Does a high-security facility that hosts customers' websites qualify as an 'internet data center,' making its equipment purchases exempt?

Plain-English summary

The Petitioner operates a 30,000-square-foot, purpose-built, fault-tolerant data center in Pearl River, NY, with ~20,000 sq ft of secure raised-floor space for servers that host customers' websites. It provides 24/7/365 uninterrupted internet access to customers' web pages and continuous internet-traffic management -- via monitoring (packet/checksum error checking), bandwidth/traffic problem determination, dynamic bandwidth and web-server expansion, and load balancing -- all under heavy physical security and full power/cooling redundancy. The Petitioner does not run its own websites there and is not in the retail business of selling internet access service. It asked whether it qualifies as an "operator of an internet data center" under the exemption in Tax Law 1115(a)(37)(i).

The Office of Counsel concluded that it does qualify:

• The exemption. Tax Law 1115(a)(37)(i) exempts machinery, equipment, and other specified tangible personal property sold to a person operating an internet data center in New York, where the property is located/installed in the center and is required for and directly related to providing internet website services for sale.
• Definition met. An operator of an internet data center is a person who (a) operates a facility specifically designed and constructed for a high-security environment to house servers on which customers' websites reside, and (b) provides there the website services of (i) uninterrupted internet access to customers' web pages in a secure environment and (ii) continuous internet-traffic management for those web pages. The Petitioner's secure, redundant facility and its four service categories satisfy this.
• The access-service caveat. An operator that is primarily engaged at the center in the retail sale of "internet access service" (Tax Law 1115(v)) is not treated as providing website services for sale. The Petitioner stated it is not primarily selling internet access.
• Result. Assuming it isn't primarily selling internet access, the Petitioner may claim the exemptions in Tax Law 1115(a)(37) (qualifying equipment) and 1115(y) (specified related services) for that facility.

What this means for you

Colocation / web-hosting data center operators

If you run a purpose-built, high-security facility that hosts other companies' website servers and deliver uninterrupted access plus continuous traffic management for their web pages, you can qualify as an internet data center operator -- and buy qualifying equipment (and related services) exempt from sales/use tax. This is a significant break on a capital-intensive build-out.

Don't be "primarily" an internet-access seller

The exemption is built for website-hosting services. If your center is primarily in the retail business of selling internet access (connectivity), you're outside the exemption. Keep your facility's role focused on hosting/website services.

Document the qualifying property and services

The exemption reaches property located in the center and directly related to providing the website services, plus specified related services (1115(y)). Map your purchases to those categories and keep records tying them to the qualifying facility.

Common questions

Q: Does a web-hosting data center get a sales-tax break on its equipment?
A: Yes, if it qualifies as an "internet data center" -- a purpose-built, high-security facility hosting customers' website servers with uninterrupted access and traffic management. Then qualifying equipment and related services are exempt.

Q: What disqualifies us?
A: Being primarily engaged at the center in the retail sale of internet access service. That takes you out of "internet website services for sale" and the exemption.

Q: Does running our own websites there matter?
A: The exemption is about providing website services to customers for sale. Here the operator hosted customers' sites and didn't run its own -- a clean fit.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1115(a)(37) (exemption for property used in an internet data center)
• Tax Law section 1115(y) (exemption for related services at an internet data center)
• Tax Law section 1115(v) (definition of internet access service)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-14(15)S
Sales Tax
July 2, 2014

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S121220C

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTED REDACTED REDACTED REDACTED REDACTED REDACTED REDACTED
REDACTED. Petitioner asks whether it qualifies as an “operator of an internet data center” at a
specified facility in New York pursuant to the exemption in Tax Law § 1115(a)(37)(i) for purchases
of qualifying tangible personal property for use in an internet data center.
We conclude that the Petitioner is an “operator of an internet data center” pursuant to
§ 1115(a)(37)(i) of the Tax Law with regard to the specified facility.
Facts
Petitioner operates a 30,000 square foot purpose-built, fault-tolerant data center in Pearl
River, New York (the “Facility”). The Facility includes approximately 20,000 square feet of
specifically designed, highly secure, raised floor data center space for the location of servers and
similar equipment that host internet web sites, as well as associated communications equipment and
other equipment needed to support the use, maintenance and operation of the Facility. Petitioner
uses the Facility to sell and service internet web applications for customers in the media and
entertainment, financial and insurance services, government and education, healthcare and
pharmaceutical, manufacturing and distribution, technology, direct marketing and professional
services. Petitioner does not operate its own website operations at the Facility.
Petitioner’s controls, operational policies and procedures are designed and deployed to
provide a highly secure environment for the location of internet data center hardware and software
that host internet web sites for its customers. Petitioner provides uninterrupted internet access to its
customers’ external and internal web pages and other customer applications 24 hours per day, 7
days per week, 365 days per year and continuous management of internet traffic for its customers’
websites and applications. To accomplish this, Petitioner delivers (i) specific monitoring services,
(ii) bandwidth and traffic problem determination services, (iii) dynamic bandwidth and web server
expansion services, and (iv) bandwidth and traffic load balancing.
According to Petitioner, “specific monitoring services” include what is known as “packet
error (transmission) checking.” During this process, data is transmitted from point to point in
groups (called "packets”) of data. A value, called a "checksum,” is calculated for each packet prior
to and after the packet is transmitted. If that checksum value is the same on both ends of the
transmission, then the packet was transmitted properly. Every packet transmitted is checked for
accurate transmission using a checksum calculation.

