Information Release

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.