Rackspace, Hostgator, Linode customers must file taxes in Texas from now on.

http://www.usataxaid.com/ustaxaid-blog/are-small-businesses-about-to-get-caught-in-texas-nexus-battle/

by WildUtah • 16 years ago

57 59 16 years ago

swombat• 16 years ago

Yeah, right, and how exactly are they planning to enforce that on all those international customers? Seems like wishful thinking on the part of the tax department - and wishful thinking that isn't likely to last long, because if they do somehow try to enforce this, they'll just drive all their hosting businesses out of Texas.

jackowayed• 16 years ago

Well, driving all their hosting businesses would be a very slow process if it happened at all.

First, the hosting companies would have to find/build enough datacenter space for all their servers that are currently in TX. This includes abandoning large investments into their TX datacenters, which will lose value if this exodus really occurs.

Once they've done that, they have to move the stuff. VPSes and shared hosting are probably fairly easy to move with minimal downtime (as long as you have enough extra hardware), but Rackspace would have one hell of a time getting all of their customers to move their colo-ed servers to another state.

Also, there are reasons that TX has so many datacenters. Land is pretty cheap, as is power thanks to all their wind energy. It's in the middle of the country, helping you have low latency to both coasts. It's a great place to put a datacenter.

dangrossman2• 16 years ago

I don't really understand how this could work. How does purchasing a service from a Texas company give you a physical nexus in Texas? Maybe if Texas was arguing this applied to those who colocate physical servers they own in a Texas data center I could buy it. But merely being a customer of a hosting company, where you are being sold some storage space and bandwidth on a computer? Whether it's shared hosting, VPS or renting a server, you don't own any physical property in the state.

rottencupcakes• 16 years ago

That's a silly argument. If I rent office space and rent an apartment, I don't own any physical property in that state either.

Obviously this isn't ideal, but it seems very reasonable from that point of view.

jules• 16 years ago

And if a company uses a service that happens to be hosted in Texas? e.g. a wiki. Do they have to pay taxes there as well? Why is a virtual server different?

patio11• 16 years ago

The test for nexus is not "do you own physical property in the state." It gets a little complicated -- see Quill v. North Dakota or flag down your friendly neighborhood grellas.

Applying these principles, [the US Supreme Court has] held that if a foreign corporation purposefully avails itself of the benefits of an economic market in the forum State, it may subject itself to the State's in personam jurisdiction even if it has no physical presence in the State. [They then reason that jurisdiction to resolve lawsuits establishes a sufficient level of judicial authority to satisfy the Commerce Clause's requirement that states not unduly hinder interstate commerce.]

Policywise, I think it is almost certainly a poor decision for Texas, but legally this could be a close call. There are many, many unsettled questions about how the Internet economy intersects with tax regulations drafted back when Sears Roebuck consumed a measurable percentage of the world's total paper output. (Ask me sometime about tax treatment for BCC. It is an international boondoggle.)

dpcan• 16 years ago

I really have to agree. It's not my server. They are letting me use their server and store some files on it, but in no way do I believe that I would have a nexus in Texas.

Under these conditions, anyone with a Gmail account would have to pay taxes where ever their email is stored by Google.

eekfuh• 16 years ago

Wow. This could seriously hurt Texas if people start pulling out of the TX data centers and those data centers are forced to shut down or move to a more friendly state. I personally use Linode and this freaks me out a bit.

TamDenholm• 16 years ago

I don't know about the other hosts but being a linode customer myself I know that Linode allows you to move your linode to any other data center free of charge.

ary• 16 years ago

Is this really the case? I think you can setup a new linode (at a new data center) and then clone your current one. Is there really a way to shut it down and move it? Just logged into my account to check and couldn't find the option.

cmelbye• 16 years ago

Submit a ticket. If there's space in the datacenter you want, they'll schedule a migration instantly. If not, they'll put you on the waiting list.

callmeed• 16 years ago

Great, that will be 4 states I have to file taxes in now ... yuck.

icey• 16 years ago

I'm getting "Error establishing a database connection" when trying to see this - does anyone have a mirror?

ptm• 16 years ago

Google got it http://bit.ly/cJtUzk

dbrannan• 16 years ago

Maybe they forgot to pay their taxes.

metageek2• 16 years ago

The article claims that the standard is "if you use a server that is housed in the state of Texas". If I use, say, Google Apps, or Google App Engine, I have no idea where the servers I'm using are.

