Is a company that hosts a customer's cryptocurrency-mining machines in its facility — providing power, internet, physical security, and monitoring — providing a taxable data processing or security service under Texas law?

Plain-English summary

A company hosts its customer's cryptocurrency-mining hardware in its facility for an all-inclusive fee based on power usage. The customer owns the machines and controls them remotely; the host provides the building, electricity, temperature control, internet connectivity, help distributing mined currency to third-party pools, routine monitoring/maintenance, and physical security (locked, restricted-access facility). For an extra fee, the host also handles more complex repairs. The Comptroller ruled the core hosting service isn't taxable — but the repair add-on is.

Texas only taxes services that are specifically listed in its tax code, and this hosting arrangement doesn't fit either of the two categories the taxpayer worried about. It's not data processing, because the host never touches or accesses the data or internal processing running on the machines — it just provides power, space, and connectivity. That's different from "web hosting," which the Comptroller has previously ruled IS taxable data processing (STAR 201807010L), because in that earlier case the provider actually resold cloud computing resources it controlled. Here, the host has zero visibility into what the machines are doing. It's also not a security service, because Texas's security-service tax only applies to services that require a license under the Occupations Code (guard companies, alarm companies, private investigators, etc.) — physically locking a building and restricting access doesn't require that license, so it falls outside the taxable category even though it functions like security.

The one taxable piece: when the host actually repairs or replaces a malfunctioning machine (a separately billed, higher-rate service under the sample contract), that IS taxable as "repair, remodeling, maintenance, and restoration of tangible personal property" — a distinct enumerated taxable service that doesn't depend on data access or licensing at all.

What this means for you

Crypto-mining hosts and colocation/data-center operators

Basic hosting/colocation — providing space, power, cooling, connectivity, and physical security for equipment you don't operate or access — is not automatically a taxable Texas service just because it resembles data processing or security. The dividing line is control: if you never access the customer's data or run their software, you're not providing data processing, and physically securing a building isn't a taxable "security service" unless it requires an Occupations Code security license.

Businesses billing separate repair/maintenance add-ons

Keep repair and maintenance charges for a customer's equipment separately identified — this ruling confirms that piece is taxable regardless of how the rest of the arrangement is characterized, so bundling it into an otherwise-nontaxable hosting fee could pull the whole fee into question.

Accountants and tax professionals

This is a useful contrast case to STAR 201807010L: the presence or absence of the provider's own access to/control over the hosted data or cloud resources is the dispositive fact for the data-processing analysis, not the word "hosting" itself. Also note the security-service test turns entirely on Occupations Code licensure requirements (§ 1702.101/.102), not on whether the service functions like security in a lay sense.

Common questions

Q: Why isn't providing internet access and monitoring "data processing"?
A: Because the host never accesses or manipulates the data or processing happening on the machines — it just supplies infrastructure (power, connectivity, physical space) while the customer retains full remote control. Actual computerized data storage/manipulation by the provider is what triggers the data-processing tax.

Q: The host restricts access and locks the building — why isn't that "security services"?
A: Because Texas's security-services tax is defined by reference to which activities require an Occupations Code security license (guard companies, alarm companies, etc.), and basic facility access control doesn't require that license.

Q: What part of this arrangement IS taxable?
A: Only the separately billed repair/replacement of the customer's machines — that's taxed as repair of tangible personal property regardless of how the rest of the hosting fee is treated.

Q: Does this ruling apply to my hosting or colocation business?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts. A hosting arrangement where the provider does access customer data, or where security functions require Occupations Code licensure, could come out differently.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010, § 151.009 (sales tax imposition; taxable item; tangible personal property)
• Tex. Tax Code § 151.0101(a)(5), (12), (14) (repair; data processing; security as taxable services)
• Tex. Tax Code § 151.0075 (Security Service)
• 34 Tex. Admin. Code § 3.330(a)(1) (Data Processing Services); § 3.333 (Security Services); § 3.292(a)(11), (b)(1) (Repair, Remodeling, Maintenance, and Restoration)
• Tex. Occ. Code § 1702.101, § 1702.102 (security licensing requirements)
• STAR Accession No. 201807010L (July 10, 2018)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202411011L

Original ruling text

November 15, 2024

RE: Private Letter Ruling No. PLR20220725080221

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 20, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of your business of providing hosting services for machines your customer uses for cryptocurrency mining.

