Is an online service that authenticates a customer's identity and electronically delivers a 'Digital ID' (a digital certificate for secure internet transactions) subject to New York sales tax?

Plain-English summary

A company (referred to as "the Company") provides digital certificate solutions -- "Digital IDs" or "Internet IDs" -- that let businesses and individuals conduct secure electronic commerce and communications online. A Digital ID works something like a driver's license: it uniquely identifies its owner (via a public key, name, expiration date, issuer, serial number, and digital signature) but has little other use. Customers register on the Company's website; after the Company authenticates the customer's identity through a third party, it generates a unique algorithm-based Digital ID and delivers it electronically through its "Digital ID Center," a 24/7 online service. The Company sells this on an annual subscription basis ("Website Digital Certificates" for servers/browsers, and more elaborate "Enterprise Digital Certificate" services for organizations issuing certificates to their own users), and also sells related consulting, design, integration, and training services to support those certificate deployments.

New York's sales tax only reaches services specifically listed in the statute. The Department found that providing and electronically delivering a Digital ID -- an identity-authentication credential, not a text file or software product being sold -- doesn't fit any of those enumerated taxable service categories. So charges for delivering Digital IDs, standing alone, aren't subject to sales or use tax. The Company's consulting, design, training, and systems-engineering services offered alongside the certificates are also not enumerated taxable services, and separately, the service of installing software (whether custom-built or prewritten) is specifically exempted by statute.

The Department flagged two important limits, though. First, if the Company's systems-integration work includes selling or installing computer hardware, or selecting and selling prewritten software, those particular charges can be taxable under the general tangible-property and installation-service provisions. Second, none of these services stay exempt if they're billed as a single lump sum together with taxable tangible personal property or taxable services on the same invoice -- bundling taxable and non-taxable items into one combined charge can pull the whole charge into taxability.

What this means for you

Digital certificate, PKI, and identity-verification service providers

Your core identity-authentication/certificate-delivery service is likely outside New York's enumerated taxable-service categories, similar to other online authentication and consulting services. But keep any hardware sales, prewritten software sales, or software installation charges itemized separately from your certificate/consulting fees -- lumping them together on one invoice risks making the whole charge taxable.

IT consulting and systems-integration firms

Consulting, design, training, and integration services generally fall outside the enumerated taxable-service list, and software installation (custom or prewritten) has its own specific exemption -- but selling the underlying hardware or prewritten software itself remains taxable, so keep those line items and their tax treatment distinct on customer invoices.

Accountants and tax professionals

This ruling reinforces the same "enumerated services only" principle as the same-year Measurisk ruling (TSB-A-00(9)S) -- a technology-delivered service isn't automatically taxable just because it's sophisticated or software-adjacent. The critical practical takeaway is the lump-sum billing trap: itemize taxable tangible property/software sales separately from exempt services to avoid dragging the whole invoice into taxability.

Common questions

Q: Is delivering a digital certificate or Digital ID a taxable sale of software?
A: No -- the Department found the Company isn't in the business of selling software; it's providing an identification/authentication service, which isn't an enumerated taxable service.

Q: Are consulting and training services related to digital certificates taxable?
A: Not on their own -- but if billed as a lump sum together with taxable hardware or prewritten software sales, the combined charge can become taxable.

Q: What would make part of this business taxable?
A: Selling or installing computer hardware, or selecting and selling prewritten software, as part of a systems-integration engagement -- those specific charges can be subject to tax under §§ 1105(a) and 1105(c)(3).

Q: Can another company rely on this ruling?
A: No. It binds the Department only as to this petitioner's client and the facts described. Other providers should confirm their own service and billing structure match before assuming the same treatment.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a), (c) (tax on tangible personal property and enumerated taxable services)
• Tax Law § 1105(c)(3) (tax on installing tangible personal property)
• Tax Law § 1115(o) (exemption for services performed on computer software)

Prior rulings referenced:

• Virtual Systems Group, LLC, Adv Op Comm T&F, Oct. 9, 1998, TSB-A-98(71)S
• Salomon & Leitgeb CPA's, LLP, Adv Op Comm T&F, July 23, 1997, TSB-A-97(44)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(7)S
Sales Tax
February 2, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990330B

