November 15, 2024
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RE: Private Letter Ruling No. PLR20220725080221
Dear **************:
We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated July 20, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.
You requested guidance on the taxability of your business of providing hosting services for machines your customer uses for cryptocurrency mining.
Facts Presented
The relevant facts are based on the initial private letter ruling request, a video teleconference held on Oct. 19, 2022, and additional items including an example of a hosting agreement provided by email on Mar. 12, 2023.
************** (Taxpayer) charges its customer an all-inclusive fee based on power usage to host cryptocurrency mining hardware machines (machines) in Taxpayer’s facility. Taxpayer’s customer owns the machines that are in the facility. Taxpayer’s customer has full control over the machines remotely. Taxpayer does not have access to the data or internal processing of the machines. In addition to providing a facility for the machines, Taxpayer provides:
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electricity and temperature control;
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installation of the customer’s machines in the facility;
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internet network connection for the machines;
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assistance with distribution of mined digital currency to third-party pools;
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monitoring, maintenance, and repair of the customer’s machines as needed; and
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physical security for the facility, including restricted access.
For an additional charge, Taxpayer also provides technical services for more complex diagnosis, repair, and replacement of machines.
Question, Ruling, and Analysis
Our restatement of your question is shown below, followed by our response and analysis.
Question : Are Taxpayer’s services subject to Texas sales and use tax?
Ruling : Taxpayer's machine hosting service is not a taxable service. Taxpayer’s repair of its customer’s machines is taxable repair and restoration of tangible personal property.
Analysis : Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Section 151.009 (Tangible Personal Property) defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner. The term “taxable services” includes only those services listed in Section 151.0101 (Taxable Services). Data processing services and security services are enumerated taxable services. Sections 151.0101(a)(12) and (a)(14).
Data processing is defined as the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. It specifically includes word processing, payroll and business accounting, and computerized data and information storage or manipulation. The charge for data processing services is taxable regardless of the ownership of the computer. Data processing services do not include Internet access services or data processing services provided in conjunction with and incidental to the provision of Internet access service when billed as a single charge . Rule 3.330(a)(1) (Data Processing Services).
Taxpayer states it “hosts” machines for its customer. Website hosting has been determined to be a taxable data processing service. See STAR Accession No. 201807010L (July 10, 2018) (where a taxpayer purchased cloud computing resources in bulk and resold them to customers for a single web-hosting fee). Taxpayer does not provide taxable web hosting as it does not have access to the data or internal processing of the machines in its facility. It does not provide any cloud computing services to its customer. Taxpayer instead provides 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.
Security services are defined as any service for which a license is required under Occupations Code, Section 1702.101 (Investigations Company License Required) or Section 1702.102 (Security Services Contractor License Required; Scope of License), and includes any service provided within the scope of the required license as an investigations company, guard company, alarm systems company, armored car company, courier company, guard dog company, security services contractor, private security officer, detective service, private investigator, locksmith company, or private security consultant company. Section 151.0075 (Security Service) and Rule 3.333 (Security Services).
Taxpayer provides physical security to protect its customer’s machines by locking and securing the building. Taxpayer also restricts access to the machines. However, providing this type of service does not require a license under the Occupations Code, Section 1702.101. Therefore, it is not providing taxable security services as contemplated in Section 151.0075.
The hosting service that Taxpayer provides to its customer is not data processing services or security services. The service it provides to its customer is not a service that is listed as taxable under Section 151.0101.
Repair, remodeling, maintenance, and restoration of tangible personal property is a taxable service. Section 151.0101(a)(5). Repair of tangible personal property is defined as mending or restoring to working order or operating condition tangible personal property that was broken, damaged, worn, defective, or malfunctioning. Rule 3.292(a)(11) (Repair, Remodeling, Maintenance, and Restoration of Tangible Personal Property). Service providers who repair, remodel, maintain, or restore tangible personal property belonging to another are providing taxable services. A service provider is a seller and must obtain a sales and use tax permit and collect and remit sales and use tax. Rule 3.292(b)(1).
Section 2.2.2 of Taxpayer’s sample hosting agreement indicates that “included in the monthly hosting services agreement is routine and normal operational duties to maintain and optimize servers at no additional charge. [Taxpayer] will offer additional technical services for more complex diagnosis, repair and replacement of servers pending written approval of [customer] at a rate of $75/hour.”
Based on Section 2.2.2, Taxpayer performs taxable repair of tangible personal property under Section 151.0101(a)(5) when it repairs and replaces its customer’s machines.
STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at https://comptroller.texas.gov/taxes/
If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help and reference Private Letter Ruling No. 20220725080221.
Sincerely,
Tax Policy Division – Indirect Taxes
Texas Comptroller of Public Accounts
ENDNOTE
1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.