I build and host websites. A potential client (a for-profit business) is getting part of its website funded by a federal grant, and I'll be invoicing the grant administrator directly for 75% of the design cost, with the business itself paying the other 25% plus quarterly server hosting fees. How much of this do I charge Texas sales tax on?

Plain-English summary

A web designer builds and hosts websites, charging separately for design time and for the server space used for web access. A potential client — a for-profit business — was going to get its website partially funded by federal grant money, administered through a program (referred to in the letter as a state-university-connected entity). The billing was structured as a three-way split: the grant-administering entity would pay 75% of the design cost (invoiced directly to it), the for-profit business would pay the remaining 25% of design cost up front, and the business was also separately responsible for quarterly server-space hosting fees. The designer was unsure how much Texas sales tax, if any, to charge on each piece, given that federal grant money was ultimately funding part of the job.

The Comptroller's answer confirmed two things at once:

Website development and hosting/storage are both subject to sales tax. There's no special exemption for either just because the underlying content is a website or because federal money helps pay for it.

The exemption follows who actually pays, not who benefits. The federal government and the state university/grant-administering entity are exempt governmental entities that can make tax-free purchases. Critically, the fact that a governmental entity's purchase ultimately benefits a for-profit business does not cause the exemption to be lost — as long as the governmental entity itself is the one paying for the taxable item. So: the amount billed directly to and paid by the grant-administering entity (its 75% design share) is tax-free, while the total amount billed to the for-profit business — its 25% design share plus the quarterly hosting fees it's responsible for — is fully taxable.

What this means for you

Web designers and developers working on grant-funded projects

Structure your invoicing to bill the exempt governmental/grant entity directly for the portion it's actually paying — that portion is tax-free. Any portion billed to and paid by the for-profit end-client stays taxable, even on the very same overall project.

For-profit businesses receiving grant-subsidized services

Don't assume that because part of your project is grant-funded, your own out-of-pocket share is tax-free too — only the amount the exempt governmental entity itself directly pays escapes tax; your own payments (including ongoing costs like hosting) remain taxable.

Grant administrators and university/government program managers funding vendor services for private businesses

As long as you (the exempt entity) are the one actually paying the vendor for the taxable item or service, the exemption holds even though a for-profit business is the ultimate beneficiary — but the vendor still needs to bill you directly for that portion to claim the exemption on it.

Accountants and tax professionals structuring grant-subsidized vendor contracts

The controlling principle here is "who pays," not "who benefits." Split-funded projects involving an exempt entity and a for-profit beneficiary should be invoiced as genuinely separate charges to each payer, with the exempt entity's portion billed and paid directly by it, to cleanly separate the tax-free and taxable pieces.

Common questions

Q: Are website design and hosting charges subject to Texas sales tax?
A: Yes, both are taxable.

Q: If a government entity funds part of my project through a grant, is the whole project tax-free?
A: No — only the portion actually billed to and paid directly by the exempt governmental entity is tax-free. The for-profit recipient's own payments remain taxable.

Q: Does it matter that the for-profit business ultimately benefits from the government-funded portion?
A: No — the exemption isn't lost just because a for-profit entity benefits, as long as the governmental entity is the one actually paying for the taxable item.

Q: Are ongoing hosting/server fees paid by the for-profit business taxable, even if design was partly grant-funded?
A: Yes — charges billed to and paid by the for-profit business, including hosting fees, are fully taxable.

Q: Can I rely on this letter for my own grant-funded project billing?
A: No. This opinion is rendered based on the facts presented, and if there are additional or different facts, the opinion may change; it can be relied on only by the taxpayer it was issued to.

Citations and references

No specific Tax Code section or Comptroller rule number is cited in this letter; the Comptroller applies the general governmental/exempt-entity purchaser principle (exemption follows the actual payer, not the beneficiary) without quoting a statute or rule number in the response.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9902205L

Original ruling text

February 8, 1999

Dear Ms. **:

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

I have two questions. Part of my business is building and hosting websites for
people (i.e. if someone wants a website, I can create one for them and provide
a place for the website to be accessible via the world wide web). I charge for
time I spend building the website and I also charge for the computer space used
for world wide web access.

1. Do I collect Texas state sales tax from Texas customers for these services?

I assume the answer to question 1 is yes. My real dilemma is a potential client
in Texas who wants a website. They are being partially funded by federal grant
money for their website expenses. The federal government is obviously exempt
from Texas sales tax. The administrator of the grant money is telling me to
remove the Texas sales tax from the invoice I sent. I am not so certain any
exemption applies at all in this case.

Note: In response to my email request for clarification, you stated:

I issued that invoice prior to realizing that I would be involved in a contract
with COMPANY A and the COMPANY B. I was under the impression that I would bill
COMPANY A, they would pay me, and then they would get the grant money on their
own. As it turns out, I need to sign the contract issued by the COMPANY B in
order to get this job.

The only portion of the website eligible under the grant is the design.
COMPANY B pays 75% (I invoice COMPANY B directly); COMPANY A pays 25% (COMPANY
A pays their portion first, then I can invoice COMPANY B for the remainder
after I complete the work).

I am hesitant to sign the contract until I know how much, if any, Texas state
sales should be collected from COMPANY A. Perhaps I should have asked the
questions this way:

Do I collect tax on the $* that the COMPANY B program would pay?

Do I collect tax on the $* that COMPANY A would pay?

Do I collect tax on the quarterly payments of $** for the server
space for the website (COMPANY A responsible for this amount)?

2. Are any Texas state sales tax exemptions available if a Texas customer
   receives federal grant money to help pay for my services? I am sitting on a
   contract that involves my potential client (a business in **) the
   COMPANY C (the source of the grant money), and me. I am reluctant to sign it
   until I hear from you.

Response: Charges for website development as well as charges for storage of a
website on a server are subject to sales tax. Accordingly, the total amount
that is billed to the for-profit customer is subject to tax. Both the
** at ** and the ** are exempt governmental
entities that may make tax-free purchases. The fact that a purchase made by a
governmental entity may benefit a for-profit entity does not cause the loss of
the exemption if the governmental entity pays for the taxable item.
Accordingly, Texas tax is not due on charges to these entities.

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

I hope this information is helpful. If you have other questions about the
state's sales tax law, or wish to discuss this in more detail, please contact
me. You may contact me at 1-800-531-5441, extension 3-4680 or email
. You may also write to Tax Policy, Comptroller of
Public Accounts, Post Office Box 13528, Austin, Texas 78711.

Sincerely,

Al Van Allen
Tax Policy Division