Can an Internet service provider buy its facility 'environment' and T1 connectivity charges tax-free if it charges its own customers sales tax on those services?

Plain-English summary

An Internet service provider paid $150 per month to a facility supplier for "environment" (air conditioning, power, and shelf space) and "connectivity" (a T1 line to the Internet) supporting its Internet hosting business. The ISP charged its own customers sales tax on its hosting services and asked whether it could purchase these input items tax-free.

The Comptroller answered that the facility supplier should NOT charge the ISP tax on the $150 monthly charge. Instead, the supplier itself must pay tax on the taxable items bundled into that charge — with one exception: the T1 line portion. The supplier may issue a resale certificate to the telecommunications company that actually provides the T1 line service, buying that piece tax-free. And if the supplier separately bills the ISP specifically for the T1 line (rather than bundling it into the flat $150 fee), the ISP itself may issue a resale certificate to the supplier for that T1 charge in lieu of paying tax on it.

What this means for you

Internet service providers and web hosting companies

Don't assume your facility/connectivity supplier should be charging you sales tax on a bundled hosting-environment fee — the supplier is generally the one who owes tax on the taxable components it buys, except for the telecommunications (T1 line) portion, which can move tax-free via resale certificate down the supply chain to whoever ultimately resells the taxable service to the end customer.

Facility and data-center suppliers

If you bundle environment/connectivity charges into a single fee to an ISP customer, don't collect sales tax on that fee from the ISP — you're generally the consumer of the taxable components (aside from the T1/telecom piece, which you can buy tax-free with your own resale certificate to the telecom carrier).

Common questions

Q: Should an ISP be charged sales tax by its hosting-facility supplier?
A: No, generally not on the bundled fee — the supplier itself owes tax on the taxable components, with the T1 telecommunications line handled separately via resale certificate.

Q: How does the T1 line charge get to move tax-free?
A: The facility supplier issues a resale certificate to the telecom company providing the T1 line; if the supplier separately bills the ISP for that line, the ISP can also use a resale certificate with the supplier.

Q: Can another ISP rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9709774L

Original ruling text

September 17, 1997

RE: Sales tax for internet services.

Dear *****

Thank you for your recent email. You stated that you pay $150.00 per month for
environment (air conditioning, power, and shelf space) and connectivity (T1
line to the Internet) charges related to providing Internet hosting services.
You charge tax to your customers and asked if you may purchase these items tax
free.

The provider of the environment and connectivity services should not charge you
tax on the $150.00 charge billed each month. The provider should pay tax on
the taxable items included in this charge with the exception of the T1 line
charge. The provider may issue a resale certificate to the telecommunications
company providing the T1 line service. If the service provider bills you a
separate charge for the T1 line, you may issue a resale certificate to the
provider in lieu of paying tax on the charge for the T1 line.

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

I hope this information is helpful. If you have any questions, please do not
hesitate to contact me. I can be reached by phone at 1-800-531-5441, extension
5-0037, or by e-mail at . Our mailing address is Tax
Policy Division, Comptroller of Public Accounts, P. O. Box 13528, Austin, Texas
78711.

Sincerely,

Lindey Osborne
Tax Policy Division