Texas Comptroller of Public Accounts STAR System
July 31, 2012
Re: Requests for Guidance - Web Services
Thank you for your letter regarding the taxability of services provided by
Company offers information technology infrastructure services to customers in
the form of web services. The services allow customers to access applications
and platforms without significant information technology capital investment.
Companies may access server bandwidth and storage capacity through the internet
without having to spend capital on servers, information technology support
staff, or real estate to house the servers. These services are commonly
referred to as “cloud computing” services. For example, via the internet
Company provides customers with computing power, storage, and other information
technology infrastructure services.
Company is headquartered outside of Texas and also has offices outside Texas.
While Company does not own any data centers, it does utilize large data centers
located outside Texas to provide its cloud computing services. Besides the
large data centers, Company also utilizes very small clusters of servers
located in many states, including Texas, as well as locations around the world
in order to provision a small subset of its services. The domestic data centers
and small clusters of servers are owned and operated by affiliated entities.
(1) Service A
Service A allows customers to store, retrieve, and maintain content, data,
applications and software on its servers. This service is commonly referred to
as “dumb storage”. Customers can store and retrieve large amounts of data at
any time and from any location via the internet. Customers can do this by
setting up an account via the internet which enables them to upload and
download their content to the “cloud” – the data center network which Company
has made available to them. A unique electronic code is assigned to each
account, which customers use to access stored data.
Service A is typically used by companies and individual developers. Companies
may use it to backup data or store large amounts of data for which they do not
have the memory capacity, or to store temporary data used in setting up a
website. Individual developers generally utilize the remote storage services to
backup and store data in lieu of setting up their own on-premises server
Customers that utilize Service A retain ownership of their content uploaded to
the network utilized by Company. Company does not have the authority to use,
sell, or license customer content being stored within Service A. Company merely
provides access to the infrastructure necessary for customers to store their
own digital content. Customers are able to freely access and use their content
with only some restrictions on the content that may be stored, including size
restrictions. The remote storage services are also scalable – customers can
increase storage space, speed, throughput and robustness to adapt the service
to their evolving storage needs. Customers have the capability to select a
specific data center to provide their remote storage services. Customers also
have the option to utilize a private server within the data center; however,
they do not have the option of selecting the exact server on which their data
will reside. Customers selecting this option are paying for the isolation of
their data from other customers’ data; however, Company may move the customer’s
data from one private server to another without notice to the customer (nor
does the customer have visibility as to which exact server is hosting their
Customers upload and download data through various internet programming
languages, which are all freely available via the internet and not provided by
Company. While Company makes available free of charge certain open source
operating software and applications for customers using their remote storage
services, customers are not required to use the software and applications to
use the service. Further, open source software and applications are available
free of charge from other third party providers via the internet.
Customers are charged a single fee for storage services based on the amount of
storage capacity they use within a given month. Prices are on a sliding scale.
Customers are also charged a separately-stated fee for the volume of data that
they request to be transferred between data centers or transferred back to
their own personal origin servers. Requests by customers to copy data from one
server to another may trigger a fee. Customers are not charged for the use of
(2) Service B
Company provides a scalable virtual computing environment with its Service B.
Through Service B, customers can procure cloud computing resources in order to
perform a variety of activities, including, but not limited to, running
applications, monitoring computers and computer usage, sending electronic
communications, and hosting web domains – essentially anything a server can
do. One of the service’s core benefits is that it allows customers to obtain
computer capacity and control of their computing resources without a
significant information technology investment (e.g., customers no longer have
to buy their own servers or set up their own on-premises data centers).
In order to use Service B, customers create a virtual server to run specific
applications and services. Customers select a configuration of memory, CPU, and
storage that is optimal for their choice of operating system and application.
This configuration is the basis for the fee the customer is charged for Service
B usage. Similar to the remote storage service, customers access content
through means of an account. Accounts are assigned encryption codes, which
customers use to access their content.