On March 30, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from KPMG LLP, Three Embarcadero Center, Suite 2000, San Francisco, CA 94111.
Petitioner, KPMG LLP, provided additional information pertaining to this petition on April 13, 1999.
The issue raised by Petitioner is whether its client’s on-line service of delivering Digital IDs
is subject to sales or compensating use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner’s client (“the Company”) is a provider of digital certificate solutions for businesses
and individuals wanting to perform secure electronic commerce and communications over the
Internet. A digital certificate, also known as a Digital ID or Internet ID, works very similarly to that
of a state driver’s license in that it identifies a unique individual to another party, but is of little use
for anything else. A Digital ID typically contains the following: (1) Owner’s public (electronic) key;
(2) Owner’s name; (3) Expiration date of the public key; (4) Name of the issuer (the certification
authority, otherwise known as the “CA,” that issued the Digital ID); (5) Serial number of the Digital
ID; and (6) Digital signature of the issuer. The Digital ID is not a text file. The creation of a unique
algorithm by the Company incorporates personal characteristics so as to create a wholly independent
identifier for the purpose of secure communications.
The Company markets Digital IDs for servers, browsers, e-mail applications and software
content. A customer applies for a Digital ID by first accessing the Company’s Web site and then
completing an on-line registration form. Once the Company authenticates the identity of the
customer (via a third party), it delivers the Digital ID electronically over the Internet to the customer.
The Digital ID is delivered through the Company’s Digital ID Center, an on-line service that is open
24 hours a day, seven days a week.
The Company’s service is offered on an annual subscription basis. Prices range between
$250 and $1,200 per server per year for “Website Digital Certificates,” depending on the version of
digital certificate requested and the overall volume of web site digital certificates used by the
customer.
The Company also offers “Enterprise Digital Certificate” services which are tailored to meet
the specific needs of corporations, financial institutions, government agencies and other
organizations that wish to issue digital certificates to employees, customers, citizens or trading

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TSB-A-00(7)S
Sales Tax
February 2, 2000

partners. This service is designed to support a wide range of digital certificate needs for both small
and large user communities. It can be used by customers to provide digital certificates for a variety
of applications, including controlling access to sensitive data, enabling digitally-signed e-mail and
creating an online electronic trading community. Services vary based on the nature and complexity
of the application and the degree of control customers desire to maintain. The service is designed to
offer customers ease of use at a low initial investment.
To expand and complement its Enterprise Digital Certificate service, the Company employs
experts in digital certificate architecture and application integration to provide a variety of design,
development and implementation services. These services include integration with existing
applications and databases, consulting on policies and procedures related to the management and
deployment of digital certificates, training classes on the latest developments in security technology
and the selection of enabled software and hardware to complement a digital certificate solution.
Enterprise Digital Certificate services are offered as annual subscription services with pricing
dependent upon the number of users to be supported, the complexity of the applications and the
number of additional services provided. Customers can subscribe to the service through the
Company’s Web site, the direct sales force, selected international service providers or system
integrators.
Opinion
The Company delivers Digital IDs to businesses and individuals wanting to perform secure
electronic commerce and communications over the Internet. Digital IDs provide a trusted means of
authenticating the identity of the parties in an electronic transaction. They are used much the same
way as conventional forms of identification, such as a driver’s license, to provide evidence of the
owner’s identity and authority in a given transaction.
Customers apply for a Digital ID by accessing the Company’s Web site and completing an
on-line registration form. Once the customer’s identity has been authenticated, the Company
personalizes a Digital ID by the creation of a unique algorithm, thereby assuring a unique identifier
for the customer. The Digital ID is then delivered to the customer electronically over the Internet
through the Company’s Digital ID Center. The use of the Digital ID by the customer in sending an
electronic message provides the basis for assuring the identity of the customer as the sender.
The Digital ID Center is an on-line service that is open twenty-four hours a day, seven days
a week. The service is offered on an annual subscription basis and pricing depends on the version
of Digital ID requested. The Digital ID is not a text file. The Company is not in the business of
selling software. The Company provides an identification service in order to perform secure
electronic commerce transactions.

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TSB-A-00(7)S
Sales Tax
February 2, 2000

Section 1105(c) of the Tax Law imposes sales tax upon the receipts from every sale, except
for resale, of certain enumerated services. The Company’s provision of Digital IDs does not
constitute any of the services enumerated under Section 1105(c) of the Tax Law. Therefore, in those
instances where the Company charges its customers for the electronic delivery of Digital IDs,
without the performance of any other taxable service or in conjunction with the sale of tangible
personal property, such charges are not subject to New York State and local sales or compensating
use tax.
It is noted that if the additional systems integration services the Company offers for sale
include the installation or sale of computer hardware or the selection and sale of pre-written software
in order to accomplish the integration of software packages, receipts from the sale of such property
or services may be subject to sales tax under Sections 1105(a) and 1105(c)(3) of the Tax Law (see
Virtual Systems Group, LLC, Adv Op Comm T&F, October 9, 1998, TSB-A-98(71)S, for a more
in-depth discussion on the sales taxability of systems integrations services).
It is also noted that the consulting, design, training and system engineering services the
Company may provide do not constitute taxable services described in Section 1105(c) of the Tax
Law. The service of installing computer software, custom or pre-written, is exempt from tax
pursuant to Section 1115(o) of the Tax Law. Accordingly, the Company’s receipts from the sale of
any of these services and the on-line delivery of the Digital IDs are not subject to sales and use taxes
provided that they are not performed for customers in conjunction with the sale of taxable tangible
personal property or services and billed as a lump sum with the taxable items on the invoice or other
document of sale given to the customer (see Salomon & Leitgeb CPA’s, LLP, Adv Op Comm T&F,
July 23, 1997, TSB-A-97(44); Virtual Systems Group, supra).

DATED: February 2, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.