Sales Tax on Servers, Installation and Maintenance Contracts

Which equipment and freight invoice lines are taxable?

Servers, switches and GPU server racks are generally taxable without an accepted certificate. Refurbishment creates no exemption; California's occasional-sale rules differ (Regulation 1595).

See when you must collect sales tax.

Is installation labor taxable in Texas, California and Virginia?

Itemizing installation alone creates no exemption.

Texas hardware repair and maintenance also tax the entire charge, including separately stated labor and testing (Rule 3.292(b)).

Building work follows contractor rules: Texas distinguishes lump-sum and separated contracts; nonresidential repair or remodeling is taxable (contractor manual; real property publication). California uses Regulation 1521.

Is rack integration or assembly labor taxable?

Building a finished rack from components is fabrication. Itemizing assembly labor does not remove it from the taxable price.

• California: assembly or modification as part of a sale is taxable fabrication, including customer-supplied materials (Publication 108).
• Texas: production labor enters the equipment's sales price; fabrication of customer-furnished property is taxable (Rule 3.300(b)).
• Virginia: fabrication charges include labor even when separately stated or materials come from the customer (fabrication regulation).

L11 rack invoices may bundle integration and site placement; classify each charge.

Are maintenance contracts and support plans taxable?

Maintenance treatment depends on parts coverage and whether purchase is optional.

California warranty deductibles are taxable to the extent allocated to parts (Regulation 1655(c)(4)). Virginia extended warranties issued by insurers regulated by Virginia’s Bureau of Insurance are untaxed (maintenance regulation).

For software licenses, updates, support and Washington's changed rules, see software sales tax.

Who pays sales tax on drop shipments?

Check the reseller's duty and certificate first; the supplier may owe tax if resale treatment fails.

California: a supplier engaged there owes tax when the reseller is not. Use the retail price or supplier price plus 10%; a documented lower markup may apply. The statewide base is 7.25%, plus district tax (Regulation 1706; rates).

A reseller exceeding $500,000 in California deliveries, including related persons' sales, in the current or preceding calendar year is engaged there and must collect. Establishing that status rebuts supplier liability (section 6203(c)(4); Regulation 1706(f)(2)).

A timely, good-faith resale certificate needs Regulation 1668's elements, including the buyer's valid California permit number. If no permit is required, explain why and include either its use-tax registration statement and valid account number, or a statement that the purchase is for resale through a registered marketplace facilitator that is the retailer, with its name and valid permit or use-tax account number (Regulation 1706(f)(1)).

Texas: another US state's reseller can give a complete certificate with home-state registration details for delivery inside Texas. Mexican retailers need RFC identification and their registration form. Other foreign buyers without Texas engagement or a Texas permit qualify only for delivery outside Texas within the US or Mexico. Reseller collection duties remain separate (Rule 3.285(d)).

Do we owe use tax on parts and tools at the customer's site?

Tools and supplies consumed by the seller do not qualify for resale.

Texas providers pay tax on tools and supplies they consume; qualifying transferred parts can be bought for resale (Rule 3.292). Untaxed out-of-state purchases used in Texas may owe use tax, with credit for another state's tax (use-tax guidance).

California taxes parts withdrawn from resale stock for an optional warranty at the provider's cost (Regulation 1655(c)(3)); Virginia labor-only maintenance providers pay tax on items they consume (maintenance regulation).

What does a data center exemption certificate cover?

Check purchaser, site, items, period and excluded taxes.

Texas: only Form 01-929 establishes this exemption; include purchaser and site registration numbers. Read the checked box.

Periods start at certification. Local tax is capped at 2%, with a combined maximum of 8.25%; use the actual rate (local tax guide).

Eligible property includes necessary servers, storage, network gear, racks, electrical and cooling systems, generators and supporting systems. Exclusions include taxable services on exempt equipment, leases for 1 year or less, office and maintenance supplies, other real estate improvements and nonresidential repair or remodeling (Form 01-929; overview). Classify UPS units, power distribution units (PDUs), coolant distribution units (CDUs) and switchgear by function.

Virginia: obtain Form ST-11A for qualifying equipment and enabling software under a Virginia Economic Development Partnership memorandum of understanding. Covered equipment includes chillers and backup generators, but not general building improvements or other fixtures. The ordinary exemption ends June 30, 2035; subdivision 19 allows conditional extensions (section 58.1-609.3; certificate guidance).