Customers retain all intellectual property rights to all of their data and
content sent to the cloud. Customers must represent that they own or license
the intellectual property and software that they are uploading to use during
a computing session. Similar to remote storage services, customers have the
capability to select a specific data center to provide their cloud computing
services. Customers also have the option to utilize a private server within the
data center; however, they do not have the option of selecting the exact server
on which their data will reside. Customers selecting this option are paying for
the isolation of their data from other customers’ data; however, Company may
move the customer’s data from one private server to another without notice to
the customer (nor does the customer have visibility as to which exact server is
hosting their data).
Company also makes available to customers a variety of software, data and other
content as necessary for use of Company’s Service B. Customers are not required
to use specific software to use the service and do not download any software.
Company does not separately license, sell or distribute any software with its
cloud computing services. However, some software is required for customers’ use
of the cloud computing service. Customers may use their own software with the
service or Company will make available operating system software for customers’
use on the virtual server (e.g. open source operating systems or third party
operating systems). The software is accessed and used on Company’s servers
through the cloud. If customers make use of this operating system software,
then they may only use it in conjunction with the use of the cloud computing
services. Company’s software licensing agreements between Company and third
party software vendors explicitly state that Company’s customers cannot
download the operating software, and Company may not in any other way transfer
the software to its customers. No software license is sold or otherwise
transferred from Company to customers. The software that Company provides is
used by Company in provisioning a service to Company’s customers.
Customers are generally charged for cloud computing based on the resources
that they consume, and generally are not based upon any fixed fees. Operating
software, application tools, data or other content are provided solely for the
convenience of the customer; these costs are built into the per-hour charges.
Company does not separately charge its customers for use of these items.
There are different pricing plans based upon how customers use configurations
of memory, CPU, and storage. Customers generally pay hourly rates for the
length of time they use cloud computing services. They may use cloud computing
services at any time, for any length of time.
There are also different rates for computing power depending upon which
operating system the customer is using. Customers that use a specified third
party operating system that has been licensed for use by Company may pay a
higher rate, while customers that use all other operating systems may be
charged a lower hourly rate. The software that Company allows customers to use
for no additional charge is freely available on the internet and commonly
understood to be open-source, as described above. Therefore, while Company
customers can access the software from Company for use in conjunction with
their cloud computing services, they can also obtain the open-source software
freely from other sources without being restricted in their use.
Although Service B using a third party operating system will cost customers
slightly more than the use of an open source operating system, the extra cost
is not in proportion to, and has no correlation to, the expense Company incurs
in licensing the operating system from a third party. In addition, the charge
is a single fee in both cases. Further, the configuration (memory, CPU and
short term storage) as selected by the customer generally impacts the hourly
rate for cloud computing services.
(3) Incidental usage fees
Customers' usage of services like Service A and Service B may also generate
separately stated charges. These incidental usage fees are charged when a
customer's files or other data are moved within the data center network
utilized by Company that is providing the Service A or Service B and other
cloud computing services, or when data is retrieved by the customer from this
network. This incidental usage cannot be purchased in isolation, and is always
a consequence of a customer's active use of a different and primary service
such as Service A or Service B. For example, a customer using Service A may
wish to have their data backed-up in two data centers instead of just one. When
the customer requests that data be copied from one data center to the other,
there may be a fee charged along with the fees charged for the Service A data
storage. These incidental usage fees reflect usage of the Company services
and the network utilized by Company, and are not fees for underlying
telecommunications infrastructure. To the contrary, the parties to the
Company’s services transaction (Company and the customer) pay their own
telecommunications access and usage fees to their respective telecommunications
services providers outside of their Company services transaction.
Specific incidental usage situations are noted below:
* Adding files - There is no fee to add files to the cloud.
