Use Tax on GPU Servers Bought Without Sales Tax

The seller didn't charge sales tax: do we owe use tax?

Usually yes. When GPU servers reach your Texas or Virginia colocation data center untaxed, your company owes use tax unless an exemption applies to you. Use tax mirrors sales tax: same rate, but the buyer reports and pays it to the state because the seller did not collect it (Texas Tax Code 151.101–151.102; 23VAC10-210-6030).

A seller may skip the tax because it is not registered in your state, you gave it a certificate, the invoice ships elsewhere, or you bought from a manufacturer abroad. Only an exemption or resale right you actually qualify for removes the tax; the rest leave the use tax with the buyer. Texas taxes items bought abroad and used in Texas (Comptroller: Use Tax). A Canadian or other foreign GPU cloud owes the same use tax on servers it installs in a US data center. Without a sales tax permit, it files the state's use tax return (see How do we report and pay use tax?).

A case is simple when you bought for your own use in one state. It needs judgment when you want a shared building's exemption, rent servers to customers, moved servers between states, or missed past purchases.

What to gather: purchase orders and invoices (with freight), delivery addresses, the colocation contract, the date each server was racked, and any certificate you signed.

Which state's use tax applies, and at what rate?

Use tax is due to the state and locality where the servers are first stored or used, at the same combined rate as sales tax there (Rule 3.346(f)).

If a remote seller charged Texas state tax plus its single local use tax, nothing more is due in Texas; if a seller charged less than the full rate, you owe the difference as use tax (Comptroller: Use Tax). Use each state's rate lookup for the exact address (Virginia rates). The base is the full price, including shipping and handling the seller bills (Rule 3.346(d)(3)); Virginia uses the "cost price," including services that are part of the purchase.

Can a colocation tenant use the data center's sales tax exemption in Texas?

Usually not. Texas certifies a data center used by a single qualifying occupant, who may not sublease any part of the real or personal property in it (Comptroller: Qualifying Data Centers; Tax Code 151.359(a)(2)(C)). A cage or suite smaller than 100,000 square feet, or space you share with other tenants, does not make you that occupant.

The operator's registration does not cover your purchases: each qualifying party gives the seller Form 01-929 with the data center's registration number and its own, the only proof a seller can accept.

A GPU cloud qualifies only as the single occupant of a whole building, or a portion of at least 100,000 square feet, registered with the owner or operator, who together commit to 20 qualifying jobs and $200 million over five years (40 jobs and $500 million for a large project). A new occupant of an already certified data center registers back to the certification date and can then claim refunds of state tax paid since, generally only for tax due within the last four years (Tax Code 111.107, 111.201).

The ordinary exemption removes only the state tax, for 10 or 15 years; occupants still file and pay local use tax. A large project is exempt from state and local tax for 20 years. Property rented or leased for 1 year or less is excluded. If certification is revoked, every registrant owes the tax on its exempt purchases, with penalty and interest from the date of purchase (Tax Code 151.359(h)).

Open question: whether a single occupant that rents dedicated GPU servers to customers breaches the bar on subleasing personal property. No Comptroller guidance addresses it; ask the Comptroller before relying on the exemption.

When does a tenant qualify for Virginia's data center exemption?

Only when a memorandum of understanding with the Virginia Economic Development Partnership (VEDP) covers it. Virginia exempts computer equipment and enabling software for a data center when the operator and its tenants, together, make a new capital investment of $150 million and create 50 new jobs paying at least one and a half times the local average wage (Code of Virginia 58.1-609.3(18)). In a distressed locality, the tests drop to 10 jobs and $70 million. The exemption runs until June 30, 2035, later for a very large operator that qualifies for the statute's extension.

Before claiming, the tenant, or the operator for itself and its tenants, must sign the memorandum, which sets the goals, timeline and repayment if goals are missed. A covered tenant gives the seller Form ST-11A (Virginia Tax: exemptions).

Ask your colocation provider whether its memorandum covers tenants and how to join; nothing is exempt before you are covered. Separately sold software, general building improvements and other fixtures stay taxable. Virginia Tax's exemptions page still shows an older 25-job test for an enterprise zone or high-unemployment locality; the current statute sets 10 jobs and $70 million for a distressed locality. Confirm with VEDP before relying on either.

Do other states let tenants claim a data center exemption?

Some do, through their own process. Checked on the date shown on this page:

Check the state's revenue department before any purchase.

A vendor asked for our exemption certificate: what can we sign?

Sign only a certificate you qualify for at that moment. In Texas, a buyer whose certificate was invalid when issued owes tax on the full original price, and knowingly using a false certificate is a crime graded by the tax evaded (Rule 3.287(d)(3), (e)). Certificate forms and seller records are covered in sales tax on servers, installation and maintenance.

Can we buy servers tax-free for resale because we rent out GPU capacity?

Usually not. If you sell GPU-hours or other compute, you consume the servers, so you pay sales or use tax on them. Texas taxes those compute sales as data processing and still taxes your servers: a data processing provider may give a resale certificate only when care, custody and control of the property passes to the client (Rule 3.330(d)(1)). Whether your bills are taxable is covered in sales tax on colocation, hosting and GPU compute.

