No more charging sales tax on Website Hosting in Texas

no sales tax | Nov 25, 2011 10:25 PM
Actually, you don't ever charge sales tax to non-state residents (ie customers that don't have Nexus here). That would be a violation of the Commerce Clause of the US Constitution. However, your out of state customers may theoretically be responsible for remitting sales/use taxes for their purchase to their home state. You are not responsible for collecting that tax for them. If you're Amazon and have affiliates in every state, then some states have Amazon laws that cause those affiliates to trigger nexus and then Amazon has to collect sales tax which is remitted to those individual states (a nightmare of paperwork). Unless you have operations/property/etc that creates nexus in that remote state, you do not collect sales tax on behalf of that state, and Texas cannot charge sales tax for goods/services delivered out of state. Essentially, in most cases, you DO NOT collect sales tax to someone out of state. Get a letter ruling from the Comptroller's office, as that rep was simply wrong. You're right -- most of the time, they'll err on the side of "yes, you need to collect sales tax always" Generally, though, they're very polite and professional. Such a treat after dealing with state employees in NY.

Paul | Nov 26, 2011 9:11 AM
@Jamieson
Thanks for the info.
I still have not received a response from the state comptrollers office.  I might have to send another letter.  You are right, they are very polite. 

Jamieson Becker | Nov 26, 2011 2:33 PM
@Paul, no problem. You're smart to be cautious -- the TX state comptroller is pretty aggressive about sales tax (especially since it's really one of the only sources of revenue for the state, since only businesses making more than $1M pay any tax at all, and that's capped at 1%, and absolutely no individuals pay tax.) one more thought with regards to nexus: Texas held against a software developer in another state that selling software in Texas constituted nexus because the software was real property (albeit intangible) and the developer retained ownership and was only licensing it in Texas. Thus, the foreign corporation triggered nexus and had to collect sales tax to customers in Texas (remitted back to Texas comptroller), perhaps pay Texas franchise tax (apportioned to the amount of income generated in Texas), and comply with all other Texas laws. So, it makes me wonder: if I run a three person video game development house in LA, and sell games to all 50 states through Walmart or a distributor but (of course) retain Copyright on the software, do I have to file as a foreign corporation in every state in the Union? That would be beyond ridiculous. What if you are an author and you retain copyright on your book? Does that mean you, the author, now have nexus in 50 states, even though it's debatable whether you're actually even in business per se? Regulations run amok!

elisa | Dec 11, 2011 1:54 AM
well, I have been looking into this myself. Do you actually own the computers that your websites are hosted on or do you have a reseller type account setup with a hosting company like hostgator or godaddy? From what I have read seems that if you use a computer to host, you charge tax. If the sites are not hosted on computers/servers your company personally owns you dont charge tax.

I personally use a Texas based hosting company to host my clients sites. My hosting company DOES charge me tax. Should that same service be taxed again? I am thinking not. Then I come across the Texas Taxable Services page on the Texas Tax Info website:

Data processing
Using a computer for word processing, data entry, data production, or compilation, storage, and manipulation of information. Examples of data processing include check preparation, accounts payable or receivable preparation, and web site creation, storage and maintenance. Merely using a computer as a tool to help perform a professional service is not a data processing service.