* Moving files - Fees may be charged for requesting that data be moved to a
service or copied to storage. For example, if a customer asks that data stored
in Service A be used in a Service B computing process a fee may apply. For
another example, if a customer requests that data be moved from one data center
to another data center in the same state, then an incidental usage fee may
* Retrieving data - When a customer requests that their data be transferred
from a Company service back to their own origin servers, a fee will apply.
(4) Service C
Service C intelligently determines where best to position data in the network
utilized by Company and how best to route end user requests to access that
data. Customers needing to deliver digital content (e.g., streaming
audio/video) to end users utilize Service C to help them get their data to end
users in the most efficient way possible, creating the lowest latency possible.
Service C is designed to work seamlessly with other Company services. For
example, when data is stored with Service A, it can also have cached copies
deployed to small clusters of servers that are closer to end users. Service C
determines how best to position the data. When end users request content from
the customer, Service C intelligently routes that end users' request to the
nearest server group that can provide the data with the lowest possible
Service C works behind the scenes benefiting end users by helping them get data
faster. End users do not know that the Company they requested data from is
using Service C to efficiently route their content request to the most ideal
server. In real time, Service C decides, based on many factors, to which server
their request should be routed. Similarly, developers and businesses using
Service C do not know which servers have cached copies of their content at any
given moment, nor do they have the ability to direct the exact routing of their
data across the server network. Service C determines where best to cache data.
For example, a business may be a heavy user of Service B and Service A and also
may use Service C in order to deliver content to its end users (e.g., a mobile
application Company, or online gaming Company). An end user in a particular
state may request content from the online gaming Company and Service C will
route that request to one or more server sites which may or may not be in that
end user's state. Some content could come from a server site in Texas or from
another domestic or international server site.
Pricing is on a per-request basis and data fees may apply, based on activity,
just like they do for other Company services. To be clear, pricing for Service
C depends on the number of requests that the service routes and the amount of
data transferred out of the server sites that the requests were routed to. The
incidental usage fees reflect usage of the Company’s services and the network
utilized by Company, and are not reflective of underlying telecommunications
infrastructure charges. To the contrary, the parties to the Company services
transaction (Company and the customer) pay their own telecommunications access
and usage fees to their respective telecommunications services providers
outside of their Company services transaction.
(5) Service D
Service D is a highly scalable and cost-effective bulk and transactional
email-sending service for businesses and developers. Service D provides
customers with usage of advanced email software and server power. Service D
eliminates the complexity and expense of building an in-house email solution or
licensing, installing, and operating a third-party email service. The service
provides content filtering as well as notifications of bounce backs, failed
deliveries, and spam. The service also stores all outgoing messages redundantly
across multiple data centers. Finally, the service integrates with other
Company services, making it easy to send emails from applications being hosted
on services such as Service B. Fees are based on the number of email messages
6. Service E
Service E offers a platform for creating innovative web solutions and services
based on Service E’s repository of information about the web. Developers,
researchers, web site owners, and merchants can use this information for the
benefit of their own web sites or services. Users can access web site traffic
data, related links, contact information, and a wide variety of other data.
Service E provides programmatic access to lists of web sites ordered by traffic
rank. Service E data is available for the web as a whole, or for individual
countries. Service E also gathers information about web pages, such as
popularity and linked site information, and makes that information available to
the Service E users.
PROPOSED FUTURE ACTIVITY
1. Sales office
Company may desire to create one or more sales offices in Texas. Such an office
would be staffed by sales team members and support staff. These employees would
engage in sales and marketing-related tasks such as phoning businesses,
creating marketing collateral, showing prospective customers how they could use
Company, and negotiating special pricing or terms and conditions that may
differ from the online customer agreement. The goal of the sales team is to
have customers sign up for a Company account whereby they can start requesting
services on an as-needed basis in the future. No Company services (e.g. Service
A or B, etc.) would be requested from these offices as service requests are
made directly to data centers by customers. Similarly, no Company services
would be performed from these offices as Company services are performed
remotely at data centers. The vast majority of Company customers sign up for an
account via the click-through agreement on the website, which is accepted on
servers outside of Texas. In cases where sales office employees negotiate
special pricing or terms, the agreement will be accepted by Company at the
headquarters offices outside of Texas.