Only if your contract is a taxable rental of the server itself can you buy it for lease (Texas Rule 3.294(j); 23VAC10-210-840(C)); Virginia allows this only to a business established in taxable leasing. You then collect tax on the rent. Using that server for anything else, such as your own training or inference, triggers tax; in Texas, on its fair market rental value for the time used. Texas also presumes that equipment furnished with an operator for one charge is a service, with tax due on your purchase price (Rule 3.294(c)(2)).

We paid sales tax in another state: do we get a credit?

Yes, if that tax was legally due there.

• Texas credits a similar tax legally due and paid to another state, first against state use tax, then transit, special district, county and city tax (Rule 3.338; Rule 3.346(d)(5)).
• Virginia credits another state's tax up to Virginia's tax, without requiring that state to return the favor, but not tax charged in error. You apply by letter with the invoice (Code 58.1-611; 23VAC10-210-450).

Trap: a vendor's home-state tax on servers delivered to your Texas or Virginia cage earns no credit. Ask the vendor for a refund and pay use tax.

Moving servers: Texas presumes property shipped in was bought for Texas use unless it was used outside Texas for more than one year (Rule 3.346(e)). Virginia taxes property bought for use elsewhere and brought in later by the share of its useful life spent in Virginia, on current market value (capped at cost) once six months or more have passed since purchase, but presumes it stays for the rest of its useful life unless you prove otherwise (23VAC10-210-6030(C)-(D)).

How do we report and pay use tax?

On your regular sales tax return if you have one; otherwise on a use tax return.

Virginia's Form ST-1 has replaced the old ST-7 business consumer's use tax return (ST-1 instructions; Texas use tax). Return schedules and late penalties are covered in filing sales tax returns.

We never paid use tax on past purchases: how do we catch up?

Before the state contacts you, a voluntary disclosure can limit penalties.

• Texas: open to businesses not yet contacted about the liability or notified of an audit, including permit holders. Penalties are waived and, in most cases, interest. The review covers reports due in the four years before first contact (Publication 96-576).
• Virginia: usually closed to a business already registered for that tax, which amends its returns instead. The program uses a three-year look-back; disclosure of periods under 36 months is not eligible for a limited look-back, though penalty waiver is still considered. (Virginia Tax).

Anonymous filing, several states at once and interest are covered in catching up on uncollected sales tax.

Does use tax become part of the servers' cost for depreciation?

Yes. A tax paid in connection with acquiring property is part of its cost (26 U.S.C. 164(a); Publication 551), so the use tax is depreciated with the servers. Bonus depreciation and Section 179 are covered in writing off GPU servers.

How does Canada differ?

Sources: CRA input tax credits; B.C.: report and pay PST. See provincial sales tax.

Example

All figures are in US dollars and illustrative.

Ashburn cage, $6,000,000 of servers

A Series A GPU cloud buys $6,000,000 of GPU servers from an out-of-state integrator that charges no Virginia tax. Use tax at Loudoun County's 6% is $360,000. It is $0 only if the colocation provider's VEDP memorandum covers the company as a participating tenant and the company gave Form ST-11A at purchase; its jobs and capital then count toward the shared goals, with repayment if they are missed. The $360,000 adds to the servers' cost for depreciation.

Dallas suite, $4,000,000 caught a year late

The same company racked $4,000,000 of servers in a multi-tenant Dallas colocation data center, so it is not a qualifying occupant. It sells GPU-hours, so it consumes the servers and cannot use a resale certificate; it holds a Texas permit for those sales. Use tax at 8.25% is $330,000: $250,000 state, $40,000 city and $40,000 Dallas transit authority. Nobody reported it. Before any Comptroller contact, a Texas voluntary disclosure agreement waives penalties and, in most cases, interest. Going forward, it reports purchases in Item 3.

Moved from Ashburn to Dallas, $1,000,000 of servers

Servers costing $1,000,000, bought for the Dallas suite, run four months in Ashburn while the suite is finished, and $60,000 of Virginia use tax is paid. Here Virginia is assumed to tax the full cost; if the company proves the servers were bought for Dallas, Virginia may tax only the share of useful life spent there, and Texas credits only the Virginia tax that was legally due. In Dallas, Texas use tax of $82,500 less a $60,000 credit leaves $22,500: $2,500 state (the credit goes there first), $10,000 transit authority and $10,000 city.

Different for you?

• You sell the servers, racks or installation, or a buyer says it is exempt: see sales tax on servers, installation and maintenance.
• You are unsure whether your GPU-hours, bare-metal or colocation bills are taxable: see sales tax on colocation, hosting and GPU compute.
• Several years or several states went unreported: see catching up on uncollected sales tax.
• Servers in another state may require registration, income or franchise tax, or property tax filings: see servers in a data center in another state.
• A contractor installs cooling, switchgear or UPS systems: see sales tax on installed cooling and power equipment.
• Servers were imported and tariffs or duties apply: see tariffs and duties on imported equipment.
• Servers are in a Canadian data centre: see GPU servers hosted in Canada and provincial sales tax.
• You need use tax returns or a voluntary disclosure filed for a data center build-out: see data center tax services. Our CPAs file use tax returns and voluntary disclosures; they do not apply for exemption certificates, data center certification or VEDP memorandums.
• Outside this page: negotiating incentives and memorandums, audit representation, property tax abatements, export controls and colocation contract review.