Jamieson | Dec 11, 2011 12:00 PM
It's a bit more confusing than that. First, do not conflate hosting with web design. I'm not sure what the rules are with regards to pure web design, but they seem to be different from web hosting. Softlayer, for instance, would have to charge tax to any customer in Texas, period. It's a Texas company and the state of Texas absolutely has the authority to charge sales tax between Texas customers and vendors. Any Texas customer purchasing from a non-Texas vendor has a legal obligation to remit Use tax (not sales tax) directly to Texas. I'm not sure what mechanism there is in place to do so or what is involved there. Where it gets tricky is non-Texas customers purchasing from Texas vendors. Texas vendors, in the unique instance of web hosting, do not charge sales tax to non-Texas customers. More over, merely the act of having a website in Texas alone (which is technically property owned possibly by a foreign corporation) does not trigger nexus in Texas in the way that owning or leasing property, including servers, in the state of Texas would. (In the event that a non-Texas corporation has any interest in property in Texas, including license agreements for software -- those normally trigger nexus; website hosting are specifically set aside as not triggering nexus.) So what's nexus? If you are a foreign corporation with nexus in Texas (say it fast), then you have to: 1) file as a foreign corporation in Texas 2) pay Texas franchise tax for your apportioned income (ie what you made from Texas customers) 3) file a public information report 4) CHARGE sales tax to texas customers and remit it back to texas. In other words, let's say that you rent a server from Softlayer and you're in Nebraska and then you manage it for your customer, a small bank in Omaha. You would have triggered nexus in Texas at that point. If you didn't have any Texas customers, then your only real obligations would be to file a PIR explaining who runs your company and to file zero-tax-owed franchise tax return in Texas. Moreover, you would be legally responsible for paying use tax in Nebraska for the server you're leasing in Texas, depending on the laws in Nebraska. (I've never been there and really have no idea.) (FYI, franchise tax is the only tax levied on individuals or corporations in Texas, which has income tax specifically disallowed in the state Constitution. Franchise tax does not apply until your firm makes at least $1M gross. It starts at less than one percent and maxes out at one percent. Texas is one of the best business-friendly states, but because there are so few avenues for taxes, Texas is pretty strict, especially about sales tax.) Frequently, you can request help from state tax departments -- and sometimes, as we saw above, they err. On the side of caution, perhaps, but not usually on your side. The official way to get a real answer is to request a "letter ruling", which is an official, "yes, you have to pay tax in this circumstance, and here's the legal basis." That kind of letter is something that you can rely on, because if it's says you don't owe tax, then you can use that as a defense. Disclaimer: I'm not a lawyer or an accountant and this is all just my understanding and I don't know if any of it is actually true ;-). As with any important thing, please seek competent counsel and do your own independent research before embarking on any plan of action.

Paul | Dec 11, 2011 1:25 PM
Thanks for feedback Jamieson and Elisa

To answer your questions, I do physically own the server.  I just pay monthly colocation fees to my datacenter guy who has several cabinets he leases from Core Exchanged in Dallas.  He charges me sales tax on colocation which makes sense being that we are both Texas businesses.  But he did say he does not charge Sales Tax to out of state customers. 

Currently I have been charging sales tax to both in state ( naturally ) and out of state customers, just for Hosting.  I mailed in a letter to the state and still haven't received a response.  I am about to mail another letter. 

The worst part about this is Texas raised me to Quarterly Sales Tax Reports and Payments.  So money that should have not been paid to them has been.  Wondering if there is anyway to go about getting that money back and or credited back to me.

Jamieson | Dec 11, 2011 2:18 PM
I don't know if he should be charging you sales tax or not, but I believe so. I presume, based on your statements, that you are based in Texas yourself, but it wouldn't matter: you have property in Texas and thus you are effectively either a resident of Texas or a foreign business with nexus.

I don't know if this would be considered reselling. If you resell a product, you don't have to pay sales tax on the thing you are reselling. (Thankfully, this is what separates us from a European-style value-added tax, which essentially is a sales tax added at each stage in the supply chain! My guess is that you shouldn't be paying sales tax at this stage, since you are charging sales tax (for all relevant customers, ie Texas customers) at the next stage after you 'manufacture' the end-product, which is web hosting.

You should not be charging sales tax for hosting alone to out of state customers, in general, unless they have nexus in Texas because of some other reason (such as owning property here, having employees here, etc.) In state customers and foreign corporations (ie corporations doing business here, as defined by nexus) should always be charged sales tax. Buying something in another state does not consitute nexus.

Generally, sales tax reports are quarterly for almost all businesses. They're not too bad, but don't be late! Late fees are promptly levied by the Comptroller. These two taxes are two of the few sources of revenue for the state compared to most Blue states that tax everything and everything. California, for instance, has an 11% income tax (probably going to go up) and sales tax in Silicon Valley is 10.25%!

In summary, I would: STOP charging sales tax to out of state customers for web hosting. That's not correct according to my reading of the law. Call the Comptroller for an immediate, off the cuff (but not necessarily accurate and not legally binding) response from the generally knowledgeable and nice people they have there.

Also, don't worry about quarterly. I don't know what you mean about money that should not have been paid to them because of the date that you file the report. That's normal. Make sure your email address is correct, and they'll email you a few days before. Don't be late! Keep good records. If you go too long, the state will suspend your license, but it's reversible by paying late fees and filing all reports. Remember to file your PIR and no-tax-owed franchise tax return at the end of the year also for your business. (Might not apply to sole proprietorship, I'm not sure.)

I believe that your datacenter guy is not doing the right thing. He should be charging sales tax for colocation to out of state customers, because those customers are either renting or own property in Texas (ie the servers) and thus got nexus in Texas. Whether they do the rest of it -- file as a foreign corporation etc -- is up to them. It's unlikely that Texas will pursue them unless they've got lots of servers and lots of revenue, but they might pursue your datacenter guy for all that tax. (I.e., technically, HE owes that tax as well as late fees.) Probably if he just starts charging it now and then remits it from now on properly, then the state won't bother him about it. (Also, if we're talking a small amount of money, say a few hundred bucks, the state probably won't worry about it anyway, but better safe then sorry.)

