Is hosting or colocation of customer-owned computing equipment a taxable service in Texas?

Texas taxes a service only if the statute names it

The Texas sales tax is "imposed on each sale of a taxable item in this state" (Tax Code section 151.051(a)), at a state rate of 6-1/4 percent (section 151.051(b)). A "taxable item" is "tangible personal property and taxable services" (section 151.010), and a "sale" includes "the exchange, barter, lease, or rental of tangible personal property" and "the performance of a taxable service" (section 151.005(2), (3)). Taxable services are a closed list of 16 categories in section 151.0101(a), which the Comptroller has "exclusive jurisdiction to interpret" (section 151.0101(b)). Four bear on a hosting business: repair and maintenance of tangible personal property (section 151.0101(a)(5)), telecommunications services ((a)(6)), data processing services ((a)(12)) and security services ((a)(14)). A charge that fits none of them, and transfers no tangible personal property, is outside the tax, and the lease of real property is not a sale of a taxable item at all (STAR Accession No. 201709001L, September 7, 2017). The question is one of classification: which listed service, if any, a given charge is.

Why housing a customer's machines is not data processing

Data processing is the category that matters most for hosting charges, because its definition reaches further than the word suggests. Section 151.0035(a) provides that "data processing service" includes "word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation" (section 151.0035(a)(1)), and "the use of a computer or computer time for data processing whether the processing is performed by the provider of the computer or computer time or by the purchaser or other beneficiary of the service" (section 151.0035(a)(3)). Rule 3.330 repeats the computer time clause (34 Tex. Admin. Code section 3.330(a)(1)(A)(iv)) and adds that a data processing charge "is taxable regardless of the ownership of the computer or whether the data is provided by the customer or the customer's authorized designee" (section 3.330(c)(3)).

The computer time clause taxes a customer's own processing, but only on a computer, or computer time, that the provider furnishes. Rule 3.330 as amended effective April 2, 2025 ties its hosting example to the section 151.108 definition: "Internet hosting, as defined by Tax Code, §151.108 (Internet Hosting), is a taxable data processing service when the user stores data on the service provider's hardware, or processes data on software that is owned, licensed, or leased by the user or provider" (section 3.330(b)(6)). Section 151.108(a) in turn defines Internet hosting as "providing to an unrelated user access over the Internet to computer services using property that is owned or leased and managed by the provider and on which the user may store or process the user's own data." In colocation, the property that stores and processes the data belongs to the customer. The host supplies the building around it.

The Comptroller's letters draw the same line by asking who controls the server: in 2002 the Comptroller explained that the taxability of private data suites, colocation services, dedicated servers and managed services depends on who retains the right to control the server (STAR Accession No. 200209314L, September 4, 2002). Where the host retains control of its own server, it performs taxable data processing. Where it transfers control of its own server to the customer, it has rented tangible personal property and collects tax on the total server rental charge. Where a customer already owns a tax-paid server and leases rack space, the customer is renting real property, which is not taxable. A 2009 letter to a colocation provider repeated the last point: a provider that leases rack or cabinet space to customers for their own servers is renting real property, and the charge is not subject to Texas sales or use tax (STAR Accession No. 200908438L, August 3, 2009).

The contrast case is website hosting on the provider's resources: a provider that resold bulk cloud computing capacity to host clients' websites for a single fee performed taxable data processing in every component of the fee, taxed on 80 percent of the charge under the 20 percent exemption in section 151.351 (STAR Accession No. 201807010L, July 10, 2018). The Comptroller's current guide lists "web hosting" and "data storage, including offsite backup of electronic files" as data processing (Publication 96-259, Taxable Services, January 2026).

The 2024 private letter ruling applies these principles to a machine hosting facility. The requester charged a single "all-inclusive fee" to host machines its customer owned, controlled remotely and used for cryptocurrency mining, and the host had no access to the machines' data or internal processing. The fee covered the facility, electricity and temperature control, installation, an Internet connection, help distributing mined currency to third-party pools, monitoring, maintenance and repair as needed, and physical security (STAR Accession No. 202411011L, November 15, 2024). The Comptroller ruled that the "machine hosting service is not a taxable service." It distinguished web hosting because the host "does not provide any cloud computing services," and described what the host does sell: "a secure location with internet connectivity and machine monitoring so that its customer can conduct business. This type of service is not taxable data processing." The ruling quoted the "regardless of the ownership of the computer" language from Rule 3.330 and reached that result anyway, which indicates the Comptroller does not read the ownership clause to reach a host that processes nothing.

