Which of a data-center colocation provider's charges -- space, power, cabling/bandwidth, tech support -- are subject to New York sales tax?

Plain-English summary

A company operates a New York data center where customers co-locate (place) their own servers in secure space with power and connectivity. It asked how sales tax applies to its charges -- and whether separately itemizing them changes the result. (The default rule: a single charge for taxable + nontaxable services is fully taxable; a reasonable, separately stated charge for a separately purchasable taxable service is taxed only on that service.)

The Office of Counsel addressed each charge:

• (1) Space (rack/cabinet/cage/suite) -- not taxable. The customer rents space, supplies its own equipment, and has 24/7 access, so reasonable, separately stated space charges are a nontaxable lease of real property. Requiring ID for security doesn't defeat the lease.
• (2) Power -- depends on metering. A charge based on an estimate or a flat "breakered" rate is part of the nontaxable space rent (Empire State Building). But a separately stated charge based on accurate submetered consumption is a taxable sale of electricity (section 1105(b); Mutual Redevelopment) -- even if marked up for redundancy/conditioning. The provider can't issue a resale certificate unless the power is bought exclusively for resale (it also powers common areas), but can take a credit/refund for power it resells.
• (3) Cabling/bandwidth -- dark vs. lit. "Dark fiber" (a hard-wire connection to the customer's own carrier) is a nontaxable real-property lease (TSB-A-05(32)S). "Lit fiber" is taxable telephony/telegraphy (section 1105(b)(1)(B)) to the extent it's intrastate; interstate/international service and internet-access-only purchases aren't taxable. If intrastate/interstate aren't distinguished, the whole charge is taxable. The resale exclusion is available for lit fiber resold to customers.
• (4) Tech support / backups. "Remote hands" rebooting to clear a software issue is exempt under section 1115(o) if reasonable and separately stated; but servicing the hardware itself is taxable (section 1105(c)(3)). Tape/disk backups aren't taxable, though buying the disks/tapes is.
• Not an internet data center. The provider doesn't host websites, so it isn't an internet data center operator under section 1115(a)(37) -- the equipment-purchase exemption doesn't apply.

What this means for you

Colocation / data-center operators

Space and dark-fiber charges are nontaxable real-property leases. Power flips to taxable only when you submeter actual usage (estimated/breakered stays as rent). Lit fiber is taxable intrastate telephony -- separate out interstate/international and internet-access to avoid taxing the whole thing. Software reboots are exempt if separately stated; hardware servicing is taxable.

Itemize -- carefully

A single blended charge is fully taxable if any part is taxable. Break out reasonable, separately stated charges for separately purchasable services, and distinguish intrastate vs. interstate connectivity, or you'll tax the lot.

The internet-data-center exemption is for website hosts

If you don't host customers' websites with uninterrupted access and traffic management, you're not a section 1115(a)(37) internet data center, and your equipment buys aren't exempt on that basis.

Common questions

Q: Is the space rent taxable?
A: No. Rack/cabinet/cage/suite space the customer controls is a nontaxable lease of real property -- security ID checks don't change that.

Q: How is power taxed?
A: Estimated or flat 'breakered' power is part of nontaxable rent. Accurately submetered power is a taxable sale of electricity, even if marked up.

Q: Dark fiber vs. lit fiber?
A: Dark fiber is a nontaxable real-property lease; lit fiber is taxable intrastate telephony (interstate/international and internet-access-only aren't taxable).

Q: Is rebooting a customer's server taxable?
A: A remote reboot to clear a software issue is exempt under section 1115(o) if reasonable and separately stated; servicing the hardware itself is taxable.

