Does a planned web-hosting data center qualify for New York's internet data center equipment exemption?

Plain-English summary

A company that runs data centers around the U.S. is considering building one in New York to provide web-hosting (access to customers' web pages). The planned facility would be a warehouse-style data center with server racks, uninterruptible power, cooling, emergency generators, a fiber-optic network, and 24-hour monitored security (video surveillance, guards), staffed by technicians who keep services available and manage traffic. It would not sell customers an internet connection. It asked whether it qualifies as an "operator of an internet data center" and may claim the equipment exemption in Tax Law section 1115(a)(37).

The Office of Counsel concluded it would qualify:

• Tax Law section 1115(a)(37)(i) exempts machinery, equipment and other property — e.g., servers, routers, software, storage racks/cages, interior fiber and copper cables — sold to an operator of an internet data center, when the property is located in the data center and is required for and directly related to providing internet website services for sale.
• To be an operator, the facility must (1) be specifically designed and constructed as a high-security environment for the servers that host websites; (2) provide uninterrupted internet access to customers' web pages in a secure environment; and (3) provide continuous internet traffic management for those web pages.
• The planned facility meets all three — high-security design (surveillance, guards, constant monitoring), uninterrupted hosting via its technicians, and continuous traffic management (citing TSB-A-14(15)S).
• The catch: an operator primarily engaged in the retail sale of internet access service is not treated as providing internet website services for sale (Tax Law section 1115(a)(37)(ii)). "Primarily engaged" means more than 50% of the use of the property for which the exemption is claimed. So the exemption holds as long as the center is not primarily an internet-access seller.

What this means for you

Web-hosting data centers get a broad equipment exemption

If you operate a genuine internet data center — a high-security facility providing uninterrupted hosting and continuous traffic management for customers' websites — New York exempts the servers, routers, racks, software, interior cabling and similar equipment required for and directly related to providing those website services for sale.

Meet the three operator tests

The exemption hinges on the facility being designed/built for high security, delivering uninterrupted access to customers' web pages, and providing continuous traffic management. Document how your facility satisfies each.

Don't be primarily an internet-access seller

If more than 50% of the exempt property's use is for selling internet access service (rather than website hosting), you are not providing "internet website services for sale," and the exemption is lost. Hosting — not selling connectivity — is what qualifies.

Common questions

Q: What equipment is covered?
A: Property required for and directly related to providing website services for sale and located in the data center — for example servers, routers, computer software, storage racks and cages, and interior fiber and copper cables.

Q: We host websites but don't sell internet connections — does that help or hurt?
A: It helps. Providing hosting (not selling internet access) is what qualifies. An operator primarily engaged (over 50%) in selling internet access service does not qualify.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(a) (sales tax on retail sales of tangible personal property)
• Tax Law section 1115(a)(37)(i) (exemption for internet data center equipment)
• Tax Law section 1115(a)(37)(ii) (operator requirements; primarily-engaged limit)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2016.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a16_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(2)S
Sales Tax
February 22, 2016

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

PETITION NO. S141020A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTED, (Petitioner) located at REDACTEDREDACTEDREDACTEDRED.
Petitioner asks whether operating a specific facility it plans to build in New York would qualify
it as an “operator of an internet data center” for purposes of Tax Law § 1115(a)(37). Petitioner
also asks whether it may claim the sales tax exemption for specific equipment described in Tax
Law § 1115(a)(37)(i). We conclude that Petitioner would be an operator of an internet data
center, and therefore, may claim the sales tax exemption in Tax Law § 1115(a)(37).
Facts
Petitioner operates several data centers throughout the United States, and is considering
building a data center in New York. Among other services, the data center would provide access
to its customers’ web pages through Petitioner’s hosting services.
If constructed, the New York data center would be a traditional warehouse-style data
center. It would consist of equipment including server racks, uninterrupted power supply
systems, cooling systems, emergency generators, and a fiber optic network. Furthermore, the
New York data center would be built to provide a high security environment for the location of
its servers, as it would have 24-hour monitored security, including video surveillance, security
guards and other such protections.
As for the data center’s operations, Petitioner would ensure that its online services would
be constantly available and trustworthy. Petitioner would accomplish this by employing
technicians to constantly monitor and address potential incidents that deviate from Petitioner’s
desired operations systems. Such technicians would also address service disruptions or outages
within Petitioner’s operations systems. Also, Petitioner would maintain a fully-developed
Service Management Framework that would direct and formalize its operations systems to
comply with international standards. Finally, Petitioner’s data center in New York would not be
providing its customers with a connection to the internet.
Analysis
Tax Law § 1105(a) imposes sales tax on receipts from every retail sale of tangible
personal property, except as otherwise provided. Tax Law § 1115(a)(37)(i) exempts from sales
tax certain machinery, equipment and other tangible personal property that is sold to a person
who operates an internet data center, as long as certain criteria are met. Specifically, the
property must be located or installed in a facility or structure that is classified as an internet data
center, and must be required for and directly related to the provision of internet website services
for sale by the operator of the data center. Examples of such machinery and equipment include,

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Sales Tax
February 22, 2016

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among other things, servers, routers, computer software, storage racks and cages for computer
equipment, and interior fiber optic and copper cables.
Tax Law § 1115(a)(37)(i) sets forth strict requirements necessary to be considered an
operator of an internet data center. First, the person must operate a facility that consists of a data
center, and the center must be specifically designed and constructed to provide a high security
environment for the location of servers and similar equipment responsible for maintaining
internet websites. Second, the person must operate a facility that provides uninterrupted internet
access to its customers’ web pages in a secure environment. Third, the person must provide
continuous internet traffic management for its customers’ web pages. However, an operator of
an internet data center who is primarily engaged in the retail sale of internet access service is not
considered to provide internet web services for sale. See Tax Law § 1115(a)(37)(ii). “Primarily
engaged” means that more than 50% of the use of all the machinery, equipment and other
property, for which the exemption is claimed, is used for the provision of internet access
services.
Based on the description provided, Petitioner’s facility would qualify as an internet data
center for purposes of Tax Law § 1115(a)(37)(i). If built, Petitioner’s facility will be a data
center designed to provide a high security environment for its customers’ internet websites. For
instance, Petitioner would install video surveillance and hire security guards to maintain a safe
and secure environment around its facility and provide for constant monitoring. See TSB-A14(15)S. Further, by employing technicians who will constantly monitor Petitioner’s host
systems, the facility will provide uninterrupted internet services that will be constantly available
and secure. Such technicians will also ensure continuous internet traffic management that will
allow its online services to be continuously available. Accordingly, we conclude that
Petitioner’s facility would qualify as an internet data center for purposes of Tax Law §
1115(a)(37)(i).
Petitioner would qualify as an operator of an internet data center, provided that it is not
primarily engaged in providing internet access service for sale at its facility. Petitioner would be
entitled to claim the sales and use tax exemption for the equipment described in Tax Law §
1115(a)(37)(i) that is required for and directly related to the provision of internet website
services for sale by Petitioner and located or installed in Petitioner’s internet data center. See
Tax Law § 1115(a)(37)(ii); TSB-A-12(30)S.

DATED: February 22, 2016

/S/
Deborah R. Lieberman
Deputy Counsel

NOTE: 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

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TSB-A-16(2)S
Sales Tax
February 22, 2016

described 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.