For an existing Texas cloud-computing data center planning a 100,000+ square foot expansion, seven questions: does hosting customer data violate the exemption's single-occupant rule; is the pre-2013 existing center itself exempt; can the expansion qualify on its own; can shared jobs/investment/electricity/equipment be split between the old and new parts; do contractor-staffed jobs count; does providing some telecom service disqualify the project; and is a backup generator outside the building eligible?

Plain-English summary

A cloud computing company with an existing Texas data center (built before September 1, 2013) planned to build a new, adjacent data center of 100,000+ square feet — possibly sharing infrastructure and even a wall with the existing one — to run a cloud "Platform" offering computing, data storage, applications, and networking services to customers. The Comptroller answered seven distinct questions about the qualifying-data-center sales tax exemption (§ 151.359), several of them explicitly flagged as "questions of first impression" that would prompt a rule amendment:

1. Does hosting customer data on the operator's own servers violate the "single qualifying occupant" requirement? No. The operator owns all equipment, decides who gets data-center access, and never leases servers, dedicated server space, or excess capacity to customers — customers are merely hosting-agreement clients running programs on the operator's hardware, not sub-occupants placing their own property in the data center. (Contrast: a 2008 STAR letter had already treated this kind of "customer accesses hosted data over the internet" arrangement as taxable data processing — a separate tax issue from the single-occupant question addressed here.)
2. Is the pre-existing (built before September 1, 2013) data center itself exempt? No — by the statute's plain effective-date language, it simply doesn't qualify.
3. Must the new expansion independently qualify, or can it ride on the existing center's status? It must qualify entirely on its own; there's no bootstrapping off the non-qualifying existing center.
4. Can shared resources between the old and new portions count toward the new portion's requirements? Employees and capital investment supporting BOTH portions cannot be split/allocated to help the new portion meet its job or investment thresholds — the statute requires all qualifying jobs and investment to be attributable to the qualifying data center itself. Electricity, by contrast, CAN be allocated between the two portions using a predominant-use study; but equipment used by or shared between both portions cannot be allocated — it's simply ineligible if it's not installed at or incorporated solely into the qualifying data center.
5. Do contractor-staffed jobs count toward the 20-qualifying-jobs requirement? Yes — there's no requirement that a third-party staffing contractor sign a five-year agreement, so long as the actual positions are maintained for the required period and any vacancy is filled within 120 days.
6. Does providing some telecommunications service disqualify the project? No — "primarily" means more than 50% of the time; as long as the data center is used for qualifying data functions more than half the time, incidental telecom services don't disqualify it.
7. Can a backup generator installed OUTSIDE the qualifying data center's walls still qualify? Yes, if it's necessary and essential to the data center's operation, immediately adjacent/attached, and used exclusively by the qualifying data center (or, if the sole occupant designates only part of a shared building as its qualifying data center, exclusively by that designated portion).

What this means for you

Cloud computing and hosting companies planning a data center exemption application

Building an expansion next to an existing, non-qualifying data center creates real complications: your expansion must meet every certification requirement standing entirely on its own — you cannot share qualifying jobs, capital investment, or dual-use equipment between the old and new portions to help the new one qualify. Only electricity can be split via a predominant-use study.

Companies using contract staffing to meet the 20-qualifying-jobs threshold

You don't need your staffing vendor to commit to a five-year contract — what matters is that the actual positions persist for the required period and vacancies get refilled within 120 days.

Cloud/SaaS operators worried about the "single occupant" rule

Providing hosting, remote access, and application services to many customers doesn't turn them into "sub-occupants" that would violate the exemption's single-occupant requirement — as long as you retain full control of the equipment and never lease dedicated servers or server space to any customer.

Common questions

Q: Does a data center built before the qualifying-data-center exemption's effective date ever qualify?
A: No, per this ruling — a data center built before September 1, 2013 is categorically ineligible under the statute's own effective-date language.

Q: Can I split employees and capital investment between my existing (non-qualifying) data center and a new certified expansion?
A: No, per this ruling — those must be fully attributable to the qualifying data center itself; only electricity can be allocated between the two using a predominant-use study.