A short example shows the classification at work. A company leases a building in Texas, installs racks, cooling, backup generation and a fiber connection, and signs three unrelated customers that ship in their own servers and operate them remotely. Each customer pays a flat monthly fee per cabinet covering space, power, cooling, connectivity, reboots on request and physical security. Separately, the company bills hourly for replacing failed drives and power supplies, and it sells an optional nightly backup of customer data to a storage array the company owns. On the rulings above, the monthly cabinet fee is not taxable. The hourly drive and power supply replacements are taxable repair. The backup service is data processing, so on a $1,000 monthly backup charge, tax applies to $800.

The components that are taxable, or may be

Repair, maintenance and installation. Section 151.0101(a)(5) taxes the repair, maintenance and restoration of tangible personal property, and a customer's servers are tangible personal property. Rule 3.292 defines maintenance broadly as "[w]ork performed on operational and functioning tangible personal property that is necessary to sustain or support safe, efficient, continuous operation of the tangible personal property, or is necessary to keep the tangible personal property in good working order by preventing decline, failure, lapse, or deterioration" (34 Tex. Admin. Code section 3.292(a)(7)), and repair as mending or restoring broken, damaged or malfunctioning property to working order (section 3.292(a)(11)). Tax is due "on the entire charge" for the service, and "on any charge connected to the taxable service, including separately stated charges for inspecting, monitoring, or testing" (section 3.292(b)(1)). Rule 3.308 adds that tax "is due on charges for labor or services rendered in installing or applying computer hardware" and in "remodeling, repairing, maintaining, or restoring computer hardware" (34 Tex. Admin. Code section 3.308(b)(3), (4)).

The 2024 ruling found taxable repair in the host's separately priced technical services for "more complex diagnosis, repair, and replacement" of machines. The same agreement included "routine and normal operational duties to maintain and optimize servers at no additional charge" inside the all-inclusive fee, and the ruling did not say whether any part of that fee was taxable maintenance. Given the breadth of the Rule 3.292 definition, a bundled fee that includes substantial hands-on maintenance carries some risk that an auditor will allocate part of it to a taxable service. The 2009 letter narrows that risk for lighter work: rebooting servers, troubleshooting without repair, monitoring equipment availability, and tracing and labeling cables sold with colocation were held not taxable (STAR Accession No. 200908438L). Installation is a similar seam. The 2009 letter held that installing customer-owned equipment into the customer's rack is not taxable when the host did not sell the equipment, and the 2024 ruling folded installation into the nontaxable fee, but Rule 3.308(b)(3) taxes labor to install computer hardware without that qualification. A separately stated installation charge is the line most exposed to that rule.

Security. A "security service" is a "service for which a license is required under Section 1702.101 or 1702.102, Occupations Code" (section 151.0075). The 2024 ruling held that locking the building and restricting access to customer machines requires no such license and is not a taxable security service. A host that contracts with a licensed guard or alarm company is a purchaser of a taxable security service on its own account.

Connectivity. "Telecommunications services" means "the electronic or electrical transmission, conveyance, routing, or reception of sounds, signals, data, or information," excluding data storage and processing and excluding "Internet access service" (section 151.0103(a)). Internet access service is a service "that enables users to access content, information, electronic mail, or other services offered over the Internet," and the term "does not include telecommunications services" (section 151.00394(a)). Internet access service is not among the taxable services in section 151.0101(a), and the Comptroller's STAR alerts state that state and local tax on Internet access was repealed effective July 1, 2020. Separately stated bandwidth was treated as a taxable telecommunications service in the 1999, 2002 and 2009 letters (STAR Accession Nos. 9910747L, October 4, 1999; 200209314L; 200908438L), all written before that repeal. Separately stated cross-connects over fiber annexed to the building, where the host "does not route or transmit data," are rentals of real property (STAR Accession No. 201709001L), and in 2024 the Internet connection was part of a fee nontaxable as a whole. No ruling read for this article addresses whether separately stated bandwidth sold after July 1, 2020 is telecommunications or Internet access service; the answer turns on what the contract sells.

