For a software/hardware consulting company doing internet-era work — rendering vs. creating HTML documents, server co-location/administration tasks, and charging for access to a database it maintains online — which of these services are taxable in Texas, and how?

Plain-English summary

A software and hardware consulting company asked the Comptroller about the taxability of several internet-era services it performed that weren't clearly addressed by existing data processing, information services, or telecommunications rules. Three distinct fact patterns, three separate rulings:

1. Creating vs. "rendering" HTML documents. Creating an HTML document is already established as taxable data processing. The company asked whether "rendering" — changing the format of an already-created document rather than making the original — is different. It isn't: the Comptroller treats rendering as maintenance of the information on the HTML document, taxable as data processing under Rule 3.330(a). (As a general note, effective October 1, 1999, 20% of data processing and information service charges are statutorily exempt from tax.)

2. Server co-location/administration services. The company hosts client-owned servers at its own facility and acts as "server administrator," providing several distinct services. The Comptroller broke each one down separately: maintaining the client's servers is taxable, as maintenance of tangible personal property (Rule 3.292). But installing/configuring software the company didn't sell, maintaining any applications on the servers that the company didn't sell, and providing technical assistance with server logins or with applications the company didn't sell are all not taxable (Rule 3.308) — the key distinguishing fact across all four nontaxable items is that the software/application in question wasn't sold by the company itself.

3. Charging for database access via the internet. The company provides access to information (databases it maintains) over the internet, but not as an internet service provider. A charge for this database access is taxable as an information service. The company can buy the underlying information tax-free from its own data provider by issuing a resale certificate, since it's reselling that information to its own customers. And where a customer purchasing the information service is benefiting from it at both in-state and out-of-state locations, that multistate customer — not the seller — is responsible for issuing an exemption certificate asserting the multistate benefit, and for reporting and paying tax on just the portion of the charge attributable to the Texas location (Rule 3.342(h)). The same 20% data-processing/information-service exemption noted above applies here too.

What this means for you

Web developers and digital agencies

Reformatting or restyling an existing HTML page is taxed the same as building one from scratch — both are data processing under Rule 3.330(a). Don't assume "just changing formatting" escapes tax treatment that applies to creation.

Server co-location and managed-hosting providers

Break your service menu apart by task. Physically maintaining a client's server hardware is taxable maintenance of tangible personal property. But software/application work — installation, configuration, maintenance, or technical support — is untaxed as long as you didn't sell that software or application to the client in the first place.

Online database and information-service providers

Selling access to a database you maintain is a taxable information service. You can buy your own underlying data tax-free with a resale certificate if you're reselling it. For multistate customers, push the multistate-benefit exemption certificate and Texas-portion tax reporting obligation onto the customer under Rule 3.342(h) rather than trying to allocate it yourself.

Accountants and tax professionals

This letter is a useful three-part reference for internet-service classification questions from the early data-processing/information-services regulatory era: HTML rendering = data processing; server-hardware maintenance = TPP maintenance (taxable), but third-party software work on that hardware = nontaxable; and database access fees = information services, with the resale-certificate and multistate-benefit mechanics spelled out.

Common questions

Q: Is reformatting an existing web page taxed differently than creating a new one?
A: No — both are taxable data processing under Rule 3.330(a); "rendering" (reformatting) is treated as maintenance of the information on the document.

Q: If I host and administer a client's server but didn't sell them the software on it, do I collect tax on my administration services?
A: Only on the physical server maintenance itself (taxable as TPP maintenance). Installing/configuring software, maintaining applications, and technical support on software you didn't sell are all nontaxable.

Q: How is a fee for accessing a database I maintain treated?
A: As a taxable information service. You can buy your underlying data tax-free with a resale certificate, and multistate customers handle the out-of-Texas portion themselves via a multistate-benefit exemption certificate.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.330(a) (data processing services — HTML creation/rendering)
• 34 Tex. Admin. Code Rule 3.292 (maintenance of tangible personal property — server maintenance)
• 34 Tex. Admin. Code Rule 3.308 (nontaxable installation/configuration/maintenance of software not sold by the provider)
• 34 Tex. Admin. Code Rule 3.342(h) (information services — multistate benefit exemption certificate)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200006389L

Original ruling text

June 7, 2000

From: Gilbert Zamora
[email protected]

To: **

Subject: Ruling Request

Dear **:

Thank you for your e-mail inquiry on behalf of your client ("Taxpayer") who is
involved in software and hardware consulting. Your fact situation is restated
below

Several issues have arisen regarding the taxability of certain services
associated with the Internet. It is clear that a number of services are
taxable, as set forth in the rules outlining data processing services,
information services, and telecommunication services. However, we believe that
Taxpayer performs certain services that have not been addressed in these rules
or any of the ruling requests that we have researched. We respectfully request
that you respond in writing to the following questions:

1. It is our understanding that the creation of "HTML" documents are taxable
   data processing services. Is there a distinction, in terms of taxability,
   between creating "HTML" documents and rendering "HTML" documents? The term
   "rendering" means changing the format of the document after it has been
   created, rather than actually creating the original document.

Response: We would consider the rendering service to be maintenance of the
information on the HTML document and taxable as data processing under Rule
3.330(a). Effective October 1,1999, 20% of the charge for data processing and
information services is exempted from tax.

2. Taxpayer provides server co-location services to a number of clients. The
   clients own the servers, but the servers are actually located at Taxpayer's
   facility. Taxpayer acts as the "server administrator" for these clients and
   provides a number of services in this capacity. Please address whether or not
   the following services that are associated with server administration are
   taxable:

Maintaining client servers.
Installing and configuring software on client servers.
Maintaining any and all applications that run on the servers.
Assisting clients with server login problems.
Assisting clients with problems associated with applications running on the
servers. Setting up and/or updating e-mail accounts for clients.

Response: I will address the taxability of each separate service below:

A. Maintaining client servers - Taxable as the maintenance of tangible personal
property. Rule 3.292.

B. Installing and configuring software on client servers. - Charges for
installing and configuring software not sold by your client are not taxable.
Rule 3.308.

C. Maintaining any and all applications that run on the servers. - Charges for
maintenance of software not sold by your client is not taxable. Rule 3.308.

D. Assisting clients with server login problems. - A charge for technical
assistance on software applications that your client did not sell is not
taxable.

E. Assisting clients with problems associated with applications running on the
servers. - A charge for technical assistance on software applications that your
client did not sell is not taxable.

3. Taxpayer provides access to information (i.e., databases maintained by the
   seller of the service) on the Internet but not as an Internet service provider.
   Is this service taxable?

Response: A charge by your client to his customers for database access is
taxable as an information service. Your client may issue a resale certificate
to the database provider for information that your client will resell to his
customers. A multi-state customer purchasing information services for the
benefit of both in-state and out-of-state locations is responsible for issuing
to the information service provider an exemption certificate asserting a
multistate benefit, and for reporting and paying the tax on that portion of the
charge for information which will benefit the Texas location. See rule
3.342(h). Effective October 1,1999, 20% of the charge for data processing and
information services is exempted from tax.

Sales tax rules can be accessed on the Internet at:
http://www.window.state.tx.us/taxinfo/rulendx/ruleindex.html

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please call me toll-free at 1-800-531-5441, extension 3-4502. The
direct line is 512/463-4502. You may also write to Tax Policy Division,
Comptroller of Public Accounts. You may also e-mail our tax help section at:
[email protected]

Gilbert Zamora
[email protected]
Tax Policy Division