If an out-of-state software company places an unstaffed backup server computer in Texas, does merely owning that computer create nexus requiring the company to collect and remit Texas sales tax?

Plain-English summary

A New Hampshire software development and sales company that delivers its products and services entirely over the Internet was considering placing a computer in Texas purely as a backup server -- a failover machine to kick in if the company's primary server back in New Hampshire went down. The company would have no employees in Texas; it planned only to hire an outside Internet company (likely Texas-based) to handle maintenance and repairs on the backup machine as needed. The company asked whether this arrangement would create Texas nexus for sales tax purposes.

The Comptroller's answer was direct and unqualified: yes, ownership of the computer alone is sufficient to establish nexus. No employees, no active use of the machine (it's just a backup), and no owned maintenance staff are needed to trigger the nexus determination -- simply owning physical equipment (the server) located in Texas is enough. As a result, the company would be required to obtain a Texas sales tax permit and collect and remit Texas sales tax on its sales to Texas residents. The letter also flagged Rule 3.308 on computer software as the relevant substantive rule for how the company's software products themselves would be taxed once nexus is established.

What this means for you

Out-of-state software, SaaS, and Internet-delivered service companies

Placing ANY owned physical equipment in Texas -- even a passive backup server with no staff and no active daily use -- can be enough to create nexus under this letter's reasoning. If you're evaluating disaster-recovery or redundancy infrastructure in Texas, factor in the sales tax registration and collection obligations that come with it, not just the technical benefits.

Companies considering third-party colocation or managed hosting instead of owned equipment

This letter addressed ownership of a computer specifically -- it may be worth exploring whether a third-party-owned hosting/colocation arrangement (rather than your own owned hardware) changes the nexus analysis, since this letter doesn't address that scenario directly.

Accountants and tax professionals advising remote/Internet-based businesses

A clean, early (1999) example of physical-presence nexus being triggered by minimal owned infrastructure -- useful groundwork for any client weighing where to place servers, especially before considering how post-Wayfair economic nexus rules may have separately expanded a company's Texas tax obligations regardless of physical presence.

Common questions

Q: Does an out-of-state company need Texas employees to have nexus in Texas?
A: No -- this letter confirms that owning a computer physically located in Texas, with no employees there, is sufficient by itself.

Q: Does it matter that the server is just a passive backup, not actively used?
A: No, the letter draws no distinction based on the server's active vs. backup role -- ownership of the physical equipment in Texas is what matters.

Q: What obligations follow once nexus is established?
A: The company must obtain a Texas sales tax permit and collect/remit Texas sales tax on sales to Texas residents.

Q: Can I rely on this letter for my own company's server placement decision?
A: No. It is based on the specific facts presented and can only be relied on by the taxpayer to whom it was issued -- and note this is a 1999 letter that predates later nexus-law developments (including economic nexus rules), so confirm current law before relying on it.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.308 (computer software)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9904359L

Original ruling text

April 26, 1999

Dear Mr. **:

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

"We are a software development and sales company located in New Hampshire. Our
products and services are delivered over the Internet. We are contemplating
locating a computer in the ** area to act as a back-up server in
case our primary computer, located here in New Hampshire, fails.

This back up server will be connected to telephone lines. We will not have any
employees in Texas, but will engage an Internet company, probably in Texas, to
provide maintenance and repairs when needed. My question is whether having this
back up server in Texas creates a "Nexus" for sales tax purposes and thus
whether we would be required to collect and remit Texas Sales Taxes."

Response: Your ownership of a computer in Texas will be sufficient to
establish Nexus and require your firm to collect Texas tax on sales to Texas
residents. You may download an application for a sales tax permit through our
Window on State Government web site at
. Rule 3.308 on
software is at .

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