Servers in Another State's Data Center: What You File There

Do servers in another state's data center create nexus?

Usually yes. Nexus is a connection strong enough for a state to tax you, and servers you own in a state are property there. Texas lists holding personal property located or used in Texas as physical presence on its nexus questionnaire. Virginia said a company's servers in an unrelated party's secured facility, which the company could not even enter, went beyond Public Law 86-272, and that its activities (the servers plus one salesperson) "would appear to create nexus" (P.D. 12-36).

This matters to neoclouds (cloud companies built around renting GPU compute) because they place racks where power is, often far from the team. Neither Texas nor Virginia excludes servers in a colocation data center from nexus.

Nexus and apportionment are two questions. Nexus decides whether you file. Apportionment decides how much income the state taxes. For any other state, check whether it lists owned or rented property as physical presence, how its formula weighs property and sources service sales, and whether its counties tax business equipment. The general tests (sales thresholds, remote staff, owners' returns) are in Business income tax in other states.

What servers in another state can trigger:

Own, rent or buy capacity. Rented servers count too: Virginia put servers a company rented in a Virginia facility into its property factor (P.D. 16-77). Buying shared cloud capacity is different. Virginia said cloud services bought from a provider that counts as an independent contractor are not attributed to the buyer for nexus, while renting servers there is not protected and likely creates more than a minimal connection (P.D. 16-135). These are older, fact-specific rulings.

To gather: install dates per site, colocation and lease contracts, the fixed-asset register by location, and where customers are.

Does Public Law 86-272 protect a GPU cloud?

No. Public Law 86-272 blocks a state's net income tax only when your activity there is soliciting orders for tangible goods that are approved and shipped from outside the state. Selling GPU-hours, inference or hosting is a service. Virginia applies the same solicitation test to services by policy, but servers that deliver the service go beyond solicitation (P.D. 12-36). The law never covers gross receipts taxes, and Texas Rule 3.586(i) says it does not apply to the Texas franchise tax.

Do servers in a Texas data center mean Texas franchise tax?

Likely yes. Texas taxes an entity with physical presence from the day it begins (Rule 3.586(g)), even when Texas receipts stay under the $500,000 economic nexus test. Rule 3.586 never names servers, but its list "include[s], but [is] not limited to" providing any service in Texas, leasing property used in Texas, keeping a place of business there, and holding any property located in Texas. We found no Texas ruling on colocation servers.

Owing tax is a separate step. At or below $2,650,000 of annualized total revenue, no tax is due, but a Public Information Report or Ownership Information Report still is. Above it, the rate for most businesses is 0.75% of the Texas share of margin (Comptroller). Reports and first-report dates are in Texas franchise tax; margin options are in Texas franchise tax deductions. Ignoring a required report is costly: 45 days after a forfeiture notice, the Comptroller can forfeit the company's right to do business in Texas, and directors and officers then become personally liable for its Texas debts incurred until it is revived (171.251, 171.2515 and 171.255).

Do servers in Virginia mean a Virginia corporate income tax return?

Likely yes. Virginia taxes every foreign corporation with income from Virginia sources at 6%, and a positive property factor establishes Virginia-source income (P.D. 12-36). Owned servers in Ashburn or elsewhere in Virginia give a positive property factor. A company that registers with Virginia's State Corporation Commission files Form 500 every year, even with no Virginia income (23VAC10-120-310).

How much income does the state tax?

Each state uses its own formula, and the servers can pull a large share of income to the state where they sit.

Texas. If your compute fits the Internet hosting definition (customers store or process their own data on property you own or lease and manage, 151.108(a)), receipts count in Texas only for Texas customers (171.106(g)). Otherwise a service counts where performed (171.103(a)(2)), which can pull sales to the Dallas servers, and renting a server situated in Texas is a Texas rental (171.103(a)(3)) (Chapter 171). Whether your compute is hosting or a rental depends on the contract; see Hosting and compute sales tax.

Virginia. A sale of services is in Virginia when more of its cost of performance (the direct cost of delivering it, such as running your servers, power and staff time) is there than in any other state. Using your own property counts where the property sits (23VAC10-120-230), so servers in Ashburn can pull most compute sales into Virginia even when customers are elsewhere. Whether colocation fees for space and power count, as rent in the property factor or as a cost of performance, is unsettled: the regulation leaves out independent contractors' costs, but P.D. 12-36 says a Virginia Supreme Court decision lets them count unless the company elects the regulation. Customer-location sourcing applies only to listed industries, not GPU clouds. The single-sales-factor rule for data centers (58.1-422.2) covers only companies that built and own a data center for their own use under an economic development agreement, never a colocation tenant.

Must we register (foreign qualify) where the servers sit?

Maybe; it is a separate legal test. Texas (BOC 9.251) says "owning, without more, real or personal property" is not transacting business, and neither is interstate commerce. Virginia says the same for corporations (13.1-757) and LLCs (13.1-1059), and adds that the registration test does not decide taxation. Running your service from those servers may be more than owning them: Texas says an entity is generally transacting business if it is "otherwise pursuing one of its purposes in Texas" (Secretary of State), and tells you to ask legal counsel when unsure.

Note: once registered with Virginia's State Corporation Commission, a corporation files Form 500 every year, even with no Virginia income, until it withdraws (23VAC10-120-310). How to register, and late-registration penalties, are in Registering in another state; a Canadian corporation should read Registering a Canadian corporation in a US state.