Electricity. The 2009 letter held that a separately stated electricity charge to a colocation customer is not taxable, and that the host is the consumer of the electricity used to provide the colocation space and pays sales tax when it buys that electricity (STAR Accession No. 200908438L). Section 151.317(a) exempts electricity only for listed uses, and the one aimed at computing facilities is use "by a data center or large data center project that is certified by the comptroller as a qualifying data center under Section 151.359 or a qualifying large data center project under Section 151.3595 in the processing, storage, and distribution of data" (section 151.317(a)(9)). Both data center exemptions require space "used by a single qualifying occupant for the processing, storage, and distribution of data" (sections 151.359(a)(2)(C), 151.3595(a)(2)(D)), along with size, job and investment minimums (sections 151.359(a)(2), (d), 151.3595(a)(2)). A multi-tenant colocation facility does not fit the single-occupant requirement as written, and no authority read for this article addresses whether equipment run for a purpose other than the processing, storage and distribution of data qualifies. The same consumer rule reaches racks and fixtures: the 2009 letter held that the host owes tax on power strips used to connect customer equipment, and the 2002 letter that racking equipment used to offer rack space cannot be bought for resale.

Bundled fees and what the invoice says

Rule 3.330 governs bundles that include data processing. Data processing sold for a single charge with another service is excluded only if it "does not have a separate value" and is "ancillary to the other service," and the taxpayer carries the burden of showing both (34 Tex. Admin. Code section 3.330(a)(1)(C)). Where nontaxable related services and taxable services are sold for one charge "and the portion relating to taxable services represents more than 5.0% of the total charge, the total charge is presumed to be taxable"; the presumption is overcome by "separately stating to the customer a reasonable charge for the taxable services," or later by documentary evidence, with the provider's books supporting the allocation on cost or stand-alone pricing (section 3.330(e)(2)). A host that folds a backup or storage service on its own equipment into a flat monthly fee therefore puts the whole fee at risk unless the data processing component is priced separately.

The label on the invoice also matters in audit. In Comptroller's Decision No. 107,961 (December 18, 2018), a technology provider argued that charges invoiced as hosting were nontaxable colocation and cloud services because the server space was under its customers' complete control and it had no access to their data. It produced no documentation of the contested transactions, and its sample colocation agreement provided tangible personal property as well as data storage. The administrative law judge sustained the assessment, observing that sales described as hosting indicate data and information storage services that may be treated as data processing, and the Comptroller adopted the proposal as changed. The contract, the invoice line descriptions and evidence of who controls the equipment are what carry a colocation position through audit.

How far the 2024 ruling reaches, and tax already collected

A private letter ruling is "[t]he comptroller's written determination on the application of relevant tax laws, rules, and policies to a specific set of facts submitted in a properly completed private letter ruling request" (34 Tex. Admin. Code section 3.1(a)(2)). A person who receives one "may rely on it prospectively from the date that the private letter ruling is issued and with respect only to the particular issue and the person identified in the request" (section 3.1(d)(1)). It loses prospective effect if a change in law, rules or hearing decisions affects its validity, or if the Comptroller modifies or revokes it. For any other host, the 2024 ruling is the Comptroller's stated reasoning on a described set of facts, consistent with the 2002 and 2009 letters, and not a promise. The Rule 3.330 amendments effective April 2, 2025 postdate the ruling, but the amended rule's hosting example keeps the provider-owned equipment element, so nothing in the amendment cuts against the ruling's reasoning. A host whose facts differ, with access to customer data, managed operating systems, host-owned equipment, or substantial bundled maintenance, can request its own ruling.

A host that has been charging tax on a nontaxable hosting fee cannot keep it. A person who collects "any money represented to be a tax" holds it "in trust for the benefit of the state" and is liable for the full amount (Tax Code section 111.016(a)). The host, as the person that paid the state, is the refund claimant (section 111.104(b)), but no tax is refunded to a person who collected it from another "unless the person has refunded all the taxes and interest to the person from whom the taxes were collected" (section 111.104(f)), and the claim must be filed while the deficiency assessment period for the tax remains open (section 111.107(a)). The host credits its customers first and claims the refund second.

Practice notes

The first question for any Texas hosting arrangement is who owns and controls the computing equipment. Where the customer owns the machines, operates them remotely and keeps the host away from its data, the space, power, cooling, connectivity, monitoring and security sold together fall within the 2024 ruling and the 2002 and 2009 letters, and the sound contract and invoice describe colocation of customer-owned equipment rather than "hosting." Repair and replacement are priced and taxed separately; an installation line is reviewed against Rule 3.308(b)(3); backup or storage on the host's systems is separately stated and taxed on 80 percent of the charge; and bandwidth is classified on the contract's terms. Electricity and racks are the host's own taxable purchases unless a data center certification applies. A host that collected tax on a nontaxable fee remits it and refunds its customers before claiming it back. Facts that depart from the 2024 ruling are candidates for a ruling request of the host's own. G&G State Tax Group provides sales tax classification reviews, ruling requests and refund work for hosting and colocation operators alongside its state and local tax practice.