Does a financial-risk-analysis firm owe sales tax on the prewritten software it buys and uses to generate its reports, and does it have to charge customers sales tax on its portfolio risk-analysis and stress-test services?

Plain-English summary

Measurisk, LLC provides institutional investors with Risk Analysis reports covering the market, credit, and liquidity risk in their investment portfolios, plus an add-on "Stress Test" service letting clients model how their portfolio would perform under a hypothetical or historical market scenario (like the October 1987 crash). To produce these reports, Measurisk runs client portfolio data through a multi-step pipeline that combines its own custom-built software with a purchased prewritten product, Algorithmics, which crunches the actual market and credit risk numbers. Clients pay Measurisk a recurring fee (based on report frequency and portfolio size) for Risk Analysis, plus a per-request fee for Stress Tests, and receive their reports and results over the internet.

Measurisk asked two separate questions. First, does it owe sales tax on its own purchase of the Algorithmics software? Since Algorithmics is prewritten (not built specifically for Measurisk) and Measurisk uses it internally rather than reselling it to clients, that purchase is a taxable retail sale -- Measurisk pays tax on it like any other taxable software purchase. Second, does Measurisk have to charge its own clients sales tax on the Risk Analysis and Stress Test service fees? New York's sales tax only reaches services that are specifically listed as taxable in the statute, and "electronic financial consulting services" like these aren't on that list -- following the Department's recent Deloitte & Touche ruling on a similar service. So Measurisk's client-facing fees for both services are exempt from sales tax, even though internet delivery and internally-used prewritten software are both part of how the service gets produced.

What this means for you

Fintech and financial-analytics companies

Buying and internally using prewritten (off-the-shelf) analytics or modeling software is a taxable purchase for you, separate from whether your own client-facing service fees are taxable. Don't assume that because a piece of taxable software is baked into your service delivery, your own fees automatically become taxable too -- the two questions are analyzed independently.

Financial consulting and analytics service providers

Genuine financial consulting/advisory services -- analyzing risk, running scenario models, and delivering reports -- generally fall outside New York's enumerated taxable-service categories, even when delivered over the internet using sophisticated software tools. The delivery mechanism (internet, software-driven) doesn't itself create taxability; what matters is whether the underlying service is one of the specific categories the statute lists as taxable.

Accountants and tax professionals

This ruling reinforces the "enumerated services only" principle for New York sales tax: absent a specific statutory category, a service isn't taxable no matter how technology-intensive its delivery. Separately, remember that a company's own internal use of prewritten software (as opposed to reselling or incorporating it into a taxable service transfer) remains a straightforward taxable purchase under §§ 1105(a)/1110(a), regardless of the tax status of the resulting service.

Common questions

Q: If a company uses taxable software to produce a service, does that make the service itself taxable?
A: Not necessarily. Here, the software purchase and the service are analyzed separately -- the software purchase is taxable because it's used internally, while the resulting financial consulting service is exempt because it isn't one of New York's enumerated taxable services.

Q: Are all internet-delivered financial services exempt from sales tax?
A: Not automatically -- it depends on whether the specific service falls into one of the tax law's enumerated taxable categories. Genuine financial consulting/analysis services like risk analysis and stress testing don't, based on this and the Deloitte & Touche ruling.

Q: Can another financial services company rely on this ruling?
A: No. It binds the Department only as to this petitioner's facts. Other companies should confirm their own services aren't structured in a way that falls under a different enumerated taxable category (e.g., information services or data processing).

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4)(i) (definition of "retail sale"; resale exclusion)
• Tax Law § 1101(b)(5), (6), (14) (definitions of "sale," "tangible personal property," and "pre-written computer software")
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1110(a) (compensating use tax)
• 20 NYCRR § 526.6(c) (resale exclusion)

Prior rulings referenced:

• Deloitte & Touche, LLP, Adv Op Comm T&F, Dec. 3, 1999, TSB-A-99(58)S

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_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(9)S
Sales Tax
February 10, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990311A

On March 11, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Measurisk, LLC, 331 Madison Avenue, 12th Floor, New York, New York, 10017.
Petitioner, Measurisk, LLC submitted additional information with respect to the Petition on April
21, 1999.
The issues raised by Petitioner are:
1) Whether Petitioner has to pay sales tax on the purchase of software to be reconfigured into
a larger software system, where the software system is used to produce its services that are sold to
businesses.
2) Whether the services provided by Petitioner, which will be accessed through the Internet,
are subject to sales tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a company whose principal business is to provide a portfolio Risk Analysis to
institutional investors. Clients of Petitioner receive regular reports which they pay for. These reports
provide an analysis of all major financial risks in a client’s portfolio, i.e., market, credit and liquidity
risk. Algorithmics software, which is pre-written computer software, is purchased and used to
produce the market and credit risk numbers as described in Step (e) below. Performing the Risk
Analysis involves processing the portfolio through the following steps:
a) receiving the portfolio file from a client;
b) using custom software to load the client’s data;
c) using custom software and 3rd party data providers to supplement the client supplied data
with the necessary security and market data ;
d) using custom software to format the client supplied data for analysis;
e) running the formatted data through the Algorithmics software to produce market and credit
risk numbers;
f) running the formatted data through custom analytics to produce liquidity risk numbers;