Citations and references

• Tax Law section 1105(b) (sales tax on utility services and telephony/telegraphy)
• Tax Law section 1105(c)(3) (maintaining, servicing, or repairing tangible personal property)
• Tax Law section 1115(o) (exemption for services performed on software)
• Tax Law section 1115(a)(37) (internet data center exemption)
• 20 NYCRR 527.2, 527.6 (telephony/telegraphy; lease of real property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(34)S
Sales Tax
August 17, 2015

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

PETITION NO. S110728A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED
“Petitioner”.
Petitioner operates a facility within New York State where its customers may “co-locate” their
own computer servers and equipment. Petitioner asked various questions with respect to certain
charges to its customers.
Facts
Petitioner operates a facility in New York State that provides its customers reliable, failsafe information technology (IT) operations for the operation of its customers’ computer servers
located at its facility. Pursuant to a service agreement, customers of the facility locate their own
computer system hardware, including servers, routers, and other ancillary equipment at
Petitioner’s location in order to manage their primary IT infrastructure, data storage, data
backup, business continuity and data recovery needs. Space is provided within Petitioner’s
facility, along with reliable power and telecommunications accessibility. Petitioner’s facility
provides a secure environment, including fire control, fire suppression equipment and alarms,
and internal security video surveillance cameras. Aside from a small amount of incidental
services, Petitioner is not involved with the computer applications that run on its customers’
servers.
Petitioner asked whether its charges are subject to sales tax when the charge is for a mix
of services and whether the taxability of the charges would change if the sales price of each
charge is separately itemized on the customer invoice. Petitioner also requested an opinion with
respect to the following categories of charges to its customers:
(1) Petitioner bills its customers for the space provided to maintain their computer
hardware. Petitioner’s facility is configured so as to provide its customers with a number of
space options that range from individual “rack” space, to “cabinet space”, to secure and
demarcated private “cage” space, to private “suites.” This space is made available to a
customer’s own employees, who have 24 hour access to the facility 7 days a week so that they
may access the customer’s computer equipment. Due to security measures, the customer’s
employees must present proper identification to access the facility.
(2) Because an appropriate climate controlled environment is needed for its customers’
equipment, Petitioner incurs utility costs related to its operation of air filtration and air
conditioning equipment. Some circuits within the facility are dedicated to individual customers,
and the customers are billed for their utility charges, while some customers are charged on a
“breakered” basis (a flat charge for unlimited use of power). Value-added services include
provisions for redundancy and conditioning of power. Petitioner’s facility provides fully-

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conditioned electrical power from two separate power grid feeds. Backup power is furnished by
Petitioner’s own diesel generators. Cooling is provided by redundant chilled water-based systems
that are used in conjunction with room air-conditioning units to deliver a minimum of 120 BTUs
of cooling per square foot and a maximum humidity of 48%.
(3) The customers’ equipment needs to be fully accessible via on-line
telecommunications or fiber optic access. Accordingly, Petitioner’s facility is “carrier neutral”
and its customers can contract with their own carrier outside of the facility. Petitioner is not a
telecommunications carrier, does not own or maintain a telecommunications network, and is not
an Internet Service Provider (ISP). Petitioner bills its customers for various high-speed interconnectivity configurations (“bandwidth” charges and “cabling” charges that include furnishing
Ethernet circuits, private lines, cross-connecting cabling, and the like) representing the
communications link to the customers’ equipment inside the facility to the connection point for
its chosen carrier. In some instances, to achieve connectivity, Petitioner’s customers enter into a
direct relationship with an ISP. In other instances, Petitioner enters into a contract with an ISP,
purchases the ISP’s services (denominated in Megabytes of bandwidth), and Petitioner subdivides the bandwidth, thus furnishing lit fiber to some of its customers. This connectivity
provides access for the customer to an ISP.
(4) Petitioner also offers a limited degree of technical support. For example, if a
customer’s server is “down,” the Petitioner charges the customer for “remote hands” to
investigate the issue and, potentially, to re-boot the server to clear any software related issues.
This avoids the need for the customer to personally visit the facility. In the event the re-boot
fails to remedy the issue, the customer’s technicians must access the location to solve the issue.
In most instances, these services are not complex and are only intended to reduce the need for the
customer to have its employees travel to the facility to address minor technical issues. In
addition, Petitioner may charge its customers for making tape or disk-based backups.
Analysis
If Petitioner charges a single amount for both taxable and nontaxable services, the entire
amount is subject to sales tax. However, if Petitioner bills a separate charge for any taxable
service that is reasonable in amount and the service may be purchased separately from the
nontaxable services, only that service would be subject to sales tax. See TSB-A-15(13) S and
TSB-A-97(11) S.
Our analysis of the various categories of charges follows:
Q. 1. Are Petitioner’s charges to its customers for space to locate their servers and other
computer equipment subject to tax?
A.
Petitioner’s charges to customers for the use of space within its facility are not receipts
subject to sales tax. Because a customer is charged for the amount of space it rents (whether
“rack”, “cabinet”, “cage” or “suite” space), is allowed to supply its own racks, equipment and
cabinets, and it and its employees have 24/7 access to the customer’s equipment placed in this
space, we conclude that reasonable, separately stated charges for space within the facility are not
subject to sales tax because they are charges for the lease of real property. A customer or its

