Does hosting a web page on a server located in Texas create Texas sales tax nexus, and is server space itself a taxable service?

Plain-English summary

Someone asked the Comptroller to clarify an earlier letter that discussed when a company hosting web pages on a Texas server has nexus (a tax presence) in Texas. The requester argued that because a web page can move between servers, tax situs shouldn't turn on where the server physically sits, and asked whether merely paying to reserve space on a server would count as a taxable lease/rental of the server itself.

The Comptroller's answer draws two distinct lines:

1. Nexus: An individual or company that owns, leases, or rents a server physically located in Texas has nexus in Texas — because that's substantial tangible property in the state. That party must then collect Texas tax on taxable sales (including data processing services) made to Texas residents through the server. But out-of-state residents whose only Texas connection is having their own web site hosted on someone else's Texas server are not considered to be doing business in Texas themselves.

2. Taxability of server space: Buying space on a server (web hosting) is a purchase of a taxable data processing service under Rule 3.330 — regardless of the nexus question above. However, an out-of-state customer who doesn't derive the benefit of the hosting service in Texas can purchase it Texas-tax-free.

What this means for you

Web hosting companies

If your servers are physically located in Texas, that alone creates Texas nexus, and you must collect Texas sales tax on taxable sales (including hosting/data-processing fees) to Texas customers. Note the subject line's original title flags a later statutory change (a 20% exemption on data processing charges effective October 1, 1999) that postdates this 1998 letter — verify the current exemption percentage before relying on this for present-day billing.

Businesses buying web hosting from a Texas-based provider

Paying for server space is a taxable data processing service purchase. If you're an out-of-state business that doesn't benefit from the hosting service in Texas, you may be able to buy it tax-free — but simply having your web site on a Texas server doesn't, by itself, make YOU liable for Texas nexus.

Common questions

Q: Does hosting my website on a Texas server make my out-of-state business subject to Texas tax?
A: No, per this letter — out-of-state residents with no other Texas presence beyond a web site on a Texas server are not considered to be doing business in Texas.

Q: Is web hosting/server space itself taxable?
A: Yes, per this letter — it's a taxable data processing service under Rule 3.330, though out-of-state buyers who don't benefit from it in Texas can buy it tax-free.

Q: Does owning a server in Texas create nexus?
A: Yes, per this letter — owning, leasing, or renting a server in Texas is substantial tangible property that creates nexus, requiring collection of Texas tax on taxable sales made through that server.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.330 (Data Processing Services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9806518L

Original ruling text

June 2, 1998

Dear **:

Thank you for your recent letter which is restated in part with response below.

Regarding document #9802118L in your , can you clarify the
statement, "Naturally, if the Texas server is owned, leased, or rented by the
vendor, the vendor would have nexus in Texas and would be required to collect
tax on any taxable sales made to Texas residents."

In your discussion, you state that tax situs should not be determined by the
location of the server since a web page can be moved from server to server.
However, in maintaining a web page on a server, you may be paying a fee to
reserve space on that server. Would this fee qualify as a lease or rental of
the server thus requiring the vendor to collect sales tax?

Response: An individual that owns, leases or rents a server in Texas has nexus
in this state by virtue of having substantial tangible property in Texas. The
individual selling data processing service and other taxable items to Texas
residents through that server is required to collect Texas tax. Out-of-state
residents with no presence in Texas other than a web site on a Texas server are
not considered to be engaged in business in Texas. The purchase of space on a
server is a purchase of a taxable data processing service under Rule 3.330.
Out-of-state residents not deriving benefit of the service in Texas may buy the
service Texas tax free.

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. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division