Is a company's licensed equity-trading software, along with its customer support, training, and customization charges, subject to New York sales and use tax?

Plain-English summary

Flextrade Systems Inc. developed "FLEXTRADE," a comprehensive equity-trading system with features like direct links to trade-execution systems, real-time analytics, and customizable trading strategies. Flextrade never sells the software outright — it licenses the right to use it to customers (mostly brokers), charging based on trading volume with a minimum monthly fee, under a standard license agreement that bars sublicensing and requires the customer to destroy all copies when the agreement ends. Flextrade also performs significant modifications and upgrades tailored to each customer's specifications, separately billed, and provides ongoing on-site training, repairs, maintenance, and customer support, all separately stated on invoices too.

New York taxes "prewritten" computer software (software not designed and developed to a specific purchaser's own specifications) the same as any other tangible personal property, whether it's sold outright or merely licensed — a license alone doesn't escape the tax. "Custom" software built to one purchaser's specific requirements is exempt, but if that same software (or its updates) is later sold to someone else, it becomes prewritten and taxable at that point. The Department couldn't determine on the facts submitted whether FLEXTRADE itself is prewritten or genuinely custom software — that's a factual question outside the scope of an advisory opinion — but it laid out the rules: if FLEXTRADE (or its updates) isn't built to each specific customer's own unique specifications, it's prewritten and the license fee is taxable, even though modifications tailored to one customer are performed on top of it. Those modification/enhancement charges, though, are separately exempt as long as they're reasonable and separately stated on the customer's invoice — and the same goes for training, repairs, maintenance, and customer support charges, which are exempt as services performed on software under § 1115(o) when reasonably and separately billed.

What this means for you

Software companies licensing (not selling) their products

Licensing your software instead of selling it outright doesn't change its sales tax treatment — a license fee for prewritten software is just as taxable as an outright sale. The real question is always whether the software itself was designed and developed to that specific customer's own unique specifications (custom, exempt) or not (prewritten, taxable), regardless of how the transaction is structured.

Software companies charging separately for customization, training, and support

Even when your core software product is taxable prewritten software, your charges for genuine custom modifications/enhancements, training, installation, maintenance, and customer support can be tax-exempt — but only if each charge is reasonable and separately stated on the customer's invoice. Bundle these into one undifferentiated software fee and you risk the whole thing being taxed.

Accountants and tax professionals

This tracks the settled framework in TSB-M-93(3)S: software modified to a specific customer's specs "remains" prewritten software once it started as prewritten, but the separately-stated modification charge itself escapes tax. Note the Department expressly declined to resolve the underlying factual question here — whether FLEXTRADE itself is prewritten or custom — leaving that determination to the taxpayer and, ultimately, audit or a more fact-specific ruling.

Common questions

Q: Is licensing (rather than selling) software enough to make it exempt from sales tax?
A: No. A license to use prewritten software is taxed the same as an outright sale; only genuinely custom software built to one purchaser's own specifications is exempt.

Q: If a company customizes prewritten software for a specific client, does that make the whole thing exempt?
A: No — prewritten software modified or enhanced to a specific customer's specs remains taxable prewritten software, though the separately stated charge for the modification itself can be exempt.

Q: Are training, installation, and customer support charges taxable?
A: They can be exempt under § 1115(o), as services performed on computer software, as long as the charges are reasonable and separately stated on the invoice.

Q: Did the Department decide whether FLEXTRADE itself is taxable prewritten software?
A: No — it explained the legal test but left the underlying factual determination (whether FLEXTRADE is prewritten or truly custom) unresolved, since that's outside an advisory opinion's scope.

Q: Can another software company rely on this ruling to classify its own product?
A: No. It's binding only on Flextrade's specific facts, and even here the core factual question was left open — another company would need its own opinion or careful self-assessment.