Q: Does hosting cloud customers' data on my servers make them "occupants" that would violate the single-occupant rule?
A: No, per this ruling — as long as you retain control of all equipment and don't sell, lease, or dedicate servers/server space to any customer, hosting customer data doesn't create additional occupants.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.359(a)(2), (a)(8) (single qualifying occupant requirement and definition)
• Tex. Tax Code § 151.359(b), (d) (exempt purchases; certification requirements)
• Tex. Tax Code § 151.317; 34 Tex. Admin. Code Rule 3.295 (predominant use study for electricity)
• 34 Tex. Admin. Code Rule 3.335(a)(4)-(10) (permanent job, qualifying job, qualifying occupant, and "primarily" definitions)
• 34 Tex. Admin. Code Rule 3.335(b), (d) (exempt equipment; certification requirements)
• 34 Tex. Admin. Code Rule 3.344 (Telecommunications Services, referenced for the "primarily" telecom test)

Distinguished prior guidance:

• STAR Document 200805095L (May 28, 2008) — an online business application hosted on the operator's servers was taxable data processing (a separate tax-type question from the single-occupant issue addressed here, but factually similar)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201408938L

Original ruling text

201408938L

August 22, 2014

RE: Private Letter Ruling # 133520260

Dear **:

We issue this private letter ruling in accordance with Rule 3.1 in response to
your request dated November 6, 2013, and further supplemented by letter dated
February 12, 2014. Detrimental reliance is provided in accordance with Rule
3.10, the Taxpayer Bill of Rights.

You requested guidance to ensure compliance by COMPANY A with Tax Code Section
151.359 and Rule 3.335 regarding plans to build a new data center near its
existing data center in Texas. We issue this private letter ruling because the
statute and rule regarding qualified data centers are relatively new and, even
though some of the requested rulings are directly answered by statute and rule,
the request raises questions of first impression. We intend to update Rule
3.335 to provide additional guidance as indicated.

FACTS PRESENTED

COMPANY A currently has an existing data center in CITY A, Texas,
which is partially used to provide what you describe as cloud computing
services. Please note that although we reviewed sample customer agreements
provided by COMPANY A related to its activities at the proposed new data
center, in making a determination as to the taxability of the services provided
for purposes of this ruling we accept the descriptions of the services as
provided without independent verification.

The existing data center was built prior to September 1, 2013. COMPANY A
proposes to build a new data center of more than 100,000 square feet adjacent
to its existing data center in CITY A, Texas. The expansion may consist of the
construction of new buildings, which may or may not share a wall with an
existing building, expansion of existing buildings, or the construction of a
new series of buildings. COMPANY A states that an expansion typically shares
infrastructure with an existing data center.

The new data center will house a platform (Platform) that supports services
across several categories including: (1) computing; (2) data services; (3)
application services; and (4) networks. In the computing category, the
Platform will support the deployment of web sites, virtual machines, backend
support for mobile applications, and remote software. In the data services
category, the Platform will support data management, data insight and business
analytics, and back-up and recovery. In the application services category, the
Platform will support media distribution, messaging and notification,
electronic data interchange, and identification and authorization. In the
network category, the Platform will support virtual network connections with
the data centers and load balancing for incoming traffic. For example,
customers may use the Platform to build and operate a website, test and
maintain mobile applications, distribute music and videos, or run corporate
financial systems.

COMPANY A indicates that it does not co-locate, rack, host, or manage
customer-owned equipment at its data centers, nor does it pass dominion and
control of its own servers to any of its customers. We reviewed what is
described as a typical agreement that explicitly states that COMPANY A will
acquire no rights in its customer data, other than the right to host the
customer’s data on COMPANY A systems, which includes the right to use and
produce customer data within COMPANY A systems solely for hosting purposes;
further, that COMPANY A will use the customer’s data only to provide services
to the customer. A second agreement provides for accessing the Platform
remotely. It also sets forth customer requirements relating to data storage,
data transfer, and hosting.

