Business cases for building data centers with the intent to begin offering revenue-generating services will normally include items such as income taxes, energy and labor expenses. The impact from transaction taxes for such a service may not be as obvious, but these should also be included in a business case.
One of the main differences between transaction taxes or property and income tax is that transaction taxes apply when an exchange is made regardless of whether the seller made a profit. Determination of applicable transaction taxes will depend on several factors:
1. Is the offering considered a regulated service or general item of tangible personal property?
2. Are you considering tax liability from the perspective of the company offering the service (seller) or purchasing the service (buyer)?
3. Do both parties that participate in the exchange have a physical presence in the same state?
4. How will the buyer access the service?
Let’s review some possible scenarios for each of these factors.
First, the difference between telecom and general TPP is that telecom applies if the FCC (News - Alert) declares such a service is under governance of the FCC. (This is what many people feared would be the fallout from the appeals court decision in favor of Comcast (News - Alert) in a dispute with the FCC for imposing involuntary bandwidth restrictions against BitTorrent.) A state or local telecom tax may also apply if the jurisdiction rules that such tax is applicable. For example, states differ on whether VoIP is a telecom service. Some states require all services to be taxed unless specifically exempt. Other states take the opposite approach and list only the services that will be taxed.
Second, there are some taxes that can only be assessed to the buyer, while others only apply to the seller. A data center business case needs to include taxes for the seller in its financial analysis. These may include sales tax, gross receipts tax, or business and occupation taxes that are clearly the seller’s liability and cannot be imposed on the end user. Additionally, it may be more likely for a jurisdiction to pursue a seller if there is a substantial amount of money at risk and a means to discover the seller. For example, one means of discovery is viewing a Web site that can be used to describe the seller’s services and locations for operation centers.
Third, if the seller and buyer are located in different states, then the question of who is responsible for the resulting taxes needs to be considered by determining nexus. (Nexus is lawyer-speak for significant ownership of property or facilities within a jurisdiction’s boundaries. Each state has its own interpretation for what is required to be considered significant.) Nexus is the criterion used in deciding which jurisdiction has the right to assess taxes. Some states may be limited to assessing taxes only on the buyer when the seller has nexus in a different state.
Fourth, another factor to be considered is the transport manner by which the service is provided: public Internet or private line. If a service is available anywhere in the United States by means of public Internet, it probably will not be considered a telecom service. Alternatively, if the customer is required to purchase a private line for accessing the service, then a telecom component may apply. However, with the FCC attempting to exercise the right to regulate broadband services, there may be new rules created in the near future for services offered via public Internet.
Taxes may only be a small piece of the business case, but they need to be treated with respect. Expenses incurred for audits, penalties, and interest can be greater than the amount originally owed if taxes are mishandled.
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Edited by Stefania Viscusi