Texas House Bill 1841: Hosting and Taxes

July 11, 2011

Okay, so you've read the title and passed out already ... but wait – this is good stuff! Well, maybe not "good," but at least it's relevant. The esteemed governor of Texas with the big Texas hair (and aspirations of taking his big hair out of Texas) recently signed House Bill 1841 (HB1841) into law, and that law is significant to many of SoftLayer's customers.

Last year, the Texas Comptroller's Office amended a regulation and stated that the use of a server in Texas was adequate to establish a nexus, so an e-commerce vendor who used a Texas web host was required to collect sales tax from their customers even if the vendor had no other presence in the state of Texas. This amendment immediately created issues for web hosts with data centers in Texas: 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?

Well, 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.

HB1841 puts the Texas hosting industry back where it was before the Comptroller made those changes: The use of a server located in Texas without any other presence is not considered a substantial nexus for collecting sales taxes. HB1841 specifically states that "A person whose only activity in this state is conducted as a user of Internet hosting is not engaged in business in this state." Note: You may be wondering if this bill applies to Amazon in Texas, but HB1841 doesn't cover Amazon because they had a physical presence in Texas (albeit one operating under a different affiliate with a different name), requiring them to pay sales taxes.

Our very own Brenk Johnson was involved in the effort to pass HB1841. He attended a couple of committee hearings, and he'll tell you his mere presence got this out of committee and in front of our governor. He is quoted as saying, "I can sit in a meeting with the best of them."

At the risk of making this blog sound like an Academy Awards reception speech, we would like to thank Jeff Clark and the crew over at TechAmerica for helping to get this bill passed. TechAmerica is a technology advocacy group that we recently joined, and they have a cracker-jack lobby group. Our CFO and I were on the verge of hiring a lobbyist for the 2009 Texas session, but we ended up not doing so. Two years later, we decided to go with this industry group, and the verdict is that TechAmerica has been a great investment ... It was also through this group that Lance became a Cloud Commissioner! We also want to thank our competitors over at RackSpace, especially their General Counsel Alan Schoenbaum, for getting us involved and for leading and spearheading the passage of this bill ... What was good for the goose was good for the gander on this one.

Because we are back to where we were a couple of years ago in the definition of nexus with relationship to hosts with data centers in Texas, this was not really a game-changing bill. It was important to clarify and undo the damage caused by the waffling that occurred in the State's Comptroller's Office, so in that sense this was a good bill for the industry. Next session we're going to aim for the game-changer: Margin taxes!

-@badvizsla

Comments

July 12th, 2011 at 1:34pm

So if somebody is hosting with a texas company with no other nexus are they liable for the Texas Franchise (margin not sales) tax?

July 12th, 2011 at 4:22pm

Nope. They do not have nexus in Texas thanks to HB 1841.

July 13th, 2011 at 2:26pm

Dave, i got confused because suzy wrote that their next big aim is the "margin tax"!

October 13th, 2011 at 3:13pm

Do you think that a company in California with no physical presence in Texas, no sales representatives in Texas, that provides a service through the internet, with servers in California to companies in Texas, should be considered as having nexus in Texas for the purposes of sales & use tax and franchise tax?

October 13th, 2011 at 3:39pm

As I understand it, there has never been a question about that scenario, Maria. The California company would have no presence in Texas. The legislation Suzy is talking about here takes that a step further to clarify that a company in California that rents servers in Texas is considered as having a nexus/presence in the state despite the argument that they are "doing business in/from" the state because the servers are located in Texas.

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Comments

July 12th, 2011 at 1:34pm

So if somebody is hosting with a texas company with no other nexus are they liable for the Texas Franchise (margin not sales) tax?

July 12th, 2011 at 4:22pm

Nope. They do not have nexus in Texas thanks to HB 1841.

July 13th, 2011 at 2:26pm

Dave, i got confused because suzy wrote that their next big aim is the "margin tax"!

October 13th, 2011 at 3:13pm

Do you think that a company in California with no physical presence in Texas, no sales representatives in Texas, that provides a service through the internet, with servers in California to companies in Texas, should be considered as having nexus in Texas for the purposes of sales & use tax and franchise tax?

October 13th, 2011 at 3:39pm

As I understand it, there has never been a question about that scenario, Maria. The California company would have no presence in Texas. The legislation Suzy is talking about here takes that a step further to clarify that a company in California that rents servers in Texas is considered as having a nexus/presence in the state despite the argument that they are "doing business in/from" the state because the servers are located in Texas.

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