For an internet service provider selling email, web hosting, CGI access, secure server access, and disk space, which charges are taxable Texas data processing/telecommunications services, and is an out-of-state customer's billing address enough to avoid Texas tax?

Plain-English summary

An internet service provider asked the Comptroller a long list of questions about how its various services are taxed in Texas, particularly for customers located outside the state. This file contains two letters: an earlier one (July 15, 1997) answering ten specific questions, and a reconsideration (July 23, 1997) revisiting two of those answers after further discussion.

Storing/hosting is data processing; email is telecommunications. Tax Code § 151.0035 defines data processing to include computerized data/information storage, so hosting web pages and storing customer data on a server is a data processing service. Email, by contrast, is classified as a telecommunications service -- and telecommunications services that originate outside Texas are not subject to Texas sales tax.

Billing address is never enough on its own. For data processing services (web hosting, CGI access, secure server access, additional disk space), § 151.330(e) exempts services performed for use outside Texas, but § 151.054(a) presumes gross receipts are taxable unless the seller accepts a properly completed resale or exemption certificate. Critically, a customer's billing address -- whether an individual's mailing address or a business's corporate headquarters location -- is not sufficient to prove the service's benefit is used exclusively outside Texas, even for a business with locations both inside and outside Texas. Rule 3.330(f) governs how to determine the service's actual benefit location, and the provider needs a properly completed exemption certificate (§ 151.054(c)) to be relieved of liability.

Fee-by-fee breakdown from the original letter:

• Set-up fees for taxable services are taxed the same as the underlying service, but separately stated domain-name-registration charges are not taxable.
• Email-only account charges are exempt when the underlying telecommunications service originates outside Texas.
• Monthly/annual web hosting fees, CGI-access fees, secure-server-access fees, and additional disk-space charges are all data processing services -- taxable regardless of billing address, absent a proper exemption certificate.
• A multi-state exemption's required language may be reproduced on a business's registration/application form instead of the standard Texas Exemption Certificate, but the customer's signature is still required.

The July 23 reconsideration reaffirmed that charges for hosting web pages on a Texas server are subject to Texas sales tax unless a properly completed certificate is accepted by the seller, and again stressed that a customer's address alone doesn't establish the out-of-state benefit location required by Rule 3.330(f).

What this means for you

Internet service providers and web hosting companies

Separate your email offering (telecommunications service, exempt if it originates outside Texas) from your hosting/data-storage/CGI/server-access offerings (data processing services, taxable absent a proper exemption certificate) -- they're taxed under different rules. Don't rely on a customer's billing address alone to treat any of these as out-of-state and exempt; collect a signed exemption certificate instead.

Multi-location business customers of ISPs

If you want an out-of-state exemption on data processing services, your corporate headquarters address isn't enough -- you'll need to sign a proper exemption certificate (or equivalent certified language on a registration form) addressing where the service's benefit is actually used.

Accountants and tax professionals

This letter is a clear split-authority illustration: email's tax treatment turns on telecommunications-service-origination rules, while hosting/CGI/disk-space services turn on data-processing-service benefit-location rules under Rule 3.330(f) -- don't conflate the two frameworks even though both can involve the same customer and invoice.

Common questions

Q: Is email itself a taxable data processing service?
A: No -- per this letter, email is classified as a telecommunications service, and telecommunications services originating outside Texas are not subject to Texas sales tax.

Q: Is web hosting a taxable data processing service?
A: Yes, per this letter -- hosting a website on a server is a taxable data processing service.

Q: Is a customer's out-of-state billing address enough to exempt data processing charges?
A: No, per this letter -- that's true even for a business with headquarters outside Texas or locations both in and out of the state; a proper exemption certificate is required.

Q: Are domain-name registration charges taxable?
A: No, per this letter, when separately stated from other setup fees.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0035 (data processing service definition)
• Tex. Tax Code § 151.330(e) (exemption for services used outside Texas)
• Tex. Tax Code § 151.054(a), (c) (taxable-receipts presumption and good-faith exemption certificate relief)
• 34 Tex. Admin. Code Rule 3.330(f) (determining service benefit location)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9707570L

Original ruling text

July 23, 1997

Dear ***:

As you requested in our telephone conversation of July 23, 1997, I have
reconsidered my response to issue number 8 of your letter of June 23, 1997
regarding server space sold to individuals with mailing addresses at locations
outside Texas. I have also discussed the issue with several coworkers.