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employees having to present identification for security purposes does not hinder the customer’s
access so as to prevent the charge from being considered a lease or rental. Compare 20 NYCRR
§ 527.6 (b) (2).
Q. 2-A. Are Petitioner’s charges to its customers for their use of power on an estimated or pro
rata basis subject to tax?
A. Generally, § 1105(b) of the Tax Law authorizes a tax on utility services only when furnished
in an identifiable sale transaction as a commodity or article of commerce. See Debevoise and
Plimpton v. NYS Dept. of Tax and Finance, 80 NY2d 657 (1993). In Petitioner’s situation, the
customers are renting space at Petitioner’s facility to locate their computers and related
equipment. A charge for electricity usage by a customer based on an estimate or other measure
that does not accurately reflect the customer’s consumption (such as a charge based on the
amount of servers or space used by the customer), whether bundled with other charges or
separately stated, would be considered part of the charge for rental of the space and would not be
subject to tax. See Empire State Building Co. v New York State Dept. of Taxation and Finance,
81 NY2d 1002 (1993). However, if the separately stated charge for a customer’s electricity
consumption is based on an accurate measurement of the customer’s consumption of electricity
(such as through the use of a submeter), that charge would be considered a separate sale of
electricity for sales tax purposes. In that instance, Petitioner must collect and remit sales tax.
See Mutual Redevelopment Houses, Inc. v. Roth, 307 AD2d 422 (3d Dep’t 2003); TSB-A-05(10)
S. This would be true even if the Petitioner were to mark-up the separate electricity charge to
reflect the availability of redundant power or for its conditioning of the electricity provided.
Q.2-B. Petitioner asks whether, if any charges to its customers for power are subject to sales tax,
it may make the underlying purchase of electricity exempt from sales and use tax as a purchase
for resale under Tax Law § 1101(b)(4)?
A. Petitioner cannot properly issue a resale certificate to a utility company unless its purchase
of power is exclusively for resale. The electricity is not exclusively purchased for resale by
Petitioner if a portion of the purchased electricity is consumed by the Petitioner in the operation
of common areas within its facility. Petitioner may, however, apply for a refund or take a credit
on its own sales and use tax return for any electricity Petitioner resells to its customers that is
separately sold as discussed above. See Tax Law § 1139(a); TSB-A-07(8)S.
Q. 3. Are itemized charges to Petitioner’s customers for cabling and bandwidth subject to sales
and use tax?
A. Petitioner’s charges to customers for cabling and bandwidth relate to the connection within
the facility, such as furnishing Ethernet circuits, private lines, and cross-connecting cabling. In
some cases, Petitioner provides simple “cabling,” i.e., a hard wire connection linking the
customer’s server to a port whereby the customer is connected to its own ISP (“dark fiber”). In
other cases, Petitioner purchases services itself from an ISP, denominated in megabytes of
bandwidth, and subdivides the bandwidth, thus furnishing “lit fiber” to its customers.
Tax Law § 1105(b) (1) (B) of the Tax Law imposes sales tax on receipts from every sale,
other than sales for resale, of “telephony and telegraphy and telephone and telegraph service of