Disclaimer: see above yadda yadda.

Paul | Dec 11, 2011 2:54 PM
@ Jamieson,
Thanks for your detailed responses and Analysis.  Monday I will call the state again to see if I can get a better answer about the hosting issue for out of state clients.

Jamieson | Dec 11, 2011 3:12 PM
@Paul this is some seriously confusing stuff. A lot of people in Texas could be helped out by getting the official word! good luck and let us know how it goes.

Paul | Dec 12, 2011 2:17 PM
@Everyone
Just got off the phone with the Texas State Comptrollers Office.
No Sales Tax for Web Hosting on out of state clients.
This came from a senor guy at the office.
I have updated this artcle with the latest info.

jamieson | Dec 12, 2011 2:55 PM
Awesome. Glad you talked to someone who had a clue!
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To sum up: the ONLY time as a Texas business that you would charge ANY sales tax to non-Texas residents and business is if they have nexus here. In general, the only way to get nexus here is to own OR LEASE real (tangible or intangible, such as software licensed to customers here) property here in Texas, or if you have employees here. If you lease property, including servers, in the state of Texas, then you have just gotten nexus. As a Texas business, you'd then charge sales tax to any customers renting servers from you.
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So you should never charge sales tax to non-Texas residents, in general, UNLESS they have nexus here or get nexus here as a result of your sale (ie server leasing).
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The confusion here lay in whether or not websites constitute real property that's owned by someone out of state. Clearly, they do -- but in this case, the legislature carved out a special exception for website hosting so that Texas stays competitive with other states that have hosting companies. You still would not charge sales tax for doing custom design work for customers in other states, and you generally would charge sales tax in the state of Texas whenever you transfer or lease real property to another customer. (standard disclaimer about not being an attorney or tax accountant applies)

Jeremy Thompson | Mar 1, 2012 12:54 PM
What if you rent servers say from Godaddy or Liquidweb that are outside of Texas and they do not charge you tax and you are hosting texas based websites on the servers out of state. Do I charge sales tax or not as I am just collecting the fees that I get charged and send it to the out of state company?

Paul | Mar 1, 2012 1:09 PM
Jeremy,
If your company is based out of Texas and your Customers are Based out of Texas, and you bill hosting to your customers, then yes you have to charge sales tax. Doesn't matter where the servers are located.  Al lthat matters is your customer's location in relation to you. 

Stephanie | Apr 14, 2012 11:59 AM
I live in Texas. My servers are in California which I resell from a company based in the UK. I do not pay tax to them for my server fees, am I required to pay tax to the state? I'm assuming that's what is called a "taxable purchase" on line 3. All of my clients are outside Texas so aren't being charged tax, but I do host a few personal sites on the space. Also, then, since I do webdesign and purchase graphics and such, would that also be a taxable purchase that I would owe tax on even though it was purchased from someone out of state? Am I totally overthinking all of this?! The taxes here are so confusing. 

Paul | Apr 14, 2012 2:08 PM
Stephanie,
The only thing that matters is where are you based out of, and where you client is based out of. It doesn't matter if the server is owned by you and colocated, rented by you and dedicated, or even if its in china.  Control of the service is by you and your business is located in Texas, so for any clients that are also based in Texas, or have established offices in Texas, you will have to charge them Texas Sales Tax ( 8.25%).  But if your clients are in another state, then you do not charge sales tax.  Its then up to the client to pay a use tax to their state, which would depend on if their state considers web hosting to be a taxable service.  Unfortunately for states, many businesses will not pay the use tax.  If the state ever audits your clients, they will look at all their expenses and determine what receipts were supposed to have a use tax paid.  If the Sales Tax is not itemized on the receipt / invoice, then the state will make them pay the use tax. 

So to summarize, if your clients are not located in Texas, then you do not charge sales tax for the hosting or any other services you may provide to them.

I played phone tag with the Texas State Comptrollers Office to get an definite answer on this, so I know its correct.

Neil | Jun 19, 2012 1:22 PM
Because it is considered a "Data Processing Service", only 80% of hosting charges are liable for sales tax. Your customers are essentially getting a 20% discount on the sales tax they owe. 

Paul | Jun 19, 2012 1:29 PM
@Neil
Thanks for the update.
They must have changed that recently.