2. Technology Development Office
Company may desire to create a technology development office in Texas which
would be leased either by Company or by an affiliated entity. Such an office
would be staffed by software development engineers, solution architects,
technical support staff, and related operations personnel, such as customer
service specialists whom are either employed by Company or an affiliated
entity. These personnel would not receive requests for services and would,
instead, work primarily on creating new future services or maintaining systems
that allow for current services to be provided.
3. Data Center
Currently, Company utilizes a small cluster of servers located in Texas. In the
future, however, Company may desire to utilize capabilities of a full data
center located in Texas. The data center infrastructure would not be owned by
Company, but many of the services that Company sells would utilize the
computing power of the Texas-based data center in the same way that Company
currently utilizes computing power at other data centers. For example,
customers using Service A would have the option of storing data in a Texas data
center and Service B users could choose to run virtual machine configurations
out of a Texas data center.
QUESTIONS AND RESPONSES
1. Is Service A subject to Texas sales and use tax as a data processing
Yes. Data processing services include computerized data and information
storage. See Tax Code Section 151.0035. Tax Code Section 151.351 exempts the
first twenty percent of a charge for data processing services.
2. Is Service B subject to Texas sales and use tax as a data processing
Yes. The definition of data processing services in Tax Code Section 151.0035
includes computerized data and information storage or manipulation as well as
use of computer time for data processing. Tax Code Section 151.351 exempts the
first twenty percent of a charge for data processing services.
3. Are the incidental usage fees charged in conjunction with the purchase of
core Company services subject to Texas sales and use tax as a data processing
Yes. Based on the facts provided, the data transfer fees are always provided in
connection with a data processing service and become part of Company’s sales
price to store or manipulate data. Tax Code Section 151.351 exempts the first
twenty percent of a charge for data processing services.
4. Is Service C subject to Texas sales and use tax as a data processing
Yes. Service C helps customers copy their information to sites within the
network utilized by Company and routes end user requests for customer data to
the site that can deliver the information most quickly. These services fall
within the definition of data processing, which includes data storage,
manipulation, and data retrieval. Tax Code Section 151.351 exempts the first
twenty percent of a charge for data processing services.
5. Is Service D subject to Texas sales and use tax as a data processing
No. Service D is taxable as a telecommunications service. Texas sales tax is
due on all email transmissions that both originate from and terminate at a
Texas location. Rule 3.344(b)(4). Interstate telecommunications services are
subject to Texas sales tax if they are both originated from, and billed to, a
telephone number or billing or service address within Texas such that if a call
originates in Texas and is billed to a Texas service address, the charge is
taxable even if the invoice, statement, or other demand for payment is sent to
an address in another state. See Rule 3.344(b)(5) and (c)(1).
Tax Code Section 151.0103(a) defines telecommunications services as follows:
“(a) For the purposes of this title only, "telecommunications services" means
the electronic or electrical transmission, conveyance, routing, or reception of
sounds, signals, data, or information utilizing wires, cable, radio waves,
microwaves, satellites, fiber optics, or any other method now in existence or
that may be devised, including but not limited to long-distance telephone
service. The term does not include:
(1) the storage of data or information for subsequent retrieval or the
processing, or reception and processing, of data or information intended to
change its form or content;
(2) the sale or use of a telephone prepaid calling card;
(3) Internet access service; or
(4) a pay telephone coin sent-paid telephone call.”