Citations and references

Statutes and guidance:

• Tax Law § 1101(b)(5), (6), (14) (sale/purchase; tangible personal property; prewritten computer software)
• Tax Law § 1105(a) (imposition on retail sales)
• Tax Law § 1110(a) (compensating use tax)
• Tax Law § 1115(o) (software services exemption)
• 20 NYCRR § 526.7 (sale, selling or purchase; consideration)
• TSB-M-93(3)S (Computer Software Sales/Use Tax, Mar. 1, 1993)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_11s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(11)S
Sales Tax
June 4, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000719A

On July 19, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Flextrade Systems Inc., 98 Cutter Mill Road, Great Neck, New York 11021.
Petitioner, Flextrade Systems Inc., submitted additional information with respect to the Petition on
June 6, 2001.
The issue raised by Petitioner is whether its software that is licensed to its customers, and
related services provided by Petitioner to its customers, are exempt from sales and use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is organized under the laws of the state of New York, with its principle place of
business located in the state of New York. Petitioner has developed comprehensive Equity Trading
system software referred to as “FLEXTRADE.” The features of the software are that it provides:

1. Direct link to a growing number of F.I.X. compliant execution systems.
2. Ability to send orders to crossing systems and track manual trades.
3. Real time trading with powerful analytics, order indications and real time market data.
4. Ability to trade multi-sided portfolios with real-time cash-balancing and allocations.
5. User defined system-wide and individual trading restrictions.
   6 Ability to build personal trading strategies using fully customizable analytics, visual
   alarms and stock ranking techniques.
   The software was designed and developed by Petitioner who is responsible for the
   maintenance of the software as well as creating and protecting intellectual property rights. It is
   designed to effectuate trades based upon orders submitted to the system by customers. Petitioner
   performs significant modifications, enhancements, and upgrades to the software, which are designed
   and developed to the specifications of each individual customer. Petitioner must continually
   upgrade and enhance the software to keep up-to-date as the technological needs of market leaders
   and financial markets evolve. The charges for these modifications, enhancements, and upgrades are
   separately stated on the invoice provided to customers. Petitioner also provides on-site training,
   repairs and maintenance, and customer support on a continual basis. Charges for these additional
   services are separately stated on customer invoices.

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Petitioner licenses the right to use FLEXTRADE to its customers. Petitioner charges
customers based on the number of shares traded using FLEXTRADE, with a minimum monthly
charge which is covered by volume based charges. Many of Petitioner’s customers are brokers.
For tax and financial statement purposes, Petitioner maintains ownership of FLEXTRADE,
which is never sold outright to its customers.
Petitioner submitted a sample copy of a “Flextrade Trading System Agreement” which is
entered into by Petitioner and its client. Such agreement states, in part:
License
FLEXTRADE is granting CLIENT a non-exclusive, non-transferable license
to use the FLEXTRADE software product(s) designated herein (“Licensed
Software”). Under the terms of this license, CLIENT acknowledges that the access
provided and information generated are intended solely for CLIENT’s internal use,
and may not be provided or licensed to any third party.
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Term
The initial term of this Agreement (“Term”) shall be for a period
commencing on installation and continuing for twelve (12) calendar months
thereafter. This Agreement shall automatically be renewed for periods of one (1)
year each at the end of the initial term and/or any renewal period hereunder unless
CLIENT terminates this Agreement upon thirty (30) days written notice in advance
of the last day of the initial term or any renewal period hereunder. Service charges
accrue as of the date of installation; if Service commences after the first of the month
Customer will be charged for the remainder of the month on a prorated basis. Upon
termination of this agreement, licensee must destroy all copies of the software in the
licensees possession, and any related documentation and all copies thereof and
provide Flextrade with written confirmation of having done so.
Price
The payment for the Licensed Software shall consist of those items specified
on the FLEXTRADE Price List (“Price List”) attached hereto (Exhibit A) and
identified by CLIENT signature or initials. FLEXTRADE shall maintain the
Licensed Software during the term of this Agreement. Unless specified in the Price
List, all prices are “FOB” CLIENT’s office. CLIENT shall be responsible for all

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license fees, cable, communications, data feed, supplies, power, air conditioning and
security related to CLIENT’s use of the Licensed Software unless said condition is
itemized in the Price List. FLEXTRADE shall not be responsible for any loss of
CLIENT’s data. At least once per day, CLIENT will provide FLEXTRADE with
access to information concerning its trading volume to enable FLEXTRADE to bill
CLIENT pursuant to the Price List.
Payment
CLIENT shall pay the charge(s) specified in the Price List, without discount,
on the due date specified by FLEXTRADE. Installation charges in the amount of
$4,000 shall be paid upon installation of Licensed Software. A deposit of one (1)
months charges shall be paid upon delivery of Licensed Software and shall be
credited to the last month’s required payment. Monthly charges shall be invoiced by
FLEXTRADE one week in advance of the due date. Excepting charges for the
installation and first month of service, the due date shall be the first date of each
month. . . .
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
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(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
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. . . .

