For a bundled colocation package (rack/space rental plus internet bandwidth), can the rental portion be tax-exempt while bandwidth is taxed separately, and are resold DSL circuits used only for internet access subject to telecom tax?

Plain-English summary

(Important note: STAR's ALERT on this letter is not a heading mismatch but a real, still-relevant statutory update — effective September 1, 2008, House Bill 735 (80th Regular Legislative Session) repealed the Telecommunications Infrastructure Fund (TIF) assessment discussed in this 1999 letter's second answer. That portion of the analysis below no longer reflects current law; the first answer, about splitting rack rental from bandwidth, is not affected by the TIF repeal.)

A colocation provider ("Company A") sold a bundled package combining space/facility rental (power, air conditioning, monitoring) with internet bandwidth (sold in megabits/sec), and asked how to properly collect tax on a service bundled this way. It also asked about resold DSL circuits used only for internet access.

The Comptroller confirmed two things:

1. Rack rental vs. bandwidth: if the company breaks out the rack/space rental charge separately from the bandwidth charge, the rental portion is fully tax-exempt and the bandwidth portion is fully taxable as a telecommunications service. Bundling them together without separating the charges would presumably risk the whole package being treated as taxable telecommunications service (the letter doesn't say this explicitly, but the "yes" answer is conditioned on the charges being broken out).
2. Resold DSL circuits for internet access: Internet service providers may purchase telecommunications services that are integral to performing their service tax-free for resale. But if the underlying carrier or CLEC (competitive local exchange carrier) charges sales tax to the ISP anyway, that carrier/CLEC still owes the TIF assessment on that revenue. (As noted above, the TIF assessment itself no longer exists as of September 1, 2008.)

What this means for you

Data center and colocation providers

If you sell a bundled colocation package, separately stating your rack/space rental charge from your bandwidth charge lets you treat the rental as exempt and only the bandwidth as taxable telecommunications service. Don't lump them into one undifferentiated charge if you want that split treatment.

Internet service providers reselling carrier circuits

You can generally buy telecommunications services integral to your own service (like leased DSL circuits) tax-free for resale — but confirm with your carrier whether they're charging you sales tax anyway, since that shifts obligations on their end (though the TIF-specific obligation discussed here is now obsolete post-2008).

Accountants and tax professionals

This letter is a useful historical example of the rental/telecommunications-service split for bundled data-center offerings, but flag the TIF repeal explicitly to any client relying on this letter today — the core rental/bandwidth split answer likely still reflects the underlying telecommunications-service tax framework, but the TIF assessment discussion is dead law.

Common questions

Q: Can I sell colocation rack space tax-free if I bundle it with internet bandwidth?
A: Only if you separately state the rental charge from the bandwidth charge — then the rental is exempt and the bandwidth is taxed as a telecommunications service.

Q: Are DSL circuits I lease and resell to internet customers taxable?
A: ISPs can generally buy telecommunications services integral to their service tax-free for resale, though the carrier/CLEC may still charge tax in some cases.

Q: Does the TIF assessment discussed in this letter still apply?
A: No — it was repealed effective September 1, 2008 by House Bill 735. That part of this 1999 letter is no longer current law.

Citations and references

No specific Tax Code section is quoted in the original 1999 letter text; STAR's own ALERT references the later repeal via House Bill 735, 80th Regular Legislative Session (2008).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9910747L

Original ruling text

ALERT - Statutory change — Effective September 1, 2008, the
Telecommunications Infrastructure Fund (TIF) assessment no
longer applies. House Bill 735, 80th Regular Legislative Session,
repealed the TIF assessment.

October 4, 1999

<**>

Dear Mr. **:

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

"COMPANY A sells a colocation package which includes rental for space and
facilities (power, air conditioning, monitoring), as well as various levels of
bandwidth (sold in units of megabits/sec). How should we be collecting tax for
a service that is bundled this way?

From our earlier conversation, I gather that if we broke out the rack rental
from the bandwidth piece, the rental would be fully tax exempt, and the
bandwidth would be fully taxable (as a telecommunications service). Is this a
correct statement?"

Response: Yes

"Also, while I have your attention, I have another question regarding the
resale of DSL circuits from COMPANY B, COMPANY C, COMPANY D, and other CLECs.
In particular, I want to know if the DSL circuits leased by COMPANY A from
COMPANY B, COMPANY C, COMPANY D, etc., which we resell to end users for
Internet access, are subject to the telecommunications tax or the TIF tax since
they are used only for Internet access."

Response: Internet service providers may purchase telecommunications services
that are integral to the performance of their service tax free for resale.
However, if the carrier or CLEC charges sales tax to the ISP, the carrier or
CLEC also owes the TIF assessment on that revenue.

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