Texas Comptroller of Public Accounts    STAR System


201207533L



July 31, 2012

*************
*************
*************

Re: Requests for Guidance - Web Services

Dear *************:

Thank you for your letter regarding the taxability of services provided by 
“Company”.

BACKGROUND
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.

SERVICES

(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 
infrastructure.

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 
data).

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 
any software.

(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 
apply.
* 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 
latency.

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 
sent.

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 
service?

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 
service?

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 
service?

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 
service?

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 
service?

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 
information service?

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 
service.

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 
http://www.window.state.tx.us/taxinfo/taxpubs/tx96_339.html.

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.

Regards,


William S. Hamner
Director of Tax Administration




ACCESSION NUMBER: 201207533L
SUPERSEDED: N
DOCUMENT TYPE: L
DATE: 07/31/2012
TAX TYPE: SALES