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TSB-A-14(15)S
Sales Tax
July 2, 2014

Petitioner describes “bandwidth and traffic problem determination services” as follows:
bandwidth is a measure of the amount of data transmitted between one point and another in a
system. Bandwidth is expressed in terms of bits of data per second. A bit of data is a basic unit of
information (usually 0 or 1). Petitioner monitors data transmission rates and data throughout (the
total amount of data transmitted) in its internet data center in order to fulfill its responsibilities to
customers to provide uninterrupted internet access to its customers’ web pages in a secure
environment and continuous internet traffic management for its customers' web pages. When
needed, Petitioner expands capacity (e.g., allocates additional transmission lines) and corrects any
data transmission problems (e.g., slowdowns) that may develop for customers in order to assure that
those goals are achieved.
“Dynamic bandwidth and web server expansion services” describe the manner in which
Petitioner adjusts bandwidth and adds web server resources dynamically as needed to meet
changing customer web page and traffic demands. Load-balancing allows Petitioner to anticipate
potential performance problems and resource bottlenecks. It can alert its customers to spread
workload across more servers to balance load and maintain performance service levels.
In order to maintain a high security environment, the Facility uses 24x7x365 multi-tiered
security monitoring, including badge access with multi-level security card entry, guard station,
patrol, video surveillance, and controlled card-key access. The Facility is a fully redundant, faulttolerant, purpose-built facility with multiple power utility feeds, diesel generator power,
uninterruptible power supply and redundant cooling designed and constructed to provide a secure
environment specifically for the location of internet web site servers and equipment necessary for
an internet data center. Petitioner notes that it was the only significant data center in the New York
City tri-state metropolitan area to remain fully operational without interruption of utility power
throughout Superstorm Sandy, Hurricane Irene and the October 2011 Halloween Nor’easter.
Petitioner continuously upgrades its internet network equipment and software monitoring
and security tools, as well as its server equipment, in order to ensure that its customers have
uninterrupted access to their websites and data, and to constantly ensure that its customers receive
optimal performance. The Facility is supported by two of each of the following infrastructure
components: two utility power feeds (multiple active power and cooling distribution paths), two
back-up diesel-generator systems, and two of each infrastructure component with no single point of
failure. The Facility is designed so that it can sustain an unplanned worst-case infrastructure failure
while remaining operational.
Petitioner specifically indicated that it is not engaged in the retail sale of its own internet
access service (i.e., providing connection to the internet).
Analysis
Tax Law § 1105(a) imposes sales tax on the receipts from every retail sale of tangible
personal property, except as otherwise provided. Tax Law § 1115(a)(37)(i) exempts from such tax
machinery, equipment and other tangible personal property specified therein, sold to a “person
operating an internet data center” located in this state for use in such a center, where such property:

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TSB-A-14(15)S
Sales Tax
July 2, 2014

(a) will be located or installed in an internet data center and (b) is required for and directly related to
the provision of internet website services for sale by the operator of the center. For purposes of
these exemptions, an operator of an internet data center that is primarily engaged at the data center
in the retail sale of “internet access service” (as defined in Tax Law § 1115[v]) is not considered to
be providing internet web site services for sale.
Petitioner asks whether it qualifies as the operator of an internet data center. Tax Law
§ 1115(a)(37)(i) defines the operator of an internet data center as a person (a) operating a facility
which consists of a data center specifically designed and constructed to provide a high security
environment for the location of servers and similar equipment on which reside internet websites;
and (b) providing at such facility the internet website services of: (i) uninterrupted internet access to
its customers’ web pages in a secure environment and (ii) continuous internet traffic management
for its customers’ web pages. However, an operator of an internet data center primarily engaged in
the sale from the center of internet access services exempt from tax under Tax Law §1115(v) is not
providing internet website services for sale.
Petitioner has established that it qualifies as an operator of an internet data center under the
definition found in Tax Law § 1115(a)(37)(i). It operates the Facility in a highly secure, regulated
and monitored environment. The Facility has been specifically designed and constructed for high
security. It constantly provides uninterrupted internet access to its customers’ external as well as
internal web pages and other customer applications along with continuous internet traffic
management for its customer’s web pages through (i) its specific monitoring services, (ii)
bandwidth and traffic problem determination services, (iii) dynamic bandwidth and web server
expansion services, and (iv) bandwidth and traffic load balancing.
Assuming that Petitioner is not primarily engaged in providing internet access services for
sale at the Facility, it is entitled to claim the sales and use tax exemptions found in Tax Law §§
1115(a)(37) and 1115(y) for equipment covered by that exemption for use at that Facility, and
specified services related to that equipment.

DATED: July 2, 2014

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the person
or entity to whom it is issued and only if the person or entity fully and accurately
describes all relevant facts. An Advisory Opinion is based on the law, regulations, and
Department policies in effect as of the date the Opinion is issued or for the specific time
period at issue in the Opinion. The information provided in this document does not
cover every situation and is not intended to replace the law or change its meaning.