1) (Sales for Resale).

To satisfy the resale exemption in Section 151.006(a)(1), it is not enough that the taxable item is purchased for the purpose of performing a contract with the customer. Delta Air Lines, Inc. v. Combs, 318 S.W.3d 523, 525 (Tex. App.—Austin 2010, no pet.); compare Section 151.006(a)(1) (“purpose of reselling”) with Section 151.006(a)(5) (“performing a contract”) and Section 151.006(a)(6) (“performing a contract”). Rather, the purpose of the purchaser must be to sell the taxable service to the purchaser’s customer.

Taxpayer has not shown it purchases the cloud services for the purpose of reselling those services to its customers as required by Section 151.006(a)(1). To provide its logistics services, Taxpayer purchases cloud services from the Cloud Provider to host and operate its software applications. Taxpayer uses the cloud services to access and store data processed by the Online System and provide that information to its customers.

Taxpayer has made an allocation of the charges from its Cloud Provider for cloud services to its customers. However, Taxpayer’s documentation does not establish how customers’ use of the Online System generates the charges for cloud services. As Taxpayer purchased the cloud services for its own use to provide logistics services and Taxpayer has not provided information from Cloud Provider establishing that specific customer usage generates the charges for the cloud services, the cloud services are not purchased for the purpose of reselling them as required by Section 151.006(a)(1).

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. 20210226061035.

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.