SabrinaDent• 16 years ago

You're misunderstanding the blog post. It says:

That means you must collect and pay sales tax from any taxable sales made to customers within the state of Texas.

So if your servers are in Texas, and you make an online sale to a customer in Texas, you (apparently) need to charge that customer sales tax.

bhiggins• 16 years ago

Linode has multiple datacenters, so I'm guessing this will only apply if you're using their Dallas, TX datacenter... right?

jacquesm2• 16 years ago

For as long as they still have customers I guess.

Way to go Texas, the rest of the US and Europe thank you.

Sales tax levies on server location, you have to give them points for creativity though.

What if I have multiple servers in multiple servers in different states or even countries?

How about I just pay sales tax on where my company is located and we'll call it a day?

The EU is getting more and more greedy too by the way, it used to be that you were VAT exempt for international sales but suddenly all sales to consumers within the EU are VAT liable.

But at least they go by corporate presence, not by where you've parked your servers this week.

kjuhygtfrde3• 16 years ago

Sure, my office and showrooms are in New York, my factory is in Texas but my company is a brass plaque in Grand Cayman - so I'm not paying any taxes!

jacquesm2• 16 years ago

I'll bet you don't have showrooms, a factory or a brass plaque, not even in Grand Cayman :)

btilly2• 16 years ago

For a while Citibank used to have a dodge where they'd try to get a desk in a NY skyscraper to be declared as part of the Cayman Islands embassy, and therefore Cayman Islands territory, so that the person working from there could more easily run their shell companies without being subject to NY law.

My understanding is that this was stopped a number of years ago.

tedunangst3• 16 years ago

If you have multiple servers in multiple states, you charge sales tax to customers in all of them (such as are relevant). Just as you would if you had brick and mortar stores in multiple states.

pyre3• 16 years ago

If my webhosting is in Tel Aviv, but my business and warehouses are in the USA, does this mean that all USA customers have to pay import duties to the US government because 'the sale happened in Israel?'

rjamestaylor5• 16 years ago

Slow down, people...

Here's part of an update from the Texas Taxpayers Research Association applicable to this matter:

"... This past week TTARA had extensive discussions with the Comptroller’s office concerning the original intent and interpretation of the new language. The Comptroller’s Office has acknowledged that the purpose of the proposed rule was indeed broader than what was stated in the preamble, but not so broad as to extend nexus to anyone using a server in Texas.

In order to properly clarify the intent of the rules change and more clearly state agency policy, the Comptroller’s Office will issue a new rule proposal. William Hamner, Director of Tax Administration indicated that the agency’s intent is not to extend nexus to a person simply using a third-party server in Texas for an activity such as webhosting. ..."

Move along...nothing to see here

kjuhygtfrde3• 16 years ago

Presumably this was beaten into the comptrollers office with a cluebat over the sound of uhaul trucks emptying all the data centers that had been built in Texas

alecco2• 16 years ago

Interesting, but [citation needed].

rjamestaylor5• 16 years ago

It's from a letter from the TTARA -- it's currently behind a paywall (hence the reason for only excerpting it) but should be public very soon. [Edit: website - http://www.ttara.org/ ]

pyre3• 16 years ago

Sounds like this is meant to apply to people running their own datacenters/servers. (e.g. if amazon.com ran a datacenter in Texas that was serving up their website, this would apply to them; but if amazon was buying hosting in Texas from a 3rd party, this would not apply to them)

mmaunder• 16 years ago

Server DoS'd. Google's text-only cached version:

http://bit.ly/dA9Vbc

matthavener• 16 years ago

Susan Combs is responsible and she's up for re-election Nov 2nd. (http://www.sos.state.tx.us/elections/candidates/general/2010...) I doubt this will last for long.

middlegeek• 16 years ago

Before attempting to unleash an internet mob, please take a look at this post:

http://news.ycombinator.com/item?id=1785593

dotBen2• 16 years ago

the HN title here is a little FUD... The article states:

"The new rule states that if you use a server that is housed in the state of Texas, you have Texas nexus for sales tax. That means you must collect and pay sales tax from any taxable sales made to customers within the state of Texas."

