Texas Comptroller of Public Accounts    STAR System


August 3, 2009


RE: 09057832 Server housing and network management services

Dear Mr. **************

Thank you for your recent letter regarding computer-related services. According 
to your letter, your client (ďTaxpayerĒ), headquartered in Texas, generally 
operates as a co-location provider. 

You stated that in a typical co-location arrangement, a provider generally 
invoices recurring charges for rack or cabinet space, Internet bandwidth, and 
electrical power to a customer locating computer hardware in the providerís 
facilities. In addition to these recurring customer charges, Taxpayer provides 
other colocation managed services on a stand-alone basis as requested by 
customers.  Taxpayer separately states various combinations of its colocation 
and managed service charges on their customerís invoice. You stated, these 
related services are optional at the discretion of the customer and are not 
bundled with any other services. 

Taxpayer seeks a taxability determination as to whether the recurring, managed, 
and other service charges are subject to sales tax in Texas and whether the 
referenced services can be separately stated such that tax is only collected on 
any portion that is deemed taxable.

Taxpayer provides a secure location within a building (the ďco-location spaceĒ) 
as well as a reliable environment to (1) store a customerís equipment or (2) to 
utilize as a disaster workforce and recovery back-up facility. The customer 
owns and operates the equipment housed at the co-location and does not receive 
any property interest or ownership rights to the co-location space. The charge 
for this lease is a flat monthly recurring fee. In addition, Taxpayer may 
charge customer an initial non-recurring charge that covers the costs of 
installation, labor and cabling. This co-location space is a restricted and 
supervised area providing several connection options for the customerís 

Response: When Taxpayer leases rack or cabinet space to customers for placement 
of customer-owned servers, Taxpayer is renting real property to the customer. 
This charge is not subject to Texas sales or use tax.

Electrical power is purchased from retail providers. Taxpayer bills its 
customers for the electricity used to power customerís equipment in the 
facility.  Taxpayer does not generate or produce electricity.

Response: A separately-stated charge for electricity on the invoice to the 
co-location customer is not subject to sales tax. Taxpayer is the consumer of 
the electricity used in providing the co-location space and must pay sales tax 
at the time of purchase to the retail electric provider.

Cross-connection and bandwidth services are provided to the co-location 
customer. The cross-connection service provides the physical link between the 
customer and the Internet and is billed as a flat monthly fee. The price of the 
cross-connection and bandwidth service varies based on the speed and 
reliability of the connection. The bandwidth is billed under ďcross connectĒ 
and includes the connection type such as T1, Coax, Cat6, etc. Customers 
purchasing the bandwidth and cross-connection services do not purchase 
equipment from Taxpayer. Taxpayer merely provides a connection between the 
Internet backbone and the customerís equipment. The customer uses its own 
equipment and in some cases its own ISP.

Response: Charges for cross-connection and bandwidth services are taxable 
telecommunication services. Taxpayer must collect tax on the separately stated 
charges on the customerís co-location invoice for these charges, including 
costs of installation, labor, and cabling billed to the customer. Taxpayer may 
issue a resale certificate to the telecommunications service provider in lieu 
of paying tax on these bandwidth services at the time of purchase. 

L1 and L2 network monitoring services, which generally involve the monitoring 
of equipment by engineering technicians whose work includes problem analysis 
within the connections.

Response: The charges for monitoring network equipment used by the customer 
purchasing co-location space from Taxpayer are not taxable. For example, 
Taxpayerís charges to a co-location customer for monitoring customerís 
equipment response time, availability and analysis of problem connections are 
not taxable.

L3 systems and network services are enhanced services that may include a repair 
to tangible personal property. Technicians also may install software agents 
that collect and report statistical data involving traffic, usage, device 
health and other information.

Response: Charges to repair, remodel, restore or maintain tangible personal 
property (e.g., co-location customerís computer hardware) are subject to sales 
tax. The installation of monitoring software is not taxable, provided Taxpayer 
is performing the installation but is not selling the software to the customer. 
Taxpayer owes tax when purchasing the hardware and software it uses to provide 
the nontaxable monitoring services including monitoring of devices such as 
servers, routers and other devices attached to a network.

Fiber optic and copper cabling is offered and is run through the ceiling, walls 
and floor of the building. Taxpayer or a third-party vendor may perform this 
task. The cabling becomes part of the structure of the building and, although 
it is not resold to new lessees, it can be used by a customer other than the 
one who had the cable run installed.

Response: Installation by a third-party vendor of cabling through the ceiling, 
walls and floor of Taxpayerís building is taxable to Taxpayer as real property 
remodeling. Taxpayer is the consumer of this service. The third-party vendor 
must collect and remit tax from Taxpayer on the charges. However, whether the 
cabling is installed by Taxpayer or a third-party vendor, Taxpayerís cabling 
charge to the co-location customer is not taxable.

Power strips are installed but no transfer of ownership occurs.

Response: A real property lessor, such as Taxpayer, owes tax on tangible 
personal property purchased and provided as part of the real property rental. 
Therefore, Taxpayer owes tax at the time of purchase on the power strips used 
to connect a co-location customerís equipment to Taxpayerís electrical source. 
However, Taxpayerís charge to the customer for the power strips is not taxable. 
 Rule 3.294(k)(1).

Customer-owned equipment is unpacked and moved to the customerís space by 
Taxpayer. The equipment is purchased and owned by the customer.