COMPANY A represents that it is the sole determiner as to who has access to the
data center, and it owns all of the tangible personal property within the data
center. Its customers are permitted to run their own programs on the servers
but only as parties to a hosting agreement.

COMPANY A also represents that it may purchase electricity to be routed through
a single power substation to provide electricity to both data centers. It may
also purchase equipment for both data centers or in support of both data
centers.

COMPANY A intends to hire contractors to meet the qualified jobs requirement.
The contractors will not have five-year employment agreements with COMPANY A,
but it is the intent that the permanent positions contracted for will exist at
least five years.

COMPANY A’s data center will provide telecommunication services as defined by
Texas law, but it will not use the data center over 50% of the time for such
services.

RULINGS AND ANALYSIS

The rulings you specifically requested are shown below, followed by our
responses and analysis.

(1) Does the provision of services as described violate the single occupant
requirement in the data center sales tax exemption set forth in Tax Code
Section 151.359(a)(2), or Rule 3.335(a)(10)(B)?

RESPONSE: This is a question of first impression and Rule 3.335 will be
amended accordingly. We conclude that the services, as described, do not
violate the single qualifying occupant requirement of Section 151.359 or Rule
3.335 for the following reasons.

A qualifying occupant is defined in Section 151.359(a)(8) and Rule 3.335(a)(10)
as a person who contracts with either a qualifying owner or qualifying operator
to place, or cause to be placed, tangible personal property at a qualifying
data center for use by the occupant. The qualifying occupant must be the sole
occupant of the qualifying data center. The rule allows a qualifying occupant
to provide data storage and processing services, but subleasing real or
tangible personal property within the qualifying data center is prohibited.
Therefore, the rule prohibits a qualifying occupant from selling or leasing
excess servers or server space or providing dedicated servers at a data center
to third parties.

In STAR Document No. 200805095L (May 28, 2008), the Tax Policy Division
determined that a taxpayer who provided an online business application that
resided on servers at its data center that its customers used to record,
manage, and store their business transactions was providing taxable data
processing services. The Platform affords a customer similar services by
allowing the customer to access their data by way of the Internet, and to
transmit, retrieve, process, manipulate, store, and manage data.
Further, since COMPANY A does not dedicate any of its equipment for the sole
use of a single customer, sell or lease any servers, provide any managed or
dedicated servers to its customers, or lease or sell excess server space, the
customer is not considered to be placing tangible personal property at a
qualifying data center.

COMPANY A is the sole determiner as to who has access to the data center, and
it owns all of the tangible personal property within the data center. Its
customers are permitted to run their own programs on the servers but only as
parties to a hosting agreement, and as such, are not qualifying occupants as
defined by Section 151.359(a)(8) and Rule 3.335(a)(10).

(2) Is investment in an existing data center eligible for exemption under
Section 151.359?

RESPONSE: This is not a question of first impression requiring special
guidance. The statement of facts indicates the existing data center was in
existence prior to September 1, 2013. As a result the existing data center is
not eligible for exemption under the express language of Section 151.359 or
Rule 3.335.

(3) Would COMPANY A’s proposed expansion of its existing data center be
eligible for exemption under Section 151.359?

RESPONSE: This is a question of first impression and Rule 3.335 will be
amended accordingly. COMPANY A’s proposed expansion of the existing data
center must meet the requirements for certification on its own, without
reliance on the existing data center, to meet the requirements in Section
151.359(d) and Rule 3.335(d).

(4)(a) May an allocable portion of the employees and capital investment at an
expanded data center which support both the existing and expanded portion of
the data center be used to meet the employment and capital investment
requirements?

RESPONSE: This is a question of first impression and Rule 3.335 will be
amended accordingly. COMPANY A cannot allocate employees and capital
investment that support both the existing data center and the expanded data
center to meet the employment and capital investment requirements for the
expanded data center.

Neither the statute nor the rule allows an allocation between non-qualifying
data centers and qualifying data centers. The language used is explicit and
unequivocal; all jobs and capital investments must be attributed to qualifying
data centers, and data centers not certified by the comptroller, such as the
existing data center, are by definition not qualifying data centers. See
Section 151.359(d) and Rule 3.335(d).