So let's assume this isn't bunk (I'm not convinced this is true, but anyways...) what she is saying is that you would have to collect sales tax on sales to other folks who reside in Texas.

For a start, this wouldn't apply to you unless you are running a sales business and even then it has to be one that is selling goods rather than services.

So advertising, pro services and SaaS orientated businesses, this wouldn't apply to you. If you use a TX HQ'd host but run on servers outside of Texas it doesn't apply either - so Linode's hosted in London, Atlanta, Newark or Fremont (dude, there's a fault line there, you know?) are ok too.

If this is in fact true, and you are running a sale of goods business, you would want to make sure your webhost never migrates you to a TX datacenter otherwise you could suddenly be liable for uncollected state tax :/

I'm going to look into this because we run a hosting business out of TX.

dotBen2• 16 years ago

Further thoughts:

I wonder how they are defining 'servers located in TX'?

* Would a database server located in TX but web pages served to customers from California be ok?

* What about servers in California but you use Akamai for CDN and you serve most TX customers via an Akamai edge-cache in TX

It's not really HN subject matter, but don't forget this pales into insignificance compared to the new tax law which says you have to fill out and issue a 1099 to anyone you buy more than $600 of stuff from:

http://money.cnn.com/2010/05/05/smallbusiness/1099_health_ca...

DanielBMarkham• 16 years ago

I have a startup. Now I have to do this. It pisses me off.

I'm thinking that's about as much an "HN Matter" as anything else on the front page.

This is the "death by a thousand cuts" scenario: lots of little piddly nuisances which add up to a regulatory nightmare. None of them are really all that onerous, but taken together, well, things accumulate, and perception is 9/10ths of reality. There is an aggregation of PITAs from state, local, and federal governments. I'm not saying that in an anti-government way. Whatever your feelings about taxation and government, it's more of an issue of the bus heading down the road and nobody is driving than anything else.

tedunangst3• 16 years ago

"Would a database server located in TX but web pages served to customers from California be ok?"

No. The central point is a piece of your business is inside of Texas.

This appears to be somewhat moot, as it looks like there's some uncertainty as to interpretation, but generally, it doesn't matter what part of the business is in the state, just that any part is.

trunnell• 16 years ago

At the risk of going off-topic...

...the new [1099] tax law...

There's a lot of noise being made about this but I think it's mostly FUD.

I ran a small business for about six years and had to file 1099s. Filing 1099s was really easy. If I had to, I could probably even do it retrospectively to meet this >$600 requirement without breaking a sweat: my business credit card aggregated all yearly purchases by merchant and by category. It would be a simple matter of looking at my year-end statement as all my business expenses were paid with that account. Also, the most basic Quicken-like accounting packages offer the same functionality. If there are market gaps for simple software (or bank statement reporting) they will be filled quickly. So I think this is much ado about a very small problem.

Still, there's a good chance the opposition to this relatively minor reporting requirement will force it to be repealed. If it does go into effect, I would expect the IRS to offer better automated filing for 1099s if for no other reason than to make their own jobs easier.

I have trouble believing those who complain so loudly about this requirement (thread parent excluded) because so often they are opposed to the health care legislation on other grounds. On balance, this health care law is designed to be a huge net positive for small businesses-- in addition to new tax credits to help them pay their employees' premiums, for the first time there will be public group policies available in the new health care exchanges with real competition. Costs should go down for small businesses, significantly. Doing a couple hours of extra accounting each year pales in comparison to these benefits.

rjamestaylor5• 16 years ago

Look for a public clarification on this soon (very soon) -- it's not intended to affect webhosting according to the Comptroller's office. See my previous comment.

dangrossman2• 16 years ago

Unlike other states, a lot of services and digital goods are subject to sales tax in Texas. The article mentions a few examples.

vaksel• 16 years ago

frankly I think this is b.s., doesn't interstate commerce fall under federal jurisdiction anyways?

why should internet companies have to deal with this B.S. for all 50 states?

