Are a new media company's web site development, design, consulting, and maintenance services subject to New York sales and use tax?

Plain-English summary

Liquid Digital Information Systems Inc. is a full-service "new media" company that designs, produces, implements, and maintains interactive media for corporate clients — websites, intranets, kiosks, online advertising, e-commerce sites, and network-based software applications. Its process runs from learning a client's business goals, through designing a site's structure and content, to production (coding and formatting), implementation (from a simple banner ad to a full e-commerce checkout system), and ongoing maintenance like content updates. Finished sites are sometimes delivered to clients on a CD-ROM.

The Department confirmed its now-settled line of rulings: designing, consulting on, and creating websites (for any purpose — advertising, e-commerce, intranets, or other communications) isn't a sale of tangible personal property and isn't one of the specifically taxed services, so none of it is subject to sales or use tax, regardless of whether the site is delivered online or handed over on a CD-ROM as an incidental part of the same project. Ongoing website maintenance — like updating content or adding database elements — is likewise generally not taxable. But two things on the input/output side ARE taxable: (1) Liquid Digital's own purchases of pre-written software used to build client sites are taxable retail purchases (custom software the company develops itself for its own use is not, unless it also sells similar software commercially, in which case use tax applies to the cost of the storage medium); and (2) maintenance services Liquid Digital performs on computer hardware or kiosks (the physical equipment, as distinct from web content) remain taxable, since those are enumerated taxable services under a different part of the law that the web-content exemption doesn't reach.

What this means for you

Web design, consulting, and new-media companies

Your core design, consulting, and content-creation charges aren't subject to sales tax, in whatever form you deliver the finished product — this now-settled line of Department rulings treats web development as fundamentally different from a taxable sale of software or an enumerated taxable service. But be careful to separately price and bill any hardware/kiosk maintenance work you do — that's taxed under a completely different rule that doesn't share the web-content exemption.

Companies buying prewritten software to build client deliverables

If you buy pre-written software as a tool to build your (nontaxable) web products, that purchase is itself a taxable retail purchase — the nontaxability of your finished service doesn't flow back to your own supply purchases.

Accountants and tax professionals

This restates the settled TSB-A-01(21)S/TSB-A-97(35,41,43)S/TSB-A-99(31)S line on web design non-taxability, while carving out the distinct hardware/kiosk maintenance rule from TSB-A-97(44)S (Salomon & Leitgeb) — remember that a nontaxable service bundled with taxable tangible property can drag the whole charge into tax unless the charges are separately stated, reasonable, and separately purchasable.

Common questions

Q: Is web site design and development taxable in New York?
A: No — consulting, designing, and creating websites for any purpose is neither a sale of tangible property nor an enumerated taxable service.

Q: Does delivering the finished site on a CD-ROM change that?
A: No, as long as the CD-ROM is delivered as an incident to the same nontaxable development service, not billed under a separate agreement.

Q: Is web site content maintenance (like updating pages) taxable?
A: Generally no, it's treated the same as the nontaxable design/development work.

Q: Is maintaining or repairing computer hardware or kiosks taxable?
A: Yes — that's a taxable service under a different statutory provision that doesn't share the web-development exemption.

Q: Is the company's own purchase of prewritten software used to build client sites taxable?
A: Yes, as a retail purchase of tangible personal property, though genuinely custom software the company builds and uses only for itself generally is not.

Q: Can another web development company rely on this exact classification?
A: No. This opinion binds the Department only for this petitioner's specific facts, though it illustrates a well-settled line of Department rulings on web development taxability.

Citations and references

Statutes and guidance:

• Tax Law § 1101(b)(6), (14) (tangible personal property; prewritten software)
• Tax Law § 1105(a), (c)(3), (5) (retail sales; installation/maintenance services)
• Tax Law § 1115(o) (software services exemption)
• TSB-M-93(3)S (Computer Software Sales/Use Tax)

Prior opinions cited:

• TSB-A-01(21)S, Alan J. Goldstein/The Computer Studio, July 31, 2001
• TSB-A-99(31)S, David H. Posmantier, June 7, 1999
• TSB-A-97(43)S, K2 Design Incorporated, July 23, 1997
• TSB-A-97(41)S, Pat Rolland, July 23, 1997
• TSB-A-97(35)S, Ski Soft, Inc., June 25, 1997
• TSB-A-96(79)S, EMCON, Dec. 16, 1996
• TSB-A-97(44)S, Salomon & Leitgeb CPA's, LLP, July 23, 1997

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_7s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(7)S
Sales Tax
May 30, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S991221A

On, December 21, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Liquid Digital Information Systems Inc., 180 Varick Street 12th floor,
New York, New York 10014.
The issue raised by Petitioner, Liquid Digital Information Systems Inc., is whether any of
its services described below involving (A) Web site development, design, implementation and
maintenance, or (B) Web site consulting, is subject to