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(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(a) of the Tax Law provides for the imposition of sales tax on the receipts for
every retail sale of tangible personal property, except as otherwise provided in Article 28 of the Tax
Law.
Section 1110(a) of the Tax Law provides, in part:
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, (B) of any tangible personal property (other than
computer software used by the author or other creator) manufactured, processed or
assembled by the user, (i) if items of the same kind of tangible personal property are
offered for sale by him in the regular course of business. . . (F) of any computer
software written or otherwise created by the user if the user offers software of a
similar kind for sale as such or as a component part of other property in the regular
course of business.
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(g) For purposes of clause (F) of subdivision (a) of this section, the tax shall
be at the rate or four percent of the consideration given or contracted to be given for

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the tangible personal property which constitutes the blank medium, such as disks or
tapes, used in conjunction with the software, or for the use of such property, and the
mere storage, keeping, retention or withdrawal from storage of computer software
described in such clause (F) by its author or other creator shall not be deemed a
taxable use by such person.
Section 1115(o) of the Tax Law provides:
Services otherwise taxable under subdivision (c) of section eleven hundred
five or under section eleven hundred ten shall be exempt from tax under this article
where performed on computer software of any nature; provided, however, that where
such services are provided to a customer in conjunction with the sale of tangible
personal property any charge for such services shall be exempt only when such
charge is reasonable and separately stated on an invoice or other statement of the
price given to the purchaser.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. (1) The words sale, selling or purchase mean any transaction
in which there is a transfer of title or possession, or both, of tangible personal
property for a consideration.
(2) Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.
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(b) Consideration. The term consideration includes monetary consideration,
exchange, barter, the rendering of any service, or any agreement therefor. Monetary
consideration includes assumption of liabilities, fees, rentals, royalties or any other
charge that a purchaser, lessee or licensee is required to pay.
Technical Services Bureau Memorandum TSB-M-93(3)S, dated March 1, 1993, entitled
State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software
provides, in part:
Effective September 1, 1991, State and local sales and compensating use
taxes are imposed on the sale or use of prewritten computer software and certain
related services.

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The effect of this change in the Tax Law is to broaden the types of computer
software that are subject to sales and use taxes. Prior to September 1, 1991,
“custom” software was exempt from tax as described in Technical Services Bulletin
1978-1(S). However, certain software previously considered “custom” may now be
considered prewritten computer software and subject to such taxes. References in
the 1978 bulletin to exempt software are largely obsolete and should be disregarded.
The only software that is exempt from sales and use taxes under the new law is
software designed and developed to the specifications of a specific purchaser.
Prewritten computer software is any computer software that is not designed
and developed by the author or other creator to the specifications of a specific
purchaser.
The sale of prewritten software includes any transfer of title or possession,
any exchange, barter, rental, lease or license to use, including merely the right to
reproduce, for consideration. Thus, a payment made by a customer on or after
September 1, 1991, for a license to use, or for the rental or lease of prewritten
software is subject to sales or use tax . . .
Software that was originally designed and developed to the specifications of
a specific purchaser (i.e., “custom” software) loses its identity as such and becomes
prewritten software, subject to tax, if and when it is sold to someone other than the
person for whom it was specifically designed and developed. (See section
“Exemptions from Tax” for certain exceptions.)
Prewritten software is subject to tax whether sold as part of a package or
separately. Software created by combining two or more prewritten programs or
portions of prewritten programs is still prewritten software subject to tax. The
medium by which the software is transferred to the purchaser has no effect on the
software’s taxability. Thus, prewritten software is taxable whether sold, for example,
on a disk, tape or by electronic transmission over telephone lines.
Prewritten software, even though modified or enhanced to the specifications
of a specific purchaser, remains prewritten software subject to tax. However, if a
charge for the custom modification or enhancement is reasonable and separately
stated on the invoice or billing statement, then the separately stated charge for the
custom modification or enhancement is not subject to tax.
Example 1.

