Texas – Resale Exemption Denied for Web Hosting Software Leases


SALT Report 2150 – The Texas Comptroller issued a ruling regarding a Taxpayer’s sale and use tax assessment for web hosting services.  As part of its service, the Taxpayer provides its customers with dedicated servers and operating systems software that the Taxpayer loads onto the servers. Once the software is loaded, the customer must select a service package or plan. The Taxpayer offers several levels of service from the most basic level, which provides no human intervention to on-call full service support.

During an audit, it was determined that tax should have been paid on the purchase of the software and leased equipment. The Taxpayer appealed the decision claiming that the software was purchased for resale as part of its web hosting services and that it had charged, collected, and remitted tax on the equipment leases.

Upon review of the case, the Comptroller stated that in order to be entitled to the resale exemption, the Taxpayer must establish the following:

  • That its customers had primary possession, and were primarily responsible for custody, control, and care of the equipment, and
  • The software was purchased for resale as required by Texas Tax Code Section 151.302

To support its resale argument, the Taxpayer presented evidence that showed the majority of its customers chose the basic self-managed hosting service package and that the Taxpayer had transferred care, custody, and control of the OPS software to those customers.  However, the Comptroller denied the resale exemption because the Taxpayer failed to establish the number and type of OPS software that it had purchased and transferred through the self-managed hosting service plan.

Additionally, the Comptroller determined that the auditor had properly assessed sales taxes on the equipment leases because the lease agreement did not contain a statement indicating the amount of tax due or that tax had been included in the sales price.

Accordingly, the Comptroller denied the Taxpayer’s appeal and the sales tax assessment plus penalties and interest was upheld.

For Further Information

Texas Comptroller of Public Accounts – Decision, Hearing No. 100,294


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