Does a Texas Internet service provider owe sales tax on domain name registration fees or on a handling fee charged for helping a customer obtain a domain name?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered a question from a firm providing Internet services about whether fees related to obtaining a domain name are subject to sales tax. A domain name is an Internet "address" distributed by a quasi-governmental agency, which at the time charged $100 for the first two years and $50 for each additional two years. Customers could come to the firm for Internet services with or without already having a domain name, and the domain name remained the customer's property — usable even after the firm's services ended, and for purposes unrelated to those services. The firm sometimes charged a handling fee just for completing the paperwork needed to obtain a domain name, and it would also help people obtain domain names even when those people didn't buy any taxable data processing or telecommunication services from the firm.

The Comptroller held that the domain name fee is imposed on the customer (the purchaser/user of the domain name), not on the firm (the seller of Internet services). Because of that, a separately stated fee for the domain name licensing is not taxable, and a separately stated administrative handling charge for assisting customers with their domain name application is also not taxable. The reasoning was that neither fee is part of the sales price of any taxable personal property or taxable service.

The letter notes that this opinion is based on the facts presented, and that additional or different facts could change the outcome.

What this means for you

Internet service providers who help customers register domain names

If you charge customers a separately stated fee that simply passes through or licenses the domain name registration cost, and you also separately state any handling or paperwork fee for helping obtain the domain name, this letter indicates neither charge is treated as taxable — because the domain name fee belongs to the customer, not to you as the Internet services provider.

Businesses that assist with domain names even without a services contract

The ruling covered a firm that would help people obtain domain names even when those people did not buy any taxable data processing or telecommunications services. The non-taxable treatment of the domain name fee and handling charge did not depend on the customer also purchasing taxable services.

Accountants and tax professionals

Keep in mind this letter turns on the fees being separately stated and on the domain name fee being a pass-through charge tied to the customer's own property (the domain name), rather than being bundled into the sales price of a taxable service. If fees aren't separately stated, or if they end up folded into the price of taxable data processing or telecommunications services, the analysis could differ.

Common questions

Q: Is the domain name registration fee itself taxable?
A: No. The Comptroller found the fee is imposed on the customer, not on the Internet services provider, so a separately stated licensing fee for it is not taxable.

Q: Is a handling fee for helping a customer obtain a domain name taxable?
A: No, as long as it is separately stated. The letter states such an administrative handling charge "will not be taxable."

Q: Does it matter if the customer also buys taxable data processing or telecommunication services from the firm?
A: Based on the facts described, the firm helped some customers obtain domain names without those customers contracting for any taxable data processing or telecommunication services, and the non-taxable conclusion still applied to the domain name and handling fees.

Q: Can another business rely on this letter?
A: No. The letter states the opinion is based on the facts presented, and if there are additional or different facts, the opinion may change. STAR letters generally may be relied on only by the taxpayer to whom they were issued.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9511632L

Original ruling text

November 7, 1995

Dear ****:

Thank you for your letter of October 17, 1995, concerning the taxability of the
provision of domain names to Internet users. Your letter was forwarded to me
by Al Van Allen.

Your letter and our phone conversation of November 6 presented the following
facts.

A domain name is an Internet "address" distributed by a quasi governmental
agency. The agency charges $100 for the first 2 years and $50 for each
additional two years. A customer may approach your firm for Internet services
with or without having obtained the domain name. The domain name is the
property of your customer. The customer may continue to use the domain name
after termination of your services and may use it for purposes other than those
relating to your services. You may charge a handling fee for completion of the
paperwork required in obtaining the domain name. Your firm may assist in
obtaining domain names for others that do not contract for any taxable data
processing or telecommunication services.

The domain name fee is imposed on your customer (purchaser/user) and not your
film (seller of Internet services). The separately stated fee for licensing is
not taxable. A separately stated administrative handling charge collected for
assisting customers in their application for a domain name will not be taxable.
The fee is not considered a part of the sales price of any taxable personal
property or taxable service.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475- 0613. You may also write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division