Response: The unpacking, moving, and installation of customerís equipment into 
the co-location customerís rack space or cabinet is not taxable, provided 
Taxpayer did not sell the equipment to the customer. 

Cabinet/Power Audit and Cable Tracing is a service whereby cables are labeled 
and the cables are traced end to end or power is traced from the power source 
through to the equipment.

Response: The tracing and labeling of data and power cables is not a taxable 
service if purchased in conjunction with a nontaxable co-location service or 
provided as part of a nontaxable installation service. 

Customer servers are rebooted. This service does not involve the repair of 
tangible property. 

Response: Powering down equipment and then powering it up again is not a 
taxable service.

Installation of software patches and software modifications are performed on 
programs that are not sold by Taxpayer to the customer.

Response: Installing software patches or software modifications on software 
that Taxpayer did not sell is not taxable.

Taxpayer troubleshoots hardware and databases, but does not perform any 
repairs. Taxpayer recommends a course of action to fix the problems, if any are 

Response: Troubleshooting equipment or databases without repair or 
modifications being made is not taxable.

Technicians provide scheduled back-up tape rotation based on customer 

Response: Tape rotation and storage that are part of the co-location lease that 
customer purchased are not taxable, provided Taxpayer does not perform any data 
processing (e.g., data back-up) services. Tape rotation and storage are taxable 
when performed as part of a taxable data processing service.

Migration consultation service involves Taxpayer checking customerís hardware, 
analyzing customer traffic over the network, determining issues and 
recommending solutions. Some recommended solutions include the customer 
purchasing additional servers or bandwidth.

Response: These consultation services would be taxable as part of the sales 
price of taxable items such as servers or additional bandwidth that the 
customer purchases from Taxpayer. If Taxpayer does not sell the recommended 
taxable items, or the consultation is sold on a standalone basis, or solely in 
conjunction with a nontaxable item, such as a co-location lease, the 
consultation is not taxable. 

Migration design services involve designing the customerís cage layout, 
recommending server spacing and alignment, and overall layout.

Response: The design services are not taxable if sold as part of a nontaxable 
co-location service.

Taxpayerís migration move-in service provides for the bonded moving of a 
co-location customerís equipment from an off-site location to the co-location 
space Taxpayer provides to customer.

Response: The moving services are not taxable if sold as part of a nontaxable 
co-location service.

Taxpayer provides backup services that include daily, weekly and monthly 
cumulative backup services to tape and complete backups. Tapes are stored 
off-site on a rotational basis.

Response: This service involves the storage and manipulation of data and is 
taxable as a data processing service. Twenty percent of the charge for data 
processing services is exempt. Tax is due on 80% of the selling price of this 

Server imaging is offered as a data backup service.

Response: This service involves the storage and manipulation of data and is 
taxable as a data processing service. Twenty percent of the charge for data 
processing services is exempt. Tax is due on 80percent of the selling price of 
this service.

Taxpayer buys software licenses on behalf of customer that Taxpayer uses to 
backup customerís data. The software is installed on customerís hardware to 
facilitate the backup service provided by Taxpayer. Taxpayer invoices customer 
for the license and the data processing charge.

Response: The total amount Taxpayer pays for the software is taxable when 
purchased. The charge(s) on the customerís invoice for the software and the 
data processing are taxable, whether billed together as a lump-sum or separate 
line items, including charges for installation of the software as data 
processing. The tax Taxpayer collects from its customer is based on 80% of the 
selling price of the charge(s) for the data processing. Taxpayer owes tax on 
all items purchased to provide the taxable data processing service. Taxpayer 
may not issue a resale certificate for software used to provide the taxable 
data processing service because care, custody and control of the software are 
not transferred to the customer.

Storage area network (SAN) fiber channel storage is offered in a redundant 
array independent disk (RAID) configuration of level 5 protection. 

Response: Data storage and backup are taxable data processing services.

SAN fiber channel storage is offered in a RAID configuration of level 10 

Response: Data storage and backup are taxable data processing services.

Taxpayerís personnel accept items shipped to the Taxpayerís location on the 
customerís behalf and facilitate shipping items to customer, or for customer, 
at customerís request.

Response: As long as the items shipped or received were not sold by Taxpayer to 
the customer, the shipping and receiving service is not taxable.

Customer or customerís third-party vendors are escorted to the customerís 
co-location area by Taxpayer.

Response: The charge for this is not taxable.

Taxpayer makes a daily walk-through for a physical inspection of customerís 
space and removes fire hazards, visually checks cabling and conducts other 
similar tasks, but does not perform repairs.

Response: This service could be a taxable real property service under Rule 
3.356 if the service is janitorial or custodial in nature to keep the premises 
clean and orderly. Additional information is needed for a definitive ruling.

I hope you find this information helpful.  Complete Texas sales tax 
information, including rules, statutes, publications, and frequently asked 
questions can be found on the Sales and Use Tax Web page at:  
http://window.state.tx.us/taxinfo/sales/.  You may click on "Statutes" and 
"Rules" to find information noted above.

This opinion is based on the information presented.  Other information, though 
similar, may yield a different result. 

If you have any questions or need additional information, you can reply to this 
email, call me at 1-800-531-5441 ext. 3-5719, or write to Tax Policy Division, 
P. O. Box 13528, Austin, Texas 78711-3528.

Our goal is to provide you with prompt, professional service.  Please take a 
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Lindey Osborne
Tax Policy
Texas Comptroller of Public Accounts

DATE: 08/03/2009