Georgia uses Department-issued data center certificates; verify coverage before exempting switchgear or other equipment.

Resale certificate or exemption certificate: which do we accept?

Resale certificates cover resale; exemption certificates cover an end user's qualifying use or status.

A value-added reseller (VAR) typically gives resale documentation. Texas Form 01-339 has separate resale and exemption forms; neither replaces Form 01-929. A permit number alone is insufficient (resale FAQ).

Do certificates expire, and what if one is missing or revoked?

Texas blanket resale certificates last until written revocation; pending-permit certificates last 60 days, then need the permanent number. Data center periods remain limited (Rule 3.285).

Texas good-faith protection requires a complete certificate at or before sale and no reason to know the claim is invalid. Late certificates may establish an exemption after verification; incomplete certificates are disallowed (Rule 3.287). Without Form 01-929, collect state and applicable local tax; a qualifying purchaser can pursue a refund. Sellers may decline the certificate. Data center registration revocation makes the purchaser liable for tax, penalty and interest on exempt purchases; seller protection depends on good-faith acceptance (data center guidance).

Virginia certificates remain effective until departmental notice, but incomplete, invalid or inconsistent certificates never protect a dealer (certificate regulation).

What records tie each untaxed invoice to its certificate?

Texas requires records for at least 4 years, longer during unresolved audits, appeals or refunds (recordkeeping FAQ).

Keep the signed certificate, covered items, purchase order, contract, delivery address, invoice and tax calculation. Match each Texas exempt invoice to its certificate, for example by entering both registration numbers, and retain local-tax evidence (data center guidance).

Example

Illustrative US dollars; assume stated registrations, certificates and movable equipment.

California integrator delivering to Texas

A California integrator sells 40 AI server racks at $1,000,000 each ($40,000,000), plus $400,000 installation and a prepaid $1,200,000 three-year hardware support contract.

With the qualifying data center box checked, racks escape the 6.25% state tax; an assumed 2% local rate produces $800,000. The taxable support contract produces $99,000 at 8.25%. If installation forms part of the racks' sales price under section 151.007(a)(3), it follows the racks: $8,000 of local tax. If it is a separate taxable hardware service, tax is $33,000 at 8.25% (Rule 3.308).

With the large project box checked, qualifying racks and installation included in their sales price carry no state or local tax; separate taxable services still do. Review the contract before choosing the installation result.

Equipment and maintenance in Loudoun County

The integrator sells $5,000,000 of switches and PDUs to a colocation tenant without Form ST-11A. Loudoun County's 6% rate produces $300,000 tax. Separately charged $300,000 installation is untaxed; bundling adds $18,000. A prepaid $600,000 three-year parts-and-labor maintenance contract has a $300,000 taxable base and $18,000 tax (Virginia rates; service exemptions).

Taiwanese equipment shipped to California through a Texas VAR

A Taiwanese UPS maker's California-registered US subsidiary sells $200,000 of units to a Texas VAR, shipping from Taiwan to a Santa Clara data center. Assume $220,000 retail sales, combined California deliveries with related persons below $500,000 in both relevant calendar years, and no other California engagement or qualifying resale documentation.

The subsidiary uses $220,000 after the permitted 10% markup: $15,950 at the 7.25% statewide base, plus district tax. A VAR above the threshold must collect instead; the supplier can establish its engagement. A valid California resale certificate protects the supplier (Regulation 1706; section 6203).

How does Canada differ?

GST/HST-registered Canadian suppliers generally charge GST/HST on taxable domestic business sales; eligible buyers claim input tax credits. QST also applies in Quebec.

Different for you?

Customs duties, tariffs, GPU export controls, CFIUS, operator exemption applications, incentives and sales tax audit representation are outside this page.

• Missing past collections: catching up on uncollected sales tax.
• Returns and personal liability: filing sales tax returns covers exempt sales, sole proprietors, partners, responsible officers, state provisions and assessment limits.
• Foreign manufacturer registering: foreign sellers and sales tax.
• Canadian seller with US stock: Canadian sellers with US inventory.
• Colocation, hosting or compute charges: hosting sales tax.
• US integrator working in Canada: non-resident GST/HST registration.
• Crews or stock creating other state obligations: state income and franchise tax.
• Mixed invoices or certificate gaps: bring contracts, delivery records, certificates and invoices for bookkeeping with sales tax registrations and returns, quoted separately.