In recent Texas Letter Ruling No. 201102989L, the Comptroller found that access fees to a website should be sourced to the location of the payor, while click-through revenue derived from advertising on the website should be sourced to the location of the online advertiser’s server.

In this Letter Ruling, the Comptroller considered sourcing issues applicable to a taxpayer who operated a social-networking website that had two primary sources of revenue: website access fees, and online advertising revenue. The taxpayer operated this website using two identical servers, which were each located in different states, and which split the number of users on the website approximately equally.

First, the Comptroller addressed how the website’s revenues from fees charged to access certain benefits on the website should be sourced for purposes of determining the website’s receipts factor. The Comptroller found that access fees are similar to membership fees because customers are charged for being able to obtain certain benefits on the website. Under Texas franchise tax rule 3.591(e)(17) “Membership or enrollment fees paid for access to benefits should be considered gross receipts from the sale of an intangible asset and are apportioned to the legal domicile of the payor.” Based on this rule, the Comptroller thus concluded that gross receipts from access fees to the website, which are like membership fees, should be sourced to the location of the payor.

Second, the Comptroller addressed how fees paid for advertising on the website should be sourced for purposes of determining the website’s receipts factor. The Comptroller found that online click-through advertising revenue is treated as commission, which, in turn, is treated as revenue from performance of a service. Franchise tax rule 3.591(e)(26) provides that “Receipts from a service are apportioned to the location where the service is performed. If services are performed both inside and outside Texas, than such receipts are Texas receipts on the basis of the fair value of the services that are rendered in Texas.” Based on this rule, the Comptroller found that gross receipts from click-through advertising revenue should be apportioned to the location of service, which, for websites, is the location of the server that provides links customer can use to purchase items from the seller. Thus, because, in the Letter Ruling, the website’s servers were located in two different states, the Comptroller concluded that the click-through advertising revenue should be apportioned half to one state and half to the other.

There are numerous websites, like the one discussed in Letter Ruling No. 201102989L, that earn revenue from charging access fees and/or from allowing third-party advertisers to host online ads on their websites. Varying states, however, may treat sourcing of such revenue differently. Taxpayers should thus seek advice regarding the tax consequences of earning revenue from charging access fees and/or charging for advertising on their websites.