Texas and Taxes: Relief For Hosting Companies

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Does having a server in a data center make your business a resident of the state where the data center is located – invoking the requirement to collect state taxes? Not in Texas anymore, thanks to a bill signed last month by Texas Gov. Rick Perry.

Texas House Bill 1841 states that an individual or business whose only activity in the state is Internet hosting is not “engaged in business” in the state and thus does not have to collect Texas sales and use taxes from customers.

The bill reverses a rule change made by the Texas Comptroller of Public Accounts during 2010, which said that renting a space on a server in Texas effectively establishes a business presence in the state. This is a huge deal, as Texas is home to many of the largest hosting and data center companies in the world, including SoftLayer, Rackspace, Layered Technologies, CI Host, CyrusOne and Horizon Data Centers. These companies’ data centers house servers for hundreds of hosting providers around the world.

The Geography of Hosting

“This amendment immediately created issues for web hosts with data centers in Texas,” writes Suzy Fulton in a summary on the SoftLayer blog. “Why would customers get servers from a host in Texas and have to worry about this tax obligation, when they could do business with another host outside of Texas and not have this obligation? The Comptroller’s Office started to realize the effect of this regulation and began to backpedal and say that they didn’t really mean what they said.”

The hosting industry mobilized to amend the amendment. “The U.S. Supreme Court has consistently ruled that a state can only require a company to collect its sales tax if the company has a substantial physical presence in the state,” notes Alan Schoenbaum, General Counsel for Rackspace. “HB 1841 removes any lingering doubt and effectively repeals the regulation and eliminates any unintended confusion about state policy on the subject. This is a very positive outcome for Rackspace customers and the cloud computing and hosting industry.”

Crisis averted. But the Texas bill – along with the tax issues for data centers in Washington state – serve as a reminder that the boundaries between the real and virtual worlds aren’t always easy to define, and can sometimes lead to unintended consequences.

About the Author

Rich Miller is the founder and editor-in-chief of Data Center Knowledge, and has been reporting on the data center sector since 2000. He has tracked the growing impact of high-density computing on the power and cooling of data centers, and the resulting push for improved energy efficiency in these facilities.

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2 Comments

  1. Zach

    FYI - The state of Oregon doesn't have a sales tax, and Eastern Oregon has power rates in the 4-5 cents/kWh range. http://www.oregonprospector.com/ed.asp?cmd=findsites&CITY=Umatilla&COUNTY=&thetype=all&units=acres&minsize=&maxsize=&Submit=Search+Properties

  2. Fortune 100/500 etc... have been able to run wild through the US economy by setting up shop in various states yet keeping their headquarters (where they are taxed) off-shore in most cases. While I largely disagree with Softlayers argument of "customers will go somewhere else to avoid tax" since if we all did what we could to avoid paying taxes we would have no tax collection at all. All the country needs is a flat tax. That way joe millionaire pays his fair share & so does lucy welfare. As major university's have said who have been threatened with taxes "you can't tax success". Well the government has been taxing success for as long as I can remember.