My Texas-based internet business builds websites, broadcasts information online, and resells domain name registrations to customers both in and out of state -- which of these are subject to Texas sales tax, and how do I handle out-of-state customers?

Plain-English summary

A Texas corporation engaged solely in internet business, serving customers both inside and outside Texas from a single in-state site, asked how Texas sales tax applies to three of its service lines: (1) building websites, (2) broadcasting information for customers over the internet, and (3) buying and reselling domain name registrations.

Website construction and upkeep = taxable data processing. The Comptroller treats a web page as electronic data and graphics residing on a computer, rather than as a computer program -- so creating and storing it is a data processing service. Charges for designing, programming, and updating the page are taxed the same way as the page itself. Sourcing follows the customer's benefit, not the server: the location(s) where the buyer actually receives the benefit of the service determines the applicable tax rate, rather than where the hosting server sits, if the customer gives the provider an exemption certificate claiming multi-state benefit.

Broadcasting/transmitting information = taxable telecommunications service. Transmission of information over the internet is a telecommunications service, and it's taxable when the transmission originates in Texas and is billed to a Texas telephone number or a Texas billing/service address. Because these transmissions came from Texas-based servers, they fell squarely into that taxable category. The telecommunications exemption in Tax Code § 151.323(3) did not apply to this fact pattern.

Domain name resale = not taxable. The sale of domain names themselves is not subject to Texas sales tax at all.

What this means for you

Web developers and internet businesses billing multi-state customers

Treat web site design, programming, and update charges as taxable data processing services sourced to where each customer receives the benefit -- but you'll need an exemption certificate claiming multi-state benefit from the customer to source away from your own (Texas) location.

Internet businesses that broadcast or transmit content from Texas servers

Expect that transmission/broadcast charges are taxed as telecommunications services whenever the transmission both originates in Texas and is billed to a Texas number or address -- serving out-of-state customers doesn't by itself take you out of this category if the technical origination point and billing details are Texas-based.

Businesses that buy and resell domain name registrations

You don't need to charge Texas sales tax on the domain name registration sale itself, separate from any taxable web-development or hosting services bundled with it.

Common questions

Q: Is building a website for a client subject to Texas sales tax?
A: Yes -- it's treated as a data processing service (design, programming, and updates are taxed the same as the web page itself).

Q: How is a website service sourced when I have out-of-state customers?
A: To the location(s) where the customer receives the benefit of the service, rather than where your server is located, provided the customer gives you an exemption certificate claiming multi-state benefit.

Q: Is transmitting or broadcasting information over the internet taxable?
A: Yes, as a telecommunications service, if the transmission originates in Texas and is billed to a Texas phone number or a Texas billing/service address -- which covers transmissions sent out from a Texas server.

Q: Do I need to charge sales tax when I resell a domain name registration?
A: No -- the sale of domain names is not subject to Texas sales tax.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.330 (data processing services; benefit-location sourcing)
• Tex. Tax Code § 151.323(3) (telecommunications exemption; found inapplicable here)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701189L

Original ruling text

January 23, 1997

Dear***:

Thank you for your recent letter which is restated in part with response below.

I have a corporate client (Texas corporation) engaged solely in the internet
business
with customers within and without the state.

I am concerned about the potential of sales tax liability for the services
provided.
Currently, they are engaged in three areas:

1) Construction of Web Sites
2) Broadcasting information for their customers over the Internet, and
3) Purchase and resale of Domain Registrations

Again these services are from customers within and without the state, although
all
service is generated from a site within the state. So the question is are these
services as
briefly described subject to the Texas sales tax and if so what about the out
of state
customers. What is considered the point of sale?

Response: Web pages are generally treated as electronic data and graphics
residing on a computer rather than computer programs. As such, their creation
and storage are considered to be data processing services. Charges for
designing, programming, and updating the web page are services in connection
with the sale and are taxed in the same manner as the web page itself. The
location or locations where the buyer receives benefit of the service
determines the tax rate and not the location of the server if the customer
issues an exemption certificate claiming multi-state benefit. I am enclosing
Rule 3.330 for your reference.

Transmission of information is a telecommunications service the charges for
which are subject to sales tax if the transmission originates in Texas and is
billed to a Texas telephone number, or billing or service address within Texas.
Transmissions from Texas servers fall into this catagory and thus are subject
to tax. The exemption in Tax Code Sec. 151.323(3) is not applicable in this
case.

The sale of domain names is not subject to sales tax.

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. My Internet address is .

Sincerely,
Al Van Allen
Tax Policy Division