Skip to content
Quick Start for:

Introduction

What Is the Internet?

The Internet is a global network of interconnected computer networks. Internet technology enables millions of independently operated computers, each using different hardware, operating systems, and software application programs to link to each other by a common protocol. Simply put, the Internet represents the computer space created by people voluntarily connecting all these dissimilar networks.

As a resource easily accessible by the public, the Internet only dates to the early 1990's. The Internet technically has existed since 1969. However, in its early years only research scientists and computer enthusiasts were frequent users. Generally, they reached the Internet through mainframe computer networks that nonprofit government and educational institutions established. The World Wide Web software protocol transformed the Internet into something that anyone able to switch on a computer could use.

An Internet service provider (ISP) provides even the most unsophisticated customers a convenient way to access the Internet. Besides simply "providing access," some ISPs handle file transfers and process subscriber data, for example by making the necessary computer software protocol conversions. In addition, some ISPs give subscribers E-mail privileges, navigational software and limited informational news or newsletters and provide some "content" as part of their regular subscription charge.

Around the country, various state taxing authorities view Internet service providers as providing one or more of several different services:

  • information services;
  • data processing services;
  • telecommunications services;
  • advertising services;
  • computer software;
  • computer services; or,
  • an entirely new service.

[Back to the Top]

History of Sales Taxes on Data Processing Services and Information Services

In the mid-1980's, Texas was faced with a daunting fiscal crisis. The petroleum, banking and real estate industries in Texas were all in very difficult straits, incurring large financial losses and substantial personnel layoffs. In a similar manner Texas tax revenues were declining substantially at a time when necessary and desirable state expenditures continued to grow. In responding to these troubled times, the Texas Legislature found it necessary in 1987 to expand Texas sales and use tax far beyond the traditional taxation of sales of tangible personal property. The Legislature extended sales and use taxes to several important categories of services[1], including data processing services[2] and information services[3]. At that time, few outside of the defense industry and higher educational institutions were aware of the existence of the Internet.

The Comptroller of Public Accounts (the "Comptroller") has issued several private letter rulings, responding to questions posed by taxpayers or their representatives, about how certain Internet related transactions are characterized for Texas sales tax purposes. Virtually all such rulings have held that manipulating a web site or web page constitutes taxable data storage[4].

[Back to the Top]

Creation of the Working Group

As an increasing number of rulings were issued that indicated Internet related services were taxable, industry concerns grew. At the national level, Congressman Cox and Senator Wyden initiated an effort to federally preempt certain state taxes on the Internet, proposing federal legislation that became the Internet Tax Freedom Act. In the course of heated debate over proper state and federal taxation of the Internet and its transactions, Texas' characterization of web site creation, maintenance, hosting, etc., as taxable services drew substantial national criticism. Some critics suggested that the tax climate in Texas was hostile to growth of the Internet and related businesses.

In November, 1997, partially in response to those criticizing Texas tax policy, John Sharp, then Texas Comptroller of Public Accounts (the "Comptroller"), convened a broad based group (the "Working Group") of industry leaders, traditional businesses which extensively use Internet services, and legal and accounting professionals both inside and outside the Comptroller's office, to suggest and formulate potential techniques to address Texas' taxation of Internet transactions. A list of the members of the Working Group is attached as Exhibit A. Wade Anderson, then the Director of Policy in the Office of the Comptroller, and David Cowling co-chaired the Working Group.

The Comptroller provided the Working Group with comprehensive descriptions of letter rulings and other authority issued by the Comptroller interpreting the application of Texas sales and use tax to Internet related transactions. Those authorities[5] applied the sales and use taxes on data processing services, information services and telecommunication services (all enacted by the Legislature during the severe economic times of the mid-1980's) to Internet transactions. The Working Group acknowledged that the Internet was a virtually unknown medium in 1987 at the time the Legislature enacted these provisions, and when the early interpretations of the sales taxes on data processing and information services were promulgated. Having examined the Comptroller's Internet authorities, the Working Group concurred that many of the current interpretations of the Comptroller constituted appropriate interpretations of Texas' existing tax statutes.

The Working Group divided into two subcommittees. The first, referred to as the Taxable Transactions Subcommittee chaired by David Cowling (attorney with Jones Day Reavis & Pogue, Dallas, Texas), was charged with the responsibility of recommending tax policies surrounding general Internet sales and transactions. The second subcommittee, the Nexus Subcommittee, chaired by Linda Fontaine (accountant and consultant with Fontaine & Kelley MultiTax Services, Austin, Texas) was charged with unraveling the mysteries of nexus as it applies to Internet transactions, ISP's, and web providers.

This report contains specific recommendations requiring legislative action. While many personnel from the Comptroller's office have been directly involved in the Working Group, these recommendations should not necessarily be considered to be the recommendations of the Comptroller. Rather, the recommendations are the considered opinions of the industry, traditional businesses which extensively use Internet services, and legal and accounting professionals participating in the Working Group.


  1. See Texas Tax Code Section 151.0101, "Taxable Services."
  2. Texas Tax Code, Sections 151.0101(d)(12), and 151.0035.
  3. Texas Tax Code, Sections 151.0101(a)(10)and 157.0038
  4. See, e.g., Comptroller Rulings Number 9512L1386B04 (creation of a web page is a taxable data processing service); 9501L1335A01 (converting advertising from video tape to electronic online medium is taxable data processing; maintaining a web page is a taxable data processing service); 9512L1386D04 (scanning information onto the Internet and creation of "HTML" documents is taxable data processing; posting web pages on a server is a taxable data processing service); 9601L1389G04 (downloading information from a server in Texas is a taxable information service); 9610L1436A02 (Internet dating service is a taxable information service); 9609L1438G12 (out of state electronic mall designs and set up website, supports and maintains the website, processes payments for sales made through the electronic mall and remits net proceeds to vendors- taxable services); 9608L1434B03 (map and proximity data sold over the Internet are taxable information services); 9612155L (providing Internet server space is a taxable data processing service); 9701189L (creation of website for use in broadcasting over the Internet is a taxable data processing service; broadcasting is a taxable telecommunications service); and 9811967L (providing Internet access is a taxable information service).
  5. See note 4 above.