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RULE §3.366Internet Access Services

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

  (1) Internet--collectively the myriad of computer and telecommunications facilities, including equipment and operating software, that comprise the interconnected worldwide network of networks that employ the Transmission Control Protocol / Internet Protocol, or any predecessor or successor protocols to the protocol, to communicate information of all kinds by wire or radio.

  (2) Internet access service--a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. The term does not include telecommunications services or other taxable services, unless these services are provided in conjunction with and are merely incidental to the provision of Internet access service. For example: Basic Internet access service includes the ability to access general information (an information service) and/or the ability to send information or messages via e-mail (a telecommunication service). These services are incidental to the provision of Internet access services and, unless separately stated, are considered part of the Internet access service. On the other hand, a person selling information services using the Internet, such as a company selling stock market prices, is not providing an Internet access service and must collect tax on the charge for its information service.

(b) Amount subject to tax. The sale, use, or other consumption in this state of Internet access service is exempt from sales or use tax in an amount not to exceed the first $25 of a monthly charge. This exemption applies to the total sales price the service provider charges a purchaser for Internet access, without regard to whether the service provider charges one lump-sum amount or separately bills the purchaser for each user. For example: Company A buys Internet access for 25 employees at several locations. The first $25 of the total charge to Company A is exempt and not the first $25 of each user's apportioned cost. Because a "purchaser" is a single entity and the $25 exemption is provided per purchaser, not user, account, or site, separate billings for employees or for different locations will not reduce the taxable amount. This exemption applies without regard to:

  (1) whether the Internet access service is bundled with another service, including any other taxable service; or

  (2) the billing period used by the service provider. Example: An Internet access service is provided for a set fee of $99 per year. The fee will qualify in its entirety for exemption because the monthly charge is less than $25. The exemption applies to services performed on or after October 1, 1999. The exemption does not apply to services performed before the effective date and billed or paid for after the effective date of the exemption.

(c) Hold permits. All providers of Internet access services must obtain a Texas sales and use tax permit and collect tax on the total amount subject to tax as provided in subsection (b) of this section, or accept a properly completed resale, exemption, or direct payment permit exemption certificate in lieu of collecting tax. See §3.285 of this title (relating to Resale Certificate; Sales for Resale); §3.287 of this title (relating to Exemption Certificates); and §3.288 of this title (relating to Direct Payment Procedures and Qualifications).

(d) Resale certificates.

  (1) Providers of Internet access services may issue resale certificates in lieu of tax to suppliers of tangible personal property only if care, custody, and control of the property is transferred to the customers. For example, a service provider purchases diskettes to transfer software to customers. The service provider may purchase the diskettes tax free by issuing a resale certificate. However, promotional diskettes provided to potential customers are not resold and are taxable.

  (2) An entity that markets Internet access services for others and gives away, or sells for a nominal amount (less than 25%), computer-related equipment as an inducement to sign an Internet service contract is considered the consumer of the equipment and must pay tax on its acquisition cost of the equipment. An entity that markets Internet access services for others and also sells related equipment for 25% or more of acquisition cost is a retailer of the equipment. The entity may buy the transferred equipment tax free for resale and collect tax on its charge to its customers. For example, Company A markets Internet access services provided by Company B. Company A purchases computers for $400 that it offers to customers for free when a customer signs a contract for Internet access service with Company B. Company A is the consumer of the computer and owes tax when it purchases the computer. If Company A sells the computer to its customer for $100 or more (25% or more of cost), Company A may purchase the computer tax free for resale but must collect tax from its customer on the sales price of the computer ($100). If Company A sells the computer for less than $100 under the condition that the customer will purchase Internet access service from Company B, the nominal amount paid by the customer is not taxable and Company A must pay tax on the original purchase price of the equipment.

  (3) A resale certificate may be issued for a service if the buyer intends to transfer the service as an integral part of taxable services. A service will be considered an integral part of a taxable service if the service purchased is essential to the performance of the taxable service and without which the taxable service could not be rendered. For example, a provider of Internet access service may purchase tax free for resale telecommunication services used to provide the Internet access services.

(e) Service benefit location. If both the Internet access service provider and the customer are located in Texas, Texas tax is due.

(f) Service benefit location - multi-state customer.

  (1) To the extent Internet access service is provided to and accessed by a multi-state customer with users both within and outside of Texas, the service is presumed to be used at the location from which the Internet is accessed. The service is not taxable to the extent it is used outside Texas. A multi-state customer may use any reasonable method for allocation that is supported by business records.

  (2) A multi-state customer purchasing Internet access services for the benefit of both in-state and out-of-state locations is responsible for issuing to the Internet access service provider an exemption certificate asserting a multi-state benefit, and for reporting and paying the tax on that portion of the Internet access charge that will benefit the Texas location. An Internet access service provider that accepts such a certificate in good faith is relieved of responsibility for collecting and remitting tax on transactions to which the certificate relates.

(g) Local taxes.

  (1) For local sales tax purposes, city, county, transit authority, and/or special purpose district sales taxes are due if the Internet access service provider has only one place of business (the location from which the provider accepts orders for Internet service) within the boundaries of a local taxing entity. Local sales tax must be collected based upon the tax rate at that location, except that no transit authority sales tax is due on services provided to a location outside the boundaries of the transit area. In the case of multiple locations, if an order for Internet service is taken at one location but the service is provided from another location from which customers may order service, the place of business from which the service is provided will determine to which local taxing entity the tax is allocated.

  (2) For the purposes of the local use tax, if a place of business is outside the boundaries of a local taxing entity, the Internet access service provider will be required to collect local use tax if the client is within the local taxing entity and the service provider has representation in the local taxing entity as outlined in §3.286 of this title (relating to Seller's and Purchaser's Responsibilities). Even if the service provider is not required to collect local use tax, the client is still liable for the tax if the service is received or a benefit is derived from the service within the boundaries of a local taxing entity.

  (3) An in-state customer purchasing Internet access services for the benefit of locations in more than one local taxing entity is responsible for issuing to the Internet access service provider an exemption certificate claiming a multi-city benefit and for determining the extent of benefit for each entity. The local use tax for each entity must be reported, allocated, and paid by the customer. An Internet access service provider that accepts in good faith an exemption certificate claiming a multi-city benefit is relieved of responsibility for collecting and remitting local tax on transactions to which the certificate relates.

(h) Use tax. If a provider of an Internet access service is not engaged in business in Texas or in a specific local taxing jurisdiction and is not required to collect Texas tax, it is the Texas customer's responsibility to report and pay the state and local use tax directly to this office.

Source Note: The provisions of this §3.366 adopted to be effective September 12, 2000, 25 TexReg 9013

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