Facts Presented

The relevant facts are based on the initial private letter ruling request, a video teleconference held on Oct. 19, 2022, and additional items including an example of a hosting agreement provided by email on Mar. 12, 2023.

** (Taxpayer) charges its customer an all-inclusive fee based on power usage to host cryptocurrency mining hardware machines (machines) in Taxpayer’s facility. Taxpayer’s customer owns the machines that are in the facility. Taxpayer’s customer has full control over the machines remotely. Taxpayer does not have access to the data or internal processing of the machines. In addition to providing a facility for the machines, Taxpayer provides:

electricity and temperature control;

installation of the customer’s machines in the facility;

internet network connection for the machines;

assistance with distribution of mined digital currency to third-party pools;

monitoring, maintenance, and repair of the customer’s machines as needed; and

physical security for the facility, including restricted access.

For an additional charge, Taxpayer also provides technical services for more complex diagnosis, repair, and replacement of machines.

Question, Ruling, and Analysis

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

Question: Are Taxpayer’s services subject to Texas sales and use tax?

Ruling: Taxpayer's machine hosting service is not a taxable service. Taxpayer’s repair of its customer’s machines is taxable repair and restoration of tangible personal property.

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). Section 151.009 (Tangible Personal Property) defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner. The term “taxable services” includes only those services listed in Section 151.0101 (Taxable Services). Data processing services and security services are enumerated taxable services. Sections 151.0101(a)(12) and (a)(14).

Data processing is defined as the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. It specifically includes word processing, payroll and business accounting, and computerized data and information storage or manipulation. The charge for data processing services is taxable regardless of the ownership of the computer. Data processing services do not include Internet access services or data processing services provided in conjunction with and incidental to the provision of Internet access service when billed as a single charge. Rule 3.330(a)(1) (Data Processing Services).

Taxpayer states it “hosts” machines for its customer. Website hosting has been determined to be a taxable data processing service. See STAR Accession No. 201807010L (July 10, 2018) (where a taxpayer purchased cloud computing resources in bulk and resold them to customers for a single web-hosting fee). Taxpayer does not provide taxable web hosting as it does not have access to the data or internal processing of the machines in its facility. It does not provide any cloud computing services to its customer. Taxpayer instead provides a secure location with internet connectivity and machine monitoring so that its customer can conduct business. This type of service is not taxable data processing.

Security services are defined as any service for which a license is required under Occupations Code, Section 1702.101 (Investigations Company License Required) or Section 1702.102 (Security Services Contractor License Required; Scope of License), and includes any service provided within the scope of the required license as an investigations company, guard company, alarm systems company, armored car company, courier company, guard dog company, security services contractor, private security officer, detective service, private investigator, locksmith company, or private security consultant company. Section 151.0075 (Security Service) and Rule 3.333 (Security Services).

Taxpayer provides physical security to protect its customer’s machines by locking and securing the building. Taxpayer also restricts access to the machines. However, providing this type of service does not require a license under the Occupations Code, Section 1702.101. Therefore, it is not providing taxable security services as contemplated in Section 151.0075.

The hosting service that Taxpayer provides to its customer is not data processing services or security services. The service it provides to its customer is not a service that is listed as taxable under Section 151.0101.

Repair, remodeling, maintenance, and restoration of tangible personal property is a taxable service. Section 151.0101(a)(5). Repair of tangible personal property is defined as mending or restoring to working order or operating condition tangible personal property that was broken, damaged, worn, defective, or malfunctioning. Rule 3.292(a)(11) (Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property). Service providers who repair, remodel, maintain, or restore tangible personal property belonging to another are providing taxable services. A service provider is a seller and must obtain a sales and use tax permit and collect and remit sales and use tax. Rule 3.292(b)(1).

Section 2.2.2 of Taxpayer’s sample hosting agreement indicates that “included in the monthly hosting services agreement is routine and normal operational duties to maintain and optimize servers at no additional charge. [Taxpayer] will offer additional technical services for more complex diagnosis, repair and replacement of servers pending written approval of [customer] at a rate of $75/hour.”

Based on Section 2.2.2, Taxpayer performs taxable repair of tangible personal property under Section 151.0101(a)(5) when it repairs and replaces its customer’s machines.

STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at https://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. 20220725080221.

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.