(4)(b) Is an allocable portion of the electricity and equipment purchased for
an expanded data center which supports both the existing and expanded portion
of the data center eligible for the sales tax exemption?

RESPONSE: This is a question of first impression and Rule 3.335 will be
amended accordingly. Electricity can be purchased tax-free for the qualifying
data center subject to the requirements of Rule 3.335(b)(1)(A). A predominant
use study is required to differentiate between taxable and nontaxable uses of
electricity from a single meter. See Tax Code Section 151.317 and Rule 3.295
for more information on predominant use.

With respect to equipment, only that equipment purchased by a qualifying owner,
qualifying operator, or qualifying occupant for installation at or
incorporation into a qualifying data center is eligible for exemption. Any
equipment used or allocated between the existing data center and the expanded
data center is not eligible for exemption. The plain language of the statute
and rule indicate that only those items purchased by qualifying persons for
installation at or incorporation into a qualifying data center are subject to
exemption.

(5) May contractors be used to meet the qualified jobs requirement even
though the contractors do not have a five year employment agreement, provided
that the permanent positions exist for at least five years?

RESPONSE: This is a question of first impression and Rule 3.335 will be
amended accordingly. So long as COMPANY A creates at least 20 qualifying jobs
meeting all the requirements set out in Rule 3.335(a)(7), the fact that it
contracts with a third-party employer to fill those positions is irrelevant.
There is no statutory or rule provision requiring a third-party contractor to
maintain a five-year agreement with COMPANY A so long as the required 20
qualifying jobs are created and maintained for the required period of time and
any vacancies in those jobs are filled within 120 days of the date of vacancy,
as required by the definition of a permanent job in Rule 3.335(a)(4).

(6) Does the term “not used primarily by a telecommunications provider” in
Section 151.359 mean that the services cannot be used more than 50% for
telecommunications services?

RESPONSE: This question is answered directly by the applicable rule and does
not present a question of first impression. Rule 3.335(a)(5) defines
“primarily” to mean more than 50% of the time. So long as COMPANY A uses a
qualifying data center more than 50% of the time to “house servers and related
equipment and support staff for the processing, storage, and distribution of
data” and less than 50% of the time to place tangible personal property that is
used to deliver telecommunications services as defined by Rule 3.344, the
provision of telecommunications services does not preclude certification.

(7)(a) Is the equipment consisting of the backup generator with its supporting
tangible personal property installed outside of the walls of the expanded data
center structure for exclusive use by the expanded data center eligible for the
sales tax exemption?

RESPONSE: This is a question of first impression and Rule 3.335 will be
amended accordingly. Under Section 151.359(b) and Rule 3.335(b)(1) only that
equipment purchased by a qualifying owner, qualifying operator, or qualifying
occupant for installation at or incorporation into a qualifying data center is
eligible for exemption. An emergency generator and tangible personal property
necessary to operate the generator purchased by a qualifying owner, qualifying
operator, or qualifying occupant will be considered incorporated into a
qualifying data center and eligible for exemption if the generator is necessary
and essential to the operation of the qualifying data center; immediately
adjacent and attached to a qualifying data center; and used exclusively by the
qualifying data center.

(7)(b) If the sole occupant of a qualifying data center formally designates
space to be used as its qualifying data center in accordance with Rule
3.335(a)(10)(B) and subleases space not designated for use as the data center
to another party, would the backup generator with its supporting tangible
personal property installed outside of the walls of the expanded data center
structure for exclusive use by the qualifying data center’s designated space be
eligible for the sales tax exemption?

RESPONSE: This is a question of first impression and Rule 3.335 will be amended
accordingly. An emergency generator and tangible personal property necessary to
operate the generator meeting the requirements described in the Response to
Question No. 7(a) are eligible for exemption if used exclusively in support of
the space designated as a qualifying data center.

If you have questions about this private letter ruling, please email us at
https://www.window.state.tx.us/taxhelp/ and reference Private Letter Ruling No.
133520260.

Sincerely,

Tax Policy Division