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whatever nature.” Generally, the words “of whatever nature” indicate that a broad construction
is to be given to the terms describing the items taxed. It does not matter that the provider of such
services is not subject to regulation as a utility company. See 20 NYCRR § 527.2(a) (2). Tax
Law § 1105(b) further imposes tax on receipts from “intrastate communication by means of
devices employing the principles of telephony and telegraphy.” See 20 NYCRR § 527.2(d) (1).
The terms “telephony and telegraphy” include the “use or operation of any apparatus for
transmission of sound, sound reproduction or coded or other signals.” See 20 NYCRR § 527.2(d)
(2). Services that provide a “conduit for the transmission of information” and “the acceptance
and delivery of data” are subject to tax as telephony and telegraphy of whatever nature. See
Easylink Services Int'l, Inc., Tax Appeals Tribunal, July 27, 2009, aff’d 101 AD3d 1180 (3d
Dep’t 2012).
The Department has previously opined that charges to customers for their use of “dark
fiber” are not charges for telephony and telegraphy subject to sales tax; the charges are more in
the nature of a lease of real property. See TSB-A-05(32) S. However, charges to its customers
for the use of “lit fiber” are charges for telephony and telegraphy subject to tax if it is considered
to be intrastate telephony or telegraphy. Services connecting points within New York State are
subject to sales tax. To the extent Petitioner can separate out interstate and international service,
those charges would not be subject to sales tax. If Petitioner fails to distinguish between
intrastate, interstate, and international service, the entire charge is subject to sales tax. See,
TSB-A-05(32) S. However, if any of Petitioner’s purchases of “lit fiber” are solely for Internet
access and not voice communications, those purchases would not be subject to sales tax. TSBM-08(2) S.
Petitioner may claim the resale exclusion for any purchases of lit fiber that are subject to
sales tax and resold to its customers.
Q. 4. Is the provision of certain technical support services such as rebooting a server to clear a
software issue when a server is “down” or making tape or disk-based backups subject to tax?
A. The provision of Petitioner’s “remote hands” technical support service is an optional service
and appears only as a separately stated charge on the invoices of those customers electing to
receive it. To a great extent, it appears that this service is geared toward clearing software issues
on a customer’s server by rebooting it for them to resolve the issue.
Tax Law § 1115(o) generally exempts from sales and use taxes services otherwise
taxable under § 1105(c) or § 1110 when performed on either custom or pre-written software,
provided the charge for such service is reasonable and separately stated. This would include
rebooting a computer system to see if that clears a software failure. However, if Petitioner were
to expand this service to include maintenance or servicing of the hardware itself, the charge to a
customer to keep their computer in operation would be subject to tax as “maintaining, servicing,
or repairing tangible personal property.” Tax Law § 1105(c)(3). The exemption in § 1115(y) for
such services provided to equipment used in an “Internet data center” would not be applicable,
because we conclude in Q.5 below that Petitioner is not an Internet data center operator as
defined in Tax Law § 1115(a)(37) and the equipment is not owned by Petitioner.

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The making of disk or tape backups for a customer is not subject to sales tax (TSB-A05(40) S), but the purchase of the disks or tapes will be subject to sales or use tax.
Q. 5. Are Petitioner’s purchases of machinery, equipment or other tangible personal property for
its facility exempt from tax?
A. 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 tax:
Machinery, equipment and other tangible personal property specified herein, sold to a
person operating an internet data center located in this state for use in such a center,
where such property: (a) will be located or installed in a facility or structure which is 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.
In addition, Tax Law section 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.
Petitioner is not an operator of an Internet data center under §1115(a)(37)(i) because it does not
provide uninterrupted Internet access to its customers’ web pages and continuous management of
Internet traffic for its customers’ websites, i.e., Petitioner does not host websites. See TB-ST405, Internet Data Centers, March 2, 2012; TSB-M-00(7) S. Therefore, Petitioner would not
qualify for this sales and use tax exemption.

DATED: August 17, 2015

NOTE:

/S/
DEBORAH 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.