Frankly i think this is just a way for them to soften everyone up for an internet sales tax. "Oh you don't like filing 50 different tax forms? Well good news, we now have an internet sales tax of 3%"

tedunangst3• 16 years ago

The point is that if part of your business is in the same state as the customer, it's not interstate. This is hardly a new rule. Mail order catalogs have extracted sales tax in states where they had warehouses since before there was an internet.

tbrownaw• 16 years ago

But someone still has to define what it means to have "part of your business" in a state. You own fixed property that's located there? One of your employees works from home and lives there? One of your employees worked 2 hours while waiting at an airport in that state? Someone rents something from you and takes it into that state? Your cloud provider keeps a backup facility in that state?

It seems like the definition of what it means for a business to have nexus in a state (so, what business counts as "interstate") is a perfect thing for the feds to handle.

rebelde• 16 years ago

Wait, does this mean that my earnings are in Texas where the state income tax rate is 0%? Woohoo. That sure beats paying tax in my state. I'm half-serious here. This might be worth looking into.

hexis• 16 years ago

This article was talking about sales tax, which is unfortunately non-zero in Texas.

WildUtah• 16 years ago

The Texas corporation income tax is one of the highest in the nation. When Texas comes to tax your servers with the state income tax, you'll really be sorry.

nhebb• 16 years ago

Another consideration: if you sell desktop software and use a payment processor, many of the full service payment processors like Fastspring, Plimus, Avangate are resellers. So the customer is actually buying from the reseller and not you.

thaumaturgy• 16 years ago

There's already another goods provider which seems to have been directly affected by this decision: http://forum.daz3d.com/viewtopic.php?p=2562075&sid=38561...

rjamestaylor5• 16 years ago

Here's a response from Rackspace (my employer):http://su.pr/2gCe3k

"Rackspace comments on changes to Texas Sales Tax Rules

Rackspace has been in discussions with the Texas Comptroller’s Office and its tax advisors to address the recent changes to the state rules governing Texas sales tax.

The new controversial language states, “A person is engaged in business in Texas if the person has nexus with the state as evidenced by, but not limited to, any of the following: [...] derives receipts from a rental or lease of tangible personal property that is located in this state or owns or uses tangible personal property that is located in this state, including a computer server or software;[...]“

The Comptroller’s Office has indicated that the language was not intended to be construed as so broad as to extend nexus to anyone using a server in Texas. William Hamner, Director of Tax Administration indicated that the agency’s intent is not to extend nexus to a person simply using a third-party server in Texas for an activity such as webhosting. However, since taxable items are subject to taxation in both electronic and physical form, the sale of data, such as music files, housed on a Texas server could create nexus for the owner of the data.

Because of the unintended confusion that has resulted from this change, we understand that the Comptroller’s Office will issue a new rule proposal in order to properly clarify the intent of the rules change and more clearly state agency policy on this matter.

We will continue to actively pursue a positive outcome on this issue with the Comptroller’s Office and will continue to monitor and report on any new developments that we believe to be important to our customers."

mgkimsal• 16 years ago

The Comptroller's response here is the exact opposite of the language, based on what I'm reading. If "the language was not intended to be construed as so broad as to extend nexus to anyone using a server in Texas" then why use the language "A person is engaged in business in Texas if the person has nexus with the state as evidenced by, but not limited to, any of the following: [...] uses tangible personal property that is located in this state, including a computer server".

The "sale of data, such as music files" is a specifically defined process, wholly separate from "using personal property, including a computer server."

IMO, the state got caught trying to overreach, and they're playing the innocent "oh that's not what we meant!" hand. If it's not what you meant, change the language.

Words have meanings - someone knew exactly what he/she was doing when that was drafted. Especially given the large number of data centers hosting servers in Texas, with its central geography, cheap land/power, etc. The pain of migrating away is too great and expensive - people will just comply with the new taxes and most will stay. Some may leave, but it'll take a long time. In the short term - few years, TX will get extra income.

ck2• 16 years ago

This is why you should run even dedicated servers as a vps and use the portability to move the node to friendlier territory within an hour or two on demand.

So what if you are on a cloud that unknowingly uses resources in Texas?

Sheesh politicians never think these things out.

Rackspace, Hostgator, Linode customers must file taxes in Texas from now on.

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