Texas and Taxes: Is a Server a Business Presence?

1sockchuck writes "Does having a server in a data center give you an official business presence in the state where the data center is located – invoking the requirement to collect state taxes? Not in Texas anymore, thanks to a new bill, which clarified a ruling that would have required hosting companies leasing servers in Texas to collect state sales tax from their customers. That's a big deal, since Texas is home to many of the industry's largest hosting companies — including Rackspace and SoftLayer, who have comments on the issue."

Comments

Owning? Yes. Leasing? No.

[blair1q]

If I can move my business out of the state using the dd(1) command, I don't have a presence there.

Re:Owning? Yes. Leasing? No.

[TheGratefulNet]

If I can move my business out of the state using the dd(1) command

oh, no you don't, buddy! this, here, is a union shop!

you'll use 'find' and 'cpio' and like it.

Re:Owning? Yes. Leasing? No.

[Pharmboy]

Because the "contents" of the website aren't physical things, and the law covers physical presence only. If you delete your "store", the server weighs the same as it did before. As it is, sales tax laws in most states are about the physical presence only.

When we were in NC, but did significant work in VA, we had to charge VA tax on those visits because we physically went to VA to do the work and charge the customer, in VA. Now we don't do work in VA (unrelated reasons) and don't charge tax for just shipping equipment there. This is per their own tax authority.

If you could be considered physically not in a state by just moving your server, every company would have their servers in the Bahamas, where taxes are ridiculously low, just to avoid taxes even in the home state.

Re:Owning? Yes. Leasing? No.

[Bengie]

How is this any different from picking up a truck or generator from an equipment rental place, or renting storage in a storage facility? You are renting time and space on the server. If the company you rented the server from is in Texas, then that company should pay Texas sales tax.

Lets say all states use this logic.

I purchase a song from my Android for $1 from Google through their cell company. Google pays a sales tax in their state, then they pay a sales tax in which the server is located, then the pay a sales tax for the state the cell company is in.

Keep daisy changing this idea over all 50 states, and you have 0 sales taxes to pay. Assume 5% sales tax, times 50 states, and you have 250% sales tax.

You see the flaw in this logic?

Re:Owning? Yes. Leasing? No.

[vux984]

If the company you rented the server from is in Texas, then that company should pay Texas sales tax.

I agree. However, this case is a bit more complex.

Here we have company A, in texas, with a stack of servers located in texas. They have a presence in texas and nobody is arguing about that.
Then we have company B, in alabama, he's a web developer who provides hosting services to his customers.
Company B leases servers from company A.
Then we have company C, in michigan, they sell socks. They hired B in Alabama to design and host a web store.
Then we have Mommy D, in california. She has a pair of socks that need replacing. She orders some online from Company C.

The questions at hand are:

Does company A collect Texas state taxes from company B for its hosting service. Reasonable people would say this is reasonable.

Does company B have to collect Texas state taxes from company C simply because the site B is hosting for C is on a server B is leasing from A is in texas. Reasonable people would say this is silly.

Finally does company C in michigan have to collect Texas taxes from Mommy D in California simply because company C is hosted by company B in alabama which leases servers from Company A in texas?

Reasonable people are asking what kind of crack you'd have to be on to think this is reasonable.

Your rented storage example doesn't really capture this situation.

Re:Owning? Yes. Leasing? No.

[dakameleon]

That's why we RTFA. It's not about hosting companies collecting sales taxes from their customers at all; the question is whether having hosting in Texas amounts to a physical presence.

The result of the physical presence in Texas, prior to the clarification, would be any commerce conducted on that server would be subject to Texas sales and/or use tax - meaning even if the company does its main operations in a different state and their customer is in a third state, they could have been liable for Texas tax, as though the operation was being handled through a Texas store-front.

What this bill clarifies is that simply having hosting is not the same as the physical presence. Rackspace et al were worried that if this was not the case, customers of theirs (the Googles etc) would go elsewhere to avoid slugging their customers the Texas tax.

Re:Owning? Yes. Leasing? No.

[Grishnakh]

You sound like you support paying sales tax on online purchases.

The problem is, if $ONLINE_SELLER doesn't have a physical location in your state, then they are NOT your "neighbor". They have zero responsibility to pay taxes in your state, because they are not receiving any services from that state.

Suppose you go on a web site, and buy a $widget from some guy in Russia. He sends it to you through snail-mail, and you get it a month later. All you paid was the price of the item, plus $3 shipping (or whatever). Do you think this Russian guy is obligated to send payment for sales tax in to your state's government? Why? Why should he have any obligation to make a payment to a foreign government over a law they have, which doesn't affect him since he's never set foot in your country, let alone your state?

It's no different when you buy an item from someone in another state. If your state wants to charge taxes on things purchased out-of-state, that's what use taxes are for. If they can't effectively enforce use taxes, that's their problem. They can't force people in other states (or countries) to police their own citizens for them.

Licensing

[Synerg1y]

Pretty sure your taxed in the state your licensed, and to obtain that license you have to be physically in the state. Reading the article, it looks like they are more amending a "grey" law to make it more clear with the tightening economy.

Sales tax vs. Corporate taxes

[oneiros27]

The issue is the requirement to collect sales tax -- ie, the reason that Amazon keeps dropping affiliates in selected states.

Basically, most states have laws that say that residents have to pay sales tax on everything they buy in the state. In my case, for Maryland, there's a line on the state income tax forms where I'm required to declare all purchases I purchased via mail-order where the company didn't already collect sales tax.

Now, companes who have a presence in the state are required to collect sales tax in that state. So when I buy from Amazon, I'm required to pay it directly to the state, rather than Amazon collecting it at the time of sale, as they don't have a presence in Maryland.

The problem is, sales taxes are *really* messy. What gets taxed? Food doesn't in Maryland ... but it does in DC if it's sold individually ready to eat. (which I don't think would count for mail order), so you have to know if a given item is or isn't taxed in each state. Then you also have cases where it's not only the state that has sales tax authority, but also the town or county ... so you might have an area that's differently taxed.

And then you get into the message cases where the municipality doesn't match up with the postal designation, so you can't just rely on the zip code or city on the shipping address to determine taxing district.

This has been a long-running issue since at least the late 1990s, when I first saw mention of attempts to come up with simpler taxing rules for mail order companies, but I don't know if anything's ever come out of those efforts.

um, how would I know?

[Adam Appel]

What if I host images in CA and my database in TX? (and both states enact this kind of legislation) would my customers have to pay both state sales tax?

As it is I have no idea where my shared linux hosting account is. Now you want me to collect taxes there?

This is so simple even lawyers will have to make a run before messing it up (but I knows they'll try).

how about the patent trolls?

[v1]

That "east district" in texas where all the trolls file their suits, doesn't that require a business to have a "presence" in texas, and thus jurisdiction? So maybe this is a good thing?

And you'd think it would also have the side-effect of a lot of companies leaving texas, leaving their server farm behind, to shed the liability of not only sales tax, but also patent troll targeting?

They should thank Amazon.

[Lord Kano]

Amazon has shown how much money states can lose when they push the issue on what constitutes a "physical presence" in a state. The smart states will adapt. The dumb ones will keep bleeding jobs.

LK