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New York Confirms that Internet Data Centers (Web Hosting) are Exempt from Sales Tax on Their Purchases

The New York Department of Taxation and Finance has issued a tax bulletin advising operators of internet data centers in New York state about property and services related to the data center which may be exempt from sales tax. New York Sales Tax Bulletin No. TB-ST-405, 03/02/2012, states that certain property and services purchases for use by an operator of a New York data center are exempt from sales tax.

An operator of an internet data center is a person who:

  • operates a data center specifically designed and constructed as a high security environment for the location of servers and similar equipment that hosts internet web sites; and
  • provides constant uninterrupted internet access to customers' web pages and continuous management of internet traffic for customers' web sites.

Note that those primarily engaged in the retail sale of their own internet access services (i.e., ISPs) do not qualify.
 
If a person/entity qualifies as “an operator of an internet data center,” such person/entity does not have to pay sales tax on the purchase or use of machinery, equipment, and certain other tangible personal property. Exempt property must be a) placed or installed in the internet data center for use there, and b) required for and directly related to providing internet web site services for sale.
 
Thus, data center operates can now purchase, tax free, computer hardware, servers, routers, software, storage racks, and any property “necessary to maintain the appropriate climate-controlled environment” such as air-conditioning equipment, power generators, raised flooring, etc. The exemption also includes property related to building systems that are designed for an internet data center.  Thus, interior fiber optic and copper cables, fire suppression equipment, and protective barriers are also exempt.
 
Further, the following services, when provided directly to or in relation to exempt Internet data center property, are exempt from sales tax: installing, maintaining, servicing, and repairing qualified tangible personal property; maintaining, servicing, and repairing qualified real property; and protective and detective services. When services are performed on property some of which is taxable and some of which is exempt, the services may be allocated and, if separately stated, the services performed on the data center will also be exempt.
 
Note that, many more taxpayers are consumers of web hosting services than are vendors of these services.   Businesses should be aware that as “web hosting” is not an enumerated taxable service, internet data centers do not have to charge sales tax to their customers.  Sales tax refunds may be available if a business has been paying sales tax to its web hosting service. 
Operators of Internet data centers should be sure to educate themselves on the New York State sales tax rules.  As most computer equipment vendors will likely be unaware of this exemption, there stands to be significant savings with proper tax treatment.

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