We're an LLC taxed as a partnership: what changes?

The nexus test is the same; the return changes. Virginia requires Form 502 from every pass-through entity that does business in Virginia or has Virginia-source income (Virginia Tax), and owners get their Virginia shares. Texas taxes partnerships and LLCs as entities whatever their federal status; a general partnership owned entirely by individuals, without limited liability, is excluded (171.0002(b)). Owner returns and withholding are in Business income tax in other states.

Must we report the servers for business personal property tax?

Yes, in states that tax business equipment. The owner files with the county or city where the servers sit on the tax day, which is January 1 in Texas and Virginia.

Servers fully deducted with bonus depreciation still go on these returns at cost. Ownership decides who files: if you lease the servers and hand them back at the end, the leasing company owns and reports them; if the "lease" is really financing and you keep the servers, you own and report them. In Virginia a lessee also files a return naming the owner (58.1-3518). A colocation provider may also list your servers as property in its care on Schedule F of its own Texas rendition. Whether a colocation cage is a location the owner "leases" for the Texas exemption (11.145(d-1)) is an open question.

Texas freeport (Form 50-113) covers goods shipped out of Texas within 175 days, so servers staged in a Texas warehouse for a site in another state may qualify where the local taxing units allow the exemption; servers running in a cage don't. Not every state taxes business equipment: Ohio phased out its general tax for most businesses.

A state sent a nexus questionnaire or rendition notice: what now?

Answer from records, not memory. Texas sends Form AP-114 on paper or the online Franchise Tax Accountability Questionnaire. Both ask for the earliest date of physical presence, which for a GPU cloud is usually the date servers went live in the cage; that date sets the first franchise report. An appraisal district's notice or rendition request is answered with the county filing above. If years went by unfiled, see Catching up on unfiled business returns.

We moved the servers out: when do the filings stop?

Not on the moving day. Servers in the state at the start of the year still count in that year's property factor (Virginia averages the values at the beginning and end of the year), so a final-year return is usually due. Virginia filings continue while you are registered with the State Corporation Commission, so withdraw the registration (a corporation's certificate of authority, an LLC's certificate of registration). Texas requires a final franchise report within 60 days of ending business there; see Texas franchise tax and Closing a company. The county filing follows where the servers sit on the next January 1.

Servers in another state vs another province

Example

Illustrative figures in US dollars.

Dallas cage, customers elsewhere

A GPU cloud, a Delaware C corporation with its team in San Francisco, racks $3,000,000 of servers in a Dallas colocation data center. In its first full year there, revenue is $8,000,000, of which $400,000 comes from customers in Texas. That is under $500,000, but the servers likely give Texas nexus already. If its compute is Internet hosting, Texas receipts are 5% ($400,000 ÷ $8,000,000). Taking margin as 70% of revenue ($5,600,000), Texas margin is $280,000 and tax at 0.75% is $2,100. With total revenue under $20 million it could instead elect the EZ computation, 0.331% of its $400,000 of Texas revenue, or $1,324. If its compute is instead a service performed in Texas or a rental of the Dallas servers, most of the $8,000,000 could be Texas receipts. Texas franchise tax deductions compares the options. On the next January 1 the servers are in Dallas County, so a rendition goes to the appraisal district by April 15 listing $3,000,000 and the year bought, even though bonus depreciation deducted it all federally. The first $125,000 of value at that location is exempt.

Ashburn cage, cost of performance

Another GPU cloud, with its engineers in California, has $9,500,000 of servers in an Ashburn colocation data center and $500,000 of other property in California; no one works in Virginia. Its taxable income after Virginia's adjustments, before apportionment, is $3,000,000. Property factor 95%, payroll factor 0%. If Virginia holds more of the cost of performing its sales than any other state, the sales factor is 100%: (95 + 0 + 200) ÷ 4 = 73.75%, so $2,212,500 is taxed at 6%, or $132,750. If California holds more, the sales factor is 0%: 95 ÷ 4 = 23.75%, so $712,500 is taxed, or $42,750. Loudoun's March 1 return lists the $9,500,000 by year bought.

Moved out, still registered

A seed-stage GPU cloud registered with Virginia's State Corporation Commission when it put $400,000 of servers in Ashburn, then moved them to Dallas in June.

• Year 1 (servers in Loudoun on January 1): Loudoun return due March 1; the Virginia return still includes the Ashburn servers in the property factor, through the start-of-year value.
• Year 2 (servers in Dallas on January 1): a Texas rendition replaces the Loudoun return. Texas franchise tax nexus began in June of Year 1, when the servers arrived. Form 500 is still due every year, even with no Virginia income, until the company withdraws its registration.

Different for you?

• Servers in more than one state, a questionnaire or years unfiled: bring install dates, colocation contracts, the fixed-asset register and customer locations to our CPAs for data center tax help.
• A Canadian corporation's federal US return: see Canadian corporation and a US tax return.
• Sales across many states or remote staff: see Business income tax in other states.
• Gross receipts taxes: see Gross receipts taxes in other states.
• Writing off the servers, and states that don't follow bonus depreciation: see Writing off GPU servers.
• Delaware franchise tax (set by where you formed, not where servers sit): see Delaware franchise tax.
• Registering or withdrawing: see Registering in another state and Closing a company, or business formation help.
• Servers in a Canadian data centre: see GPU servers hosted in Canada.