There is no question that a data processing services occurs when your client
stores a customer's data or information on their server. Tax Code Section
151.0035 defines data processing to include computerized data and information
storage. The question is whether the sale of the service is exempt from Texas
tax.

Tax Code Section 151.330(e) provides an exemption from sales tax for services
that are performed for use outside the State of Texas. Tax Code Section
151.054(a) states the presumption that the gross receipts of a seller are
presumed to be subject to sales tax unless a properly completed resale or
exemption certificate is accepted by the seller.

Accordingly, charges for hosting web pages on a Texas server are subject to
Texas sales tax unless a properly completed certificate is accepted by the
seller.

In your facsimile letter of July 23, 1997, you asked for further discussion of
my response to issue 9 in your letter of June 23, 1997. Again, the customer's
address is not sufficient. The customer takes responsibility for self
assessing and remitting appropriate tax when it issues a properly completed
certificate to your client. Please refer to Rule 3.330(f) for purposes of
determining service benefit location.

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

July 15, 1997

Dear ***:

Thank you for your recent letter. Your facts are included by reference. Your
questions are restated with responses below.

1. Are the set-up fees subject to Texas sales and use tax?

Response: Charges for setting up accounts related to taxable services are
taxable in the same manner as the service itself. Separately stated charges
for establishing domain names are not subject to sales tax.

2. For those customers which choose to have an E-mail only account (i.e.,
   simplest
   package option) are these charges subject to Texas sales and use tax, if the
   customer
   resides outside the state of Texas?

Response: Email is a telecommunications service. Telecommunications services
that originate outside Texas are not subject to sales tax.

3. Are the monthly and annual fees for hosting a website considered a taxable
   service
   for purposes of Texas sales and use tax if the customer resides outside the
   state of
   Texas.

Response: Hosting a website on a server is a taxable data processing service.
The billing address is not sufficient to show that the customer receives
benefit of use exclusively outside Texas. The client should obtain an
exemption certificate in keeping with subsection (f) of the enclosed Rule
3.330.

4. Is a separately incurred fee (i.e., separate from the monthly flat-fee or
   annual fee) for CGI access subject to Texas sales and use tax if the customer
   resides outside the
   state of Texas.

Response: Use of a mechanism on a website to count the number of individuals
viewing the website is a data processing service. The billing address is not
sufficient to show that the customer receives benefit of use exclusively
outside Texas. The client should obtain an exemption certificate in keeping
with subsection (f) of the enclosed Rule 3.330.

5. Is a separately incurred fee for secure server access subject to Texas
   sales and use tax if the customer resides outside the state of Texas.

Response: This constitutes a data processing service. Please refer to the
response to question 4.

6. Is the purchase of additional disk space subject to Texas sales and use tax
   if the
   customer resides outside the state of Texas.

Response: This constitutes a data processing service. Please refer to the
response to question 5.

7. Would either of the future services discussed above be considered taxable
   services for purposes of Texas sales and use tax if the customer resides
   outside the state of Texas.

Response: This constitutes a data processing service. Please refer to the
response to question 6.

8. Is the customers billing address adequate support to substantiate under
   audit that the out-of-state individual, or out-of-state company, should not be
   subject to Texas sales/use tax.

Response: No.

9. Is the business customers billing address or location of corporate
   headquarters adequate support to substantiate under audit that a business
   customer that has locations both within and outside of Texas should not be
   subject to Texas sales/use tax.

Response: No.

10. To the extent that a multi-state exemption is necessary, can the
    information be captured in an electronic version as a question on the
    registration/application form. It is not necessary for the business customer to
    complete the Texas Exemption Certificate.

Response: The language from the exemption certificate may be reproduced on the
registration/application form. However, a signature is necessary.

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