A company plans to build a free web-site directory for educators, paid for by local businesses that sponsor it in exchange for advertising space. Is the sponsor's fee for building, hosting, and maintaining the directory subject to Texas sales tax — and how does Texas generally tax internet-related services?

Plain-English summary

A startup company planned to build a directory of internet sites for educators, provided free to school districts and funded by local businesses who would sponsor the site as "members" in exchange for advertising space at the top of the directory. If no local sponsor could be found, the plan was to charge the school district itself on a sliding fee. The company asked whether these arrangements would be subject to Texas sales tax.

The Comptroller answered on the assumption the directory would be web-based (not a printed book): the charge to advertisers for creating the website (using HTML), hosting it, and maintaining it is a taxable data processing service. Website creation and hosting count as data processing under Tax Code § 151.0035 because they involve data storage; effective October 1, 1999, 20% of data processing/information service charges are exempt from tax (so effectively 80% of the charge is taxed).

The letter then goes further, listing the Comptroller's contemporaneous (2000-era) positions on a range of internet-related tax questions:

• Taxable data processing services: scanning information/data and creating HTML documents; posting web pages on a server.
• Taxable graphic arts: creating graphics or logos with a drawing program for a client's homepage.
• Taxable telecommunications service: transmitting information between automated clearing houses and merchants.
• Taxable information service: providing access to the seller's own databases over the internet (when not part of internet access itself); selling maps over the internet.
• NOT taxable: separate fees for licensing/completing domain-name applications; charges for continuing-education classes delivered online; charges for submitting website info to search engines.
• Software sold over the internet: taxable if downloaded to a location in Texas; not taxable if downloaded to a location outside Texas — but the retailer must keep records proving the out-of-state download location.

What this means for you

Web developers, agencies, and businesses selling website creation/hosting

Charges for building, hosting, and maintaining a website are taxable data processing services in Texas, with 20% of the charge statutorily exempted. This applies whether your customer is the end user of the site or, as here, a third-party advertiser sponsoring its creation.

Businesses selling other internet-related services

Use the 2000-era roundup as a starting checklist, but verify current treatment before relying on it — domain-name fees, online continuing-education charges, and search-engine-submission fees were nontaxable at the time; graphic design for a webpage and internet-delivered maps were taxable; and software downloaded to a Texas location is taxable while software downloaded elsewhere is not (with a recordkeeping requirement to prove the out-of-state destination).

Accountants and tax professionals

The data processing service classification under § 151.0035 (word processing, data entry/retrieval/search, information compilation, computerized data storage/manipulation) is the throughline across most of this letter's taxable categories. The 20% exemption effective October 1, 1999 is worth flagging when computing the taxable base for any data processing service charge.

Common questions

Q: Is charging a sponsor/advertiser to build and host a website taxable in Texas?
A: Yes — it's a taxable data processing service under Tax Code § 151.0035, with 20% of the charge exempt.

Q: Are domain-name registration fees taxable?
A: Per this letter, separate fees for licensing and completing domain-name applications are not taxable.

Q: Is software sold and downloaded over the internet taxable?
A: Yes, if downloaded to a location in Texas. No tax is due if downloaded to a location outside Texas, but the retailer must keep records showing the customer's out-of-state location.

Q: Are online continuing-education classes taxable?
A: Per this letter, charges for continuing education classes delivered over the internet are not taxable.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0035 (definition of "data processing service")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200007499L

Original ruling text

July 17, 2000

From: Gilbert Zamora

To:

Subject: Sales Tax on Web Site Directory

Thank you for using tax.help e-mail to inquire about the creation of a
directory of sites for educators.

You are in the process of creating a company that will provide educators with a
directory of sites that will make information easier to access in the
classroom. At present, the thought is to get a local business to sponsor the
local Independent School District's educators with the site free of charge to
the ISD. The local business would then have the ability to use the top part of
the directory for their advertising. The local businesses would be called
"members" but would not be the eventual end users. If the a local business
sponsor could not be found in a community, then the idea would be to approach
the school district to join for a potential sliding fee depending on the size
of the district. The question would be if this type of transaction(s) would be
subject to sales tax. Response: Your email did not indicate, but presumably
the directory of sites would be web based rather than a hardbound book. My
response is addressed to website creation, hosting and maintenance.

Your company's charge to advertisers for website creation using HTML, website
hosting and website maintenance is a taxable data processing service.

Website creation and hosting are a taxable data processing service because they
involves data storage. Under Tax Code Section 151.0035, "Data processing
service" includes (in part) word processing, data entry, data retrieval, data
search, information compilation, payroll and business accounting data
production, and other computerized data and information storage or
manipulation. Effective October 1, 1999, 20% of the charge for data processing
and information services is exempted from sales tax.

For your further information, 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 homepage is
  taxable graphic arts.

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

• Transmitting information between automated clearing houses and merchants is a
  telecommunications 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 continuing education classes on the Internet are not taxable.

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

• Sales of maps over the Internet are taxed as information services.

• 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. Our tax rules can be accessed online at:
  http://www.window.state.tx.us/taxinfo/rulendx/rulelist3.html#sst Our State Tax
  Automated Research ("STAR") system may be accessed online at:
  www.window.state.tx.us/

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:

Tax Policy Division