Can a Texas Internet service provider buy telecommunications services (like leased lines) tax-free for resale, even though part of its Internet access revenue becomes exempt from sales tax starting October 1, 1999?

Plain-English summary

This letter answers a question providers were asking as a major Texas tax change approached: starting October 1, 1999, part of the revenue from Internet access service becomes exempt from sales tax. Does that partial exemption disturb a provider's ability to buy the telecommunications services it uses to deliver that access -- leased/dedicated lines, for example -- tax-free under a resale certificate?

The Comptroller's answer: no change. Telecommunications services purchased to provide Internet access service, data processing service, or information service still qualify as a sale for resale under Tax Code Section 151.006(1), which covers a taxable service bought for the purpose of reselling it as an integral part of another taxable service. Each of those three services -- Internet access, data processing, information service -- meets the definition of a taxable service, even though part of the revenue from providing them will become tax-exempt. The partial revenue exemption doesn't convert any portion of the underlying telecommunications purchase into a taxable purchase; the resale exemption for the telecommunications input stays intact in full.

What this means for you

Internet service providers and data/information service companies

You can continue to buy the telecommunications services (leased lines, dedicated circuits, etc.) that go into delivering Internet access, data processing, or information services tax-free for resale, even after the October 1999 revenue exemption took effect. The partial exemption on your output revenue does not require you to prorate or give up any part of your resale exemption on inputs.

Telecommunications carriers selling to ISPs and service providers

Your customers in this space remain entitled to issue resale certificates for the full amount of telecommunications services they purchase to provide these taxable services, regardless of the revenue-side exemption change.

Accountants and tax professionals

A clean, narrow confirmation that a partial exemption on the output side of a taxable service does not create a corresponding partial taxability on the input side under Section 151.006(1)'s resale rule -- useful shorthand for similar "does a new exemption disturb my resale certificate" questions in other bundled-service contexts.

Common questions

Q: Does the October 1999 Internet access exemption affect my ability to buy telecom services tax-free for resale?
A: No. You can still issue a resale certificate for the full telecommunications purchase under Tax Code Section 151.006(1).

Q: Does this rule cover data processing and information services too, or just Internet access?
A: All three -- Internet access, data processing, and information services -- are treated the same way for this purpose.

Q: Can I rely on this letter for my own business?
A: No. It is based on the specific facts and question presented and can only be relied on by the taxpayer to whom it was issued.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.006(1) (sale for resale)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9906512L

Original ruling text

June 30, 1999

Dear Mr. ****:

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

"Do you think it would be possible to incorporate this (information) with an
explanation of how it affects (or doesn't affect, maybe, to be more precise)
the resale exemption for leased lines and so on used in the provision of
Internet access? (This seems to be a major concern)."

Response: There should be no difference in the tax treatment of
telecommunications services purchased to provide Internet access service, data
processing service, and information service on and after October 1, 1999.

Tax Code Section 151.006 (1) defines sale for resale to include sale of a
taxable service to a purchaser who acquires the service for the purpose of
reselling as an integral part of another taxable service.

Each of the items listed above meets the definition of a taxable service even
though a portion of the revenue will exempted from sales tax. Accordingly, Tax
Code Section 151.006 (1) will continue to apply to the purchase of
telecommunications services used to provide these services. The fact that a
portion of the revenue from the provision of Internet access service, data
processing service, and information service will be exempted from tax will not
cause a corresponding portion of the telecommunications services purchased to
provide that service to become 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. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division