Does equipment like routers, servers, and hubs used by an Internet service provider to deliver service qualify for Texas's manufacturing sales tax exemption?

Plain-English summary

An Internet service provider asked whether the equipment it uses to run its service -- routers, servers, hubs, and similar gear -- qualifies for Texas's manufacturing sales tax exemption. The Comptroller said no: that equipment is taxable at the time of purchase.

The reasoning is simple. The manufacturing exemption is built around Tax Code Section 151.318(d)'s definition of "manufacturing" as producing tangible personal property -- starting materials and ending with a finished physical product. An ISP isn't making a physical product; it's providing a service (getting data from one place to another, hosting a website, and so on). Because there's no tangible personal property being produced, the equipment used to provide that service falls outside the exemption entirely, regardless of how essential the equipment is to running the business.

What this means for you

Internet service providers and other service businesses

If your business's core output is a service rather than a physical product, the equipment you buy to deliver that service -- computers, networking gear, servers -- is ordinary taxable business equipment. The manufacturing exemption doesn't extend to computer/networking infrastructure just because it's essential to operations; it only reaches equipment used to physically produce goods for sale.

Accountants and tax professionals

This letter is a clean, narrow application of the "production of tangible personal property" test in § 151.318(d): the equipment analysis turns entirely on what the business's output is (a service vs. a physical product), not on how sophisticated or costly the equipment is.

Common questions

Q: Can an ISP claim the manufacturing exemption on its servers and routers?
A: No. Per this letter, that equipment is taxable at purchase because an ISP provides a service rather than producing tangible personal property.

Q: Would the answer differ if the equipment also stored the ISP's own website?
A: The letter's subject line notes the equipment is also used to "store website," but the Comptroller's answer doesn't distinguish between service-delivery uses -- providing Internet service or hosting a site are both services, not manufacturing.

Citations and references

Statutes:

• Tax Code § 151.318(d) (definition of "manufacturing" as production of tangible personal property)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9702163L

Original ruling text

February 25, 1997

Dear ***:

Thank you for your recent email regarding the tax treatment of equipment,

routers, servers, hubs, etc., used by an Internet service provider (ISP) in

the provision of their service. You specifically asked if the equipment

qualified for the manufacturer's exemption in the Tax Code.

Equipment used by Internet service providers in the provision of their service

is taxable to them at the time of purchase. The equipment cannot qualify for

the manufacturer's exemption because ISPs are providing a service rather than

producing tangible property.

Tax Code Section 151.318(d) defines manufacturing as follows:

In this section, "manufacturing" includes each operation beginning with the

first stage in the production of tangible personal property and ending with the

completion of tangible personal property having the physical properties

(including packaging, if any) that it has when transferred by the manufacturer

to another.

The Tax Code and rules are available through our web site at

. After accessing the web site, you should select

"Texas Taxes." You will find both the Tax Code and rules under the menu

heading "Tax Information."

This opinion is rendered 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. 3-4680. The direct line is

512/463-4680. You may also write to Tax Policy, Comptroller of Public

Accounts. My Internet address is .

Sincerely,

Al Van Allen

Tax Policy Division