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g) using the custom software to take the output from the Algorithmics software and produce
formatted client reports; and
h) using custom software to distribute those reports to the clients via the Internet.
Risk Analysis reports may be furnished to a client on a daily, weekly, monthly, quarterly,
semi-annual or annual basis. According to a sample contract that Petitioner submitted with its
Petition, the fee that Petitioner charges for the Risk Analysis is based on the frequency of the reports,
as well as the number and type of securities in a client’s portfolio.
Once Petitioner has performed a full Risk Analysis on a client’s portfolio, the portfolio is
staged on Petitioner’s servers for the purpose of running an Interactive Scenario Analysis (Stress
Test). In a Stress Test, a client specifies its own market views and examines the profit or loss that
is likely to occur in its portfolio if the market were to move as indicated. One of the most popular
forms of the Stress Test is to use historical scenarios. For example, a client may choose the market
crash of October, 1987 as the scenario, and would be interested in knowing what the impact would
be to the portfolio today, if a similar market event occurred. In order to provide this capability to
clients, Petitioner is building a Web interface that allows clients to choose and define scenarios. The
Web will capture the client’s scenario and transmit the information back to Petitioner’s risk servers
for processing. Once the scenario has been run, the results are passed back to the Web server for
display to the client. The Stress Test is considered a necessary element for proper risk management.
Petitioner anticipates that clients will be interested in running a few dozen scenarios on their
portfolios each month. In Petitioner’s sample contract, the fee for the Stress Tests is $100.00 per
request for use.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides in part:
(4) Retail sale. (i) A sale of tangible personal property to any person for any
purpose, other than (A) for resale as such or as a physical component part of tangible
personal property, or (B) for use by that person in performing the services subject to
tax under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven
hundred five where the property so sold becomes a physical component part of the
property upon which the services are performed or where the property so sold is later
actually transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax.
(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume (including, with respect

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to computer software, merely the right to reproduce), conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration
or any agreement therefor.
(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven
hundred five, such term shall not include gas, electricity, refrigeration and steam.
Such term shall also include pre-written computer software, whether sold as part of
a package, as a separate component, or otherwise, and regardless of the medium by
means of which such software is conveyed to a purchaser...
*

*

*

(14) Pre-written computer software. Computer software (including
pre-written upgrades thereof) which is not software designed and developed by the
author or other creator to the specifications of a specific purchaser. The combining
of two or more pre-written computer software programs or pre-written portions
thereof does not cause the combination to be other than pre-written computer
software. Pre-written software also includes software designed and developed by the
author or other creator to the specifications of a specific purchaser when it is sold to
a person other than such purchaser. Where a person modifies or enhances computer
software of which such person is not the author or creator, such person shall be
deemed to be the author or creator only of such person's modifications or
enhancements. Pre-written software or a pre-written portion thereof that is modified
or enhanced to any degree, where such modification or enhancement is designed and
developed to the specifications of a specific purchaser, remains pre-written software;
provided, however, that where there is a reasonable, separately stated charge or an
invoice or other statement of the price given to the purchaser for such modification
or enhancement, such modification or enhancement shall not constitute pre-written
computer software.
Section 1105 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred
seventy-one, there is hereby imposed and there shall be paid a tax of four percent
upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.

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Section 1110(a) of the Tax Law provides, in part:
Imposition of compensating use tax. (a) Except to the extent that property or
services have already been or will be subject to the sales tax under this article, there
is hereby imposed on every person a use tax for the use within this state on and after
June first, nineteen hundred seventy-one except as otherwise exempted under this
article, (A) of any tangible personal property purchased at retail,...
Section 526.6 of the Sales and Use Tax Regulations provides, in part:
Retail sale. (Tax Law, S 1101(b)(4)) (a) The term retail sale or sale at retail
means the sale of tangible personal property to any person for any purpose, except
as specifically excluded.
*

*

*

(c) Resale exclusion. (1) Where a person, in the course of his business
operations, purchases tangible personal property or services which he intends to
sell, either in the form in which purchased, or as a component part of other property
or services, the property or services which he has purchased will be considered
as purchased for resale, and therefore not subject to tax until he has transferred the
property to his customer.
*

*

*

(6) Tangible personal property purchased for use in performing services
which are taxable under section 1105(c)(1), (2), (3) and (6) of the Tax Law is
purchased for resale and not subject to tax at the time of purchase, where the
property so sold (i) becomes a physical component part of the property upon
which the services are performed, or (ii) is later actually transferred to the purchaser
of the service in conjunction with the performance of the service subject to tax.
*

*

*

(7) Tangible personal property purchased for use in performing a service not
subject to tax is not purchased for resale.
Opinion
Petitioner receives an investment portfolio from a particular client. From the information
contained in the portfolio, Petitioner provides its clients with a Risk Analysis report relating to the

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major financial risks associated with the particular portfolio. In addition, Petitioner provides its
clients, for an additional fee, the capability of performing Stress Tests related to a particular
investment portfolio.
Issue #1
The Algorithmics software that Petitioner purchases in conjunction with providing its
services to its customers constitutes pre-written computer software which is included in the
definition of tangible personal property in accordance with Sections 1101(b)(6) and 1101(b)(14) of
the Tax Law.

Such software is not purchased for resale but, rather, is used by Petitioner in performing the
services discussed below. Therefore, the purchase of such software is subject to sales and
compensating use tax under Sections 1105(a) and 1110(a) of the Tax Law.
Issue #2
The services of Risk Analysis relating to the financial risks associated with investment
portfolios and providing the capability to perform Stress Tests with respect to particular investment
portfolios are in essence electronic financial consulting services, which are not services which are
enumerated as taxable under Section 1105(c) of the Tax Law. See Deloitte & Touche, LLP, Adv Op
Comm T&F, December 3, 1999, TSB-A-99(58)S. Accordingly, Petitioner is not required to collect
sales tax on charges to its clients for the services of providing the Risk Analysis reports and
providing the capability to perform Stress Tests with respect to particular investment portfolios.

DATED: February 10, 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.