A software developer creates an accounting system using
prewritten software modules for general ledger, accounts
receivable, accounts payable, payroll, inventory management,
etc. The developer may also sell the modules separately or

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bundled in other packages. Even though the modules may be
modified to the specific requirements of the client's business,
the sale of the modules is subject to sales or use tax as
prewritten software. An additional charge for modification or
"custom" programming by the developer would not be subject
to sales or use tax if the developer's charge for the
modification is reasonable and is separately stated on the
billing statement.
The incidental use of a development language (e.g., COBOL, BASIC, C, etc.)
or of libraries of "prewritten" functions or routines in designing and developing a
"custom" software program to the specifications of a specific purchaser will not, in
and of itself, make the sale of an otherwise custom program taxable. The "custom"
program must be examined as a whole to determine whether it is exempt from tax.
If the prewritten components of a custom program are sold separately, their sale is
subject to tax.
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Sale of Software Upgrades
Generally, the sale of a revision or upgrade of prewritten software is subject
to tax as the sale of prewritten software. If, however, the software upgrade is
designed and developed to the specifications of a specific purchaser, its sale to that
specific purchaser would be exempt as custom software.
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Customer Support and Related Services
Services taxable under section 1105(c) of the Tax Law are exempt from tax
under section 1115(o) of the Tax Law where performed on any computer software.
However, where such services to be performed on software are sold in conjunction
with the sale of tangible personal property, such as prewritten software, the charge
for such services is exempt only if it is reasonable and separately stated on the
invoice or billing statement given to the customer.
Thus, charges for customer (user) support or for information services
provided by a vendor to a customer, either in person or by some type of
telecommunications arrangement (e.g., telephone, modem, facsimile machine, etc.),
in the nature of training, consulting, instructing or other diagnostic or
troubleshooting services related to prewritten software are exempt from sales and use

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taxes where the charges are reasonable and separately stated. Charges for the service
of installing, repairing, maintaining or servicing prewritten software are also exempt
from sales and use taxes where the charges are reasonable and separately stated on
the invoice. Of course, any charges for the above described services sold in
connection with custom software are exempt from tax.
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Use Tax Exemption
Use tax generally applies to taxable uses of prewritten computer software in
the same manner that the use tax applies to uses of other tangible personal property,
except that: (1) no use tax is imposed on software used by its author if the author
does not offer similar software for sale in the regular course of business, and (2)
where software is used by its author and the author does sell the same or similar
software in the regular course of business, use tax applies and is computed on the
cost of the medium (floppy disk, magnetic tape, etc.) that contains or is used in
conjunction with the program.
Opinion
Based on the sample contract and other information submitted by Petitioner, it appears that
Petitioner licenses the FLEXTRADE software to its customers for a consideration, based on the
number of shares traded with the software. Petitioner, therefore, is selling software to its customers
for purposes of Article 28 of the Tax Law. See Section 1101(b)(5) of the Tax Law. Petitioner’s
license of FLEXTRADE will constitute a sale of tangible personal property subject to tax under
Section 1105(a) of the Tax Law if FLEXTRADE constitutes pre-written software. See Section
1101(b)(6) of the Tax Law. Software designed and developed to the specifications of a specific
customer is “custom” software not subject to sales tax. See TSB-M-93(3)S, supra. If
FLEXTRADE, or components of FLEXTRADE, are not designed and developed by Petitioner to the
specifications of a specific purchaser, then FLEXTRADE is pre-written software subject to tax. See
Section 1101(b)(14) of the Tax Law. The license of FLEXTRADE updates constituting pre-written
software will also be subject to tax.
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. Section 1101(b)(14) of the Tax Law.
Accordingly, if FLEXTRADE or FLEXTRADE updates constitute pre-written software, this
software remains pre-written software although Petitioner performs modifications and enhancements
which are designed and developed to the specifications of a specific customer. Such modifications
and enhancements, however, shall not constitute pre-written software, where there is a reasonable
and separately stated charge on the customer invoice or billing statement for such modifications and

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enhancements. See Section 1101(b)(14) of the Tax Law. Petitioner’s charge to a customer for
modifications and enhancements in such case is not subject to tax. See TSB-M-93(3)S, supra.
Petitioner’s charges for the service of installing, repairing, maintaining, or servicing
FLEXTRADE, or for providing customer support and training for the use of FLEXTRADE, may
be exempt under Section 1115(o) of the Tax Law. In order for this exemption to apply, the charges
for such services must be reasonable and separately stated on the customer invoice or billing
statement, where such services are provided in conjunction with the sale of pre-written software or
other tangible personal property. See TSB-M-93(3)S, supra.
Although it appears that FLEXTRADE may constitute pre-written software that is modified
and enhanced to the specifications of particular customers, it is not within the scope of this Advisory
Opinion, based on the information submitted, to determine questions of fact such as whether
FLEXTRADE constitutes pre-written software or is custom software designed and developed by
Petitioner to the specifications of a specific purchaser.

DATED: June 4, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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