Tax Code Section 151.025(d) governs the manner in which a combination of
taxable telecommunications services charges billed as a lump sum charge are to
be treated. The statute states that if any nontaxable charges are combined with
and not separately stated from taxable telecommunications service charges on
the customer bill or invoice of a provider of telecommunications services, the
combined charge is subject to tax unless the provider can identify the portion
of the charges that are nontaxable through the provider's books and records
kept in the regular course of business. If the nontaxable charges cannot
reasonably be identified, the charges from the sale of both nontaxable services
and taxable telecommunications services are attributable to taxable
telecommunications services. The provider of telecommunications services has
the burden of proving nontaxable charges.
6. Is Service E provided by Company subject to Texas sales and use tax as an
Yes. Service E gathers data from around the web and makes it available to
customers in the form of lists and searchable data. This furnishing of data
that was not originally provided by the customer fits within the definition of
an information service found in Tax Code Section 151.0038. Tax Code Section
151.351 exempts the first twenty percent of a charge for an information
7. Confirm the sourcing of sales under the current facts where Company has no
office in Texas and only utilizes some computing infrastructure in the state.
The local taxes due on sales of data processing and information services sold
by Company are sourced to the local taxing jurisdictions in effect at the
customer’s Texas location.
Subject to the provisions of Tax Code Sec. 321.203 and 323.203, the application
of Texas local sales taxes in Texas is determined by the location of the place
of business of the retailer where the order is received, or in some situations,
from which the item is shipped. Because Company does not operate a “place of
business” in Texas as the term is defined in Tax Code Sec. 321.002(a)(3) and
all orders are received by Company at an out of state location, local sales
taxes are not applicable. Instead, Company is responsible for collecting use
taxes for the local taxing jurisdictions in effect at the point of delivery.
See Tax Code Sections 321.205 and 323.205.
If the seller cannot determine where the communication originates, collect
local tax based on the address to which the service is billed. See Tax Code
Sections 321.203 (g-1) – (g-3). Taxable interstate calls are subject to state
tax only. Local taxing jurisdictions may not impose local sales tax exemption
on interstate long-distance telecommunications services. See Rule 3.344(h)(2).
Local taxes for mobile telecommunication services are based on the customer’s
primary place of use. Use the customer’s residential street address or the
primary business street address within the service provider’s licensed service
area. See Tax Code Sections 321.203(g) and 151.061. Not all local taxing
entities impose tax on telecommunications services. A list of local taxing
entities that impose tax on telecommunications services is available on the
Comptroller’s website at
8. What local sales tax rate should be used in calculating tax in the event
that one or more sales offices are created in the state?
Based on the facts presented, no sales orders would be taken in Texas, and
local use taxes rather than local sales taxes would be due. Company would be
responsible for collecting use taxes for the local taxing jurisdictions in
effect at the Texas customer’s location. See Tax Code Sections 321.205 and
323.205. Local taxes on telecommunications services are due as described in
response to question 7.
9. What local sales tax rate should be used in calculating tax in the event
that one or more technology development offices are created in the state?
Because the technology development offices would not meet the definition of a
“place of business” as the term is defined in Tax Code Section 321.002(a)(3)
and all orders would be received by Company at an out-of-state location,
Company would be responsible for collecting use taxes on data processing and
information services for the local taxing jurisdictions in effect at the Texas
customer’s location. See Tax Code Sections 321.205 and 323.205. Local taxes on
telecommunications services are due as described in response to question 7.
10. What local sales tax rate should be used in calculating tax in the event
that one or more data centers are created in the state?
Based on the facts presented, Company would not operate a place of business in
Texas as the term is defined in Tax Code Section 321.002(a)(3). Orders would be
received by Company at an out-of-state location. Company would be responsible
for collecting use taxes on data processing and information services for the
local taxing jurisdictions in effect at the Texas customer’s location. See Tax
Code Sections 321.205 and 323.205. Local taxes on telecommunications services
are due as described in response to question 7.
This opinion is based on the facts presented and current law.
William S. Hamner
Director of Tax Administration
ACCESSION NUMBER: 201207533L
DOCUMENT TYPE: L
TAX TYPE: SALES