A full-service interactive media company builds websites, domain names, and e-commerce solutions for clients. Which pieces of this work — web page creation, HTML/scanning, graphics/logos, hosting, database access, domain registration, search-engine submission, and software sold online — are taxable data processing, advertising, or other services in Texas?

Plain-English summary

A full-service interactive media company — building websites, domain names, HTML, web hosting, and e-commerce solutions for clients — asked the Comptroller to sort out the tax treatment of its various internet-related offerings.

General framework: Advertising itself is not a taxable service, but under Tex. Tax Code § 151.007, the total amount charged for a taxable item is subject to sales tax, and separately stated charges for expenses or services connected with that sale are taxed the same way as the item itself. Advertising agencies must collect tax when they provide goods or taxable services — and data processing IS a taxable service. Generally, the total charge for creating and maintaining a web page is treated as a data processing service. Exception: if an advertising agency builds a web page as part of a broader advertising campaign, it does not have to collect tax on work performed BEFORE the client accepts the concept or message — if the client doesn't accept the concept, none of that preliminary work is taxed.

Item-by-item list the Comptroller provided:

• Scanning information/data and creating HTML documents: taxable data processing services.
• Creating graphics or logos with a drawing program for a client's home page: taxable graphic arts.
• Posting web pages on a server: taxable data processing service.
• Providing access to information/databases maintained by the service seller over the internet (not as part of internet access itself): taxable information service.
• Separate fees for licensing and completing domain name applications: not taxable.
• Charges for submitting website information to search engines: not taxable.

Software sales: Software sold over the internet is taxable if downloaded to a location in Texas; no tax is due if downloaded to a location outside Texas — but the retailer must keep records proving the customer's out-of-state location.

20% data processing exemption: Senate Bill 441 exempts 20% of the total charge for data processing services under contracts entered into on or after October 1, 1999.

Resale of bundled services: A business may buy tax-free for resale any taxable services it transfers to clients as an attachment to, or integral part of, another taxable service it sells.

What this means for you

Web design, hosting, and interactive media businesses

Most of your core deliverables (HTML creation, scanning content, graphics/logos, hosting) are taxable data processing or graphic arts services — plan to collect tax on them. But narrow carve-outs exist: domain name registration fees and search-engine submission fees are not taxable, and if you're structured as (or working for) an advertising agency, preliminary conceptual work performed before a client accepts your pitch isn't taxed either.

Businesses selling downloadable software online

Whether a sale is taxable turns on where the software is actually downloaded — a Texas destination is taxable, an out-of-state destination is not, but you need to keep records proving the customer's location to support the exemption.

Accountants and tax professionals

This letter is a compact, itemized checklist for internet/web-service taxability circa 2000 — useful as a reference matrix, remembering the 20% data-processing exemption under SB 441 only applies to contracts entered into on or after October 1, 1999, and that this specific letter binds the Comptroller only as to the taxpayer it was issued to.

Common questions

Q: Is building and maintaining a website taxable in Texas?
A: Generally yes, as a data processing service.

Q: Are domain name registration fees taxable?
A: No — separate fees for licensing and completing domain name applications are not taxable.

Q: Is submitting a website to search engines taxable?
A: No.

Q: Does an advertising agency have to collect tax on preliminary web design concepts a client hasn't accepted yet?
A: No — work performed before the client accepts the concept or message isn't taxed.

Q: Is software sold and downloaded over the internet always taxable?
A: Only if downloaded to a location in Texas; software downloaded outside Texas isn't taxed, provided the seller keeps records proving that.

Q: Is there any exemption for data processing service charges?
A: Yes — 20% of the total charge is exempt for data processing contracts entered into on or after October 1, 1999, under Senate Bill 441.

Q: Can I rely on this letter for my own web/interactive media business?
A: No. This opinion is rendered based on the facts presented, and additional or different facts may change the opinion; it can be relied on only by the taxpayer it was issued to.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.007 (sales price includes separately stated expenses/services connected with the sale of a taxable item)
• Senate Bill 441 (effective for data processing contracts entered into on/after 10/1/1999) (20% exemption on the total charge for data processing services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200001964L

Original ruling text

January 11, 2000

Dear **:

Thank you for your e-mail regarding questions related to the taxability of data
processing services. I apologize for taking so long to respond, but we want to
ensure we give you the correct response.

You mention ** is a full service interactive media company. You
specialize in a wide range of interactive media, i.e., www development, new
media production, domain names and customized Internet solutions including
HTML, Web Hosting, and electronic commerce.

Although "advertising" is not a taxable service, under Tax Code 151.007, the
total amount for which a taxable item is sold is subject to sales tax.
Separately stated charges for expenses incurred or services in connection with
the sale are taxable in the same manner as the item sold.

Advertising agencies must collect tax when they provide goods or taxable
services. Data processing is a taxable service.

Generally speaking, the total charge to a customer for creation and maintenance
of a web page is for data processing services. If an advertising agency
creates a web page as part of an advertising campaign, the advertising agency
is not required to collect tax on charges for work performed prior to the
client's acceptance of the concept or message.

If your client does not accept your concept, do not collect tax on any charges
for this preliminary work.

Here is a list of Internet related issues we have addressed and their tax
treatment.

• Scanning information or data into the net and the creation of "HTML"
  documents are taxable data processing services.

• Creating graphics or logos using a drawing program for a client's home page
  is taxable graphic arts.

• Posting web pages on a server is a taxable data processing service.

• Providing access to information (databases maintained by the seller of the
  service) on the Internet but not as part of Internet access is a taxable
  information service.

• Separate fees for licensing and completing applications for domain names are
  not taxable.

• Charges for submitting website information to search engines are not subject
  to tax.

Sales of software over the Internet are subject to sales tax if the software is
downloaded to a location in Texas. No tax is due on sales of software
downloaded to a location outside of Texas. The retailer must retain records to
show the customer's out-of-state location if the software is downloaded to a
point outside of Texas.

An exemption from tax for 20 percent of the total amount charged for data
processing services applies to contracts for data processing services entered
into on and after October 1, 1999. The text of this legislation, Senate Bill
441, may be found through the Texas Legislature On-line website at this
address:
.

You may purchase tax-free for resale taxable services that you transfer to your
clients as an attachment or integral part of another taxable service.

I hope this information is helpful.

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 e-mail address is [email protected].

Sincerely,

Al Van Allen
Tax Policy Division