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Taxing Your Host

Members of the ISP-Webhosting list scour the Internet for their colleagues, searching for information about the application of state sales tax to webhosting services.

[July 15, 2002]

On the ISP-Webhosting list in June, RR queried,

"Should I be applying sales tax for sales of dedicated and leased servers? I'm based in Colorado—I know that webhosting doesn't require sales tax, since it's intangible, but what about servers?"

A number of respondents said it comes down to the difference between goods and services:

[JM noted] "The thing about a dedicated server is that the physical machine being rented is just a portion of the service that you're selling, which may include space, bandwidth, power, cooling, security, maintenance, etc. I'd argue that not all of that is taxable. If you actually sell someone a physical box, then of course you're required to collect sales tax if they're a resident of Colorado, just like the sale of any other personal property."

[GW added] "For colocation, you must split the costs of hardware and installation. I charge only cost for the server, and put all of the profit into the installation, and my customers seem happy with that. I also offer them the chance to send the order over the Internet, so they can avoid the sales tax. Even if you decide to take Internet-only orders, though, the fact that you sell taxable items means that you must have a sales tax license."

Others suggested that something this complicated is best left to an experienced lawyer:

[BS observed] "The tax laws are complex and open to interpretation. Most goods are subject to sales tax, and most services are not-so how the offer itself is structured may really be the determining factor. Some items are exempt from state taxes but are subject to city and county taxes: it's all up to the local assessor. To make matters even more complex, how the bill is written enters into the equation too: a lump sum bill, for a server, assuming it is taxable, would be taxed differently than a bill itemized for the various aspects of the offer. For all these reasons, it's best to seek the advice of a professional."

[PM agreed] "I strongly recommended that you hire a tax accountant for this type of planning. And make sure the person you pick is experienced in taxes: just passing the CPA exam requires very little tax knowledge, and becoming a lawyer does not require any tax knowledge. For tax matters, make sure you deal with an accountant or attorney who specializes in business taxes."

Still others contended that it's worth doing as much as possible yourself before shelling out legal fees:

[NT advised] "Just call your state department of taxation. I did that to determine what services I had to collect tax for, and they were very helpful. In Ohio, anything that's connectivity for a business customer is taxable, and in our case that includes services like colocation. As for a dedicated server, I would count that more as a webhosting service than connectivity, and we don't need to collect tax for it in Ohio."

[GW agreed] "If you're based in Colorado, there is a lot of help. The Department of Revenue has monthly sales tax workshops that can help you understand the law as it pertains to your business. Additionally, the SBA and the local Small Business Development Centers can offer you advice and help in structuring your business. Anyone looking to do business in Colorado should also look at the Governor's Colorado Business Resource Guide. I strongly believe in exhausting your free resources before paying for information."

—End