Revenue Ruling 01-10-2
Nebraska Sales and Use Tax

WEB SITE DESIGN, DEVELOPMENT, AND HOSTING

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Issue:

Are retail sales of website design, development, and hosting by a website service provider subject to sales and use tax?

Conclusion:

Charges by a website service provider for website design and development are not subject to tax unless the website design is transferred to the customer on a tangible storage medium such as a computer disc. If the website design is retained by the service provider for hosting, or electronically transferred to either a third party hosting entity or to the customer, the charges are not subject to tax.

Website hosting by a service provider is not one of the statutorily enumerated services subject to tax in Nebraska.

Definitions:

Website service provider. A website service provider is the person or business who performs any or all of the functions related to websites, including the design, development, hosting, and updating of all or part of a website.

Website hosting. website hosting is the storage of website data on a computer, and can include the domain name registration, security, access monitoring, and data backup services.

Analysis:

Pursuant to Neb. Rev. Stat. §77-2703, retail sales of tangible personal property, computer software, and certain enumerated services are subject to tax. Computer software is defined in Nebraska Sales and Use Tax Regulation 1-088 as a sequence of instructions which directs the computer to process data.

The development of a website generally involves consulting, designing, programming, and placing the site on a server for viewers to access via the Internet. websites are made of a combination of one or more files, created through the use of different HTML editors, graphics, and sounds. The files, which can vary in their levels of sophistication, tell the viewer’s browser what to do when a website is viewed. The website may also contain embedded programming (scripts) that may be executed by the viewer’s browser to perform such functions as downloading files, purchasing products, enrolling for memberships, or connecting to or interacting with software applications or databases that reside on another computer.

Once the website is developed, it can be transferred to the customer, transferred to a third party hosting service, or retained by the developer for hosting. Purchasers of websites may be provided passwords by the hosting entity in order to upload or delete files, create file directories, change permissions, etc. Entities providing hosting services furnish the equipment and servers which are used by many customers simultaneously.

Charges for the design, development, and hosting of websites which are retained by the service provider for hosting, or electronically transferred to the customer or to a third party hosting entity, are not charges for the sale of tangible personal property, computer software, or one of the statutorily enumerated services subject to tax. While the website may contain some embedded programming to assist the viewer in performing tasks such as accessing information, purchasing products, enrolling for memberships, or generally interacting with the website, this programming is not being used by the purchaser to process data or operate a computer system, and therefore is not considered the sale of computer software to the purchaser. Only when the website is transferred to the customer on tangible storage media does the transaction represent the sale of tangible personal property which is taxable. The website service provider is the consumer of any programming used in designing, developing, or hosting the website, and must pay tax on its purchases of hardware, software, and other taxable property and services.

APPROVED:
Douglas A. Ewald
Tax Commissioner

March 1, 2010