We lease Internet-access equipment (computers, modems, printers, etc.) to assisted care living facilities so residents can go online, charging a per-resident fee plus an installation fee. Do we owe sales tax on our charges to the facility, and can we buy the equipment tax-free for resale?

Plain-English summary

A company planned to lease equipment to assisted care living facilities across Texas so residents could use Internet services. Under its "Component Lease and Program License Agreement," it would charge each facility a $1,000 up-front installation/consultation fee plus $30 per registered resident (minimum $350/month), and would install, train facility staff/residents on, and maintain the equipment at no separate charge. It had one place of business in Texas and asked the Comptroller to confirm two sets of assumptions.

On what it must charge customers: The company assumed it would owe Texas sales tax plus separate city and county local taxes on both the $1,000 installation charge and the monthly per-resident fee. The Comptroller confirmed sales tax applies to both charges (8.25%, the combined state-plus-local rate on this taxpayer's facts) but clarified the company does not need to collect additional local tax for other cities/counties it delivers into beyond that combined rate.

On what it can buy tax-free for resale: The company assumed it could use a resale certificate to buy all the equipment, software, repair parts, and repair labor tax-free. The Comptroller's answer split the equipment list based on who ends up with legal "care, custody, and control": because the arrangement has the company providing an information service (Internet access) rather than acting as an equipment leasing company, it can buy tax-free for resale the items it actually transfers to the customer's care, custody, and control — computer, monitor, keyboard, trackball, modem, printer, instructional signage, and video camera. But equipment the company keeps control of itself to run the service — the ISDN router, network hub, and network file server computers — is not transferred to the customer, so the company owes tax on those purchases.

The Comptroller also flagged, for future reference, that separate charges for web page design and web page hosting are taxable data processing services.

What this means for you

Companies providing "managed Internet access" or similar equipment-plus-service bundles

Whether you can buy your hardware tax-free for resale depends item-by-item on whether that specific piece of equipment physically ends up in your customer's care, custody, and control, or stays under your own operational control as shared infrastructure (routers, hubs, servers). Sort your equipment list along that line before assuming a blanket resale certificate applies.

Businesses billing customers in multiple Texas taxing jurisdictions from one location

You generally collect the single combined state-plus-local sales tax rate applicable to your transaction — you're not required to separately track and remit additional local taxes for every jurisdiction you deliver goods/services into, on these facts.

Web developers and hosting providers

This letter is a good reminder (flagged even in passing here) that web page design and hosting charges are taxable as data processing services in Texas — a recurring point across many STAR letters.

Accountants and tax professionals advising IT/managed-service businesses

The controlling concept is "care, custody, and control" — equipment physically handed over to and used by the customer supports resale treatment when the provider is rendering an information/service (not equipment leasing); equipment the provider retains to run its own service infrastructure does not. Note the 2017 update to Rule 3.285 referenced in STAR's own ALERT — verify this 1999 letter's specific outcome against current rule text before relying on it.

Common questions

Q: Do we collect additional local sales tax for each city/county we deliver Internet-access equipment and services into?
A: Not on these facts — the company collects the applicable combined state-plus-local rate and isn't required to separately remit additional local taxes for other jurisdictions it delivers into.

Q: Can we buy all our equipment tax-free using a resale certificate?
A: Only the equipment that's actually transferred to the customer's care, custody, and control (computer, monitor, keyboard, trackball, modem, printer, signage, camera). Equipment you retain control of yourself (router, hub, file server) is taxable when you buy it.

Q: Are web page design and hosting charges taxable?
A: Yes — the letter confirms these are subject to sales tax as data processing services.

Q: Can I rely on this letter for my own equipment-plus-service business today?
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. Also check the Rule 3.285 amendment STAR flags (effective 2017) for any updates to the underlying custody/control test.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.285 (Resale Certificates; Sales for Resale) — cited via STAR's own ALERT for current care/custody/control guidance (amended 11/01/2017)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9902265L

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

February 17, 1999

Dear **:

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

We have a client that is going to be leasing equipment to assisted care living
facilities across Texas to enable the residents of the facilities to utilize
Internet services. The client will charge the assisted care living facility a
fee of $30 per resident who registers to utilize the equipment, with a minimum
fee to the facility of $350. There is also an initial fee of $1,000 for
consultation, license fees for the licensed programs installed in the equipment
and installation of the equipment.

The client has one place of business located within the city limits of CITY A,
Texas. Employees of the client will travel to the location of the assisted care
living facilities to: install the equipment, provide training for facility
personnel and residents, and perform maintenance services on the equipment and
related software. There will be no charge to the facility for these activities.

We assume that our client will be required to collect and remit; Texas Sales
Tax, City of CITY A Local Tax and COUNTY A County Tax on the following charges
to the Facilities:

$1,000 equipment installation charge.

Monthly fee to the facility for residents use, or $350 minimum.

Response: The client will collect 8.25% sales tax from its Texas customers on
both charges. It will not be required to collect additional tax for local
taxing jurisdictions into which it may deliver goods and provide services.

We also assume that our client may purchase the following tax free by issuing a
resale certificate to its vendors: Equipment installed at the facilities,
software installed in the equipment, repair parts for the equipment and repair
labor.

We have enclosed a copy of the contract that our client will be entering into
with the assisted care living facilities. Please advise us as to whether our
assumptions are correct. Also, is our client responsible for collecting and
remitting any other local Sales Tax?

Response: The "Component Lease and Program License Agreement" calls for the
client to provide "Internet access for each registered user of the System at
the installation site." The client is using the equipment to provide
information services to its customers rather than an equipment leasing company.
Accordingly, the Client may purchase tax free for resale equipment that it
transfers to the care, custody, and control of its customers such as the:

Computer
Monitor
Keyboard
Trackball
Modem
Printer
Instructional signage, and
Video computer camera

The Client will owe tax on its purchases of items that under the terms of the
contract are not transferred to the customer such as the

ISDN router
Network hub, and
Network file server computers

I would also like to point out for future reference that charges for web page
design and hosting of web pages on servers are subject to sales tax as data
processing services.

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. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division