ST 2004-03 - Equipment used primarily in providing Internet
services – December, 2004
This Information Release addresses the application of Ohio
sales and use tax to the purchase of equipment used primarily
to provide Internet services. The applicability of Ohio sales
and use tax to the sale of the Internet service itself is
discussed separately in the Department’s Information Release
titled “On-Line Services and Internet Access” and dated
January 1999.
Internet services may be provided in different ways by
different providers. For example, cable television companies
provide Internet services using a cable modem, and
telecommunications companies provide access through digital
subscriber lines (DSL). Other technologies, such as Internet
service provided via electric power lines and wireless
satellite transmission, are being used or contemplated as
well.
This Department has received questions from providers of
Internet services regarding the taxability of the purchase of
equipment used to provide such services. The provision of
Internet service is separate from the provision of other
services such as cable television service, telecommunications
service (including Voice over Internet Protocol, or VoIP),
mobile telecommunications service, satellite broadcasting
service, and electric service. Therefore, the exemptions
found in R.C. 5739.02(B)(34), (41) and (43)(a) do not apply
to purchases used primarily to provide Internet services.
Equipment used in conjunction with Internet services may be
used to provide multiple types of services. The primary use
of equipment determines its taxability. The purchase of a
server used primarily by an Internet service provider to
allow its customers to store and retrieve e-mails would not
be exempt pursuant to R.C. 5739.02(B)(34), (41) or (43)(a).
If such server is primarily used by business customers, the
purchase of the server may be subject to the credit afforded
providers of electronic information services under R.C.
5739.071.
Additionally, the provision of Internet services may require
certain customer premises equipment, such as modems or
routers. Customer premises equipment is tangible personal
property provided to the customer as part of the provision of
the various services. However, different service providers
market their services differently. Some providers separately
bill their customers a separate charge for such equipment,
whether as a one-time fee or a monthly rental. In such a
case, the service provider must collect sales/use tax on the
equipment charge (unless the customer is exempt from the tax,
e.g., sale to a political subdivision of this state) and may
claim a resale exemption on its purchase of the equipment.
If the service provider does not separate the charge for
customer premises equipment, the service provider must pay
sales/use tax to its supplier, or accrue and remit tax, on
the purchase of the equipment. However, if no separate charge
is made and the facts and circumstances demonstrate that the
equipment is the true object of the overall transaction, the
Department may characterize the transaction as a fully
taxable sale of the tangible personal property.
The Department recognizes that some providers have been
confused in the past with respect to the application of Ohio
sales and use tax to the purchase of equipment used primarily
to provide Internet services. However, to ensure a level
playing field in the future, an Internet service provider
that purchases such equipment on or after January 1, 2005 and
erroneously claims an exemption under R.C. 5739.02(B)(34),
(41) or (43)(a) will be subject to an assessment upon which a
penalty of five percent or greater will be imposed and absent
very special circumstances will not be remitted/removed by
the Department.