Texas and Taxes: Relief For Hosting Companies

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, as hosting companies succeeded in a push to clarify a ruling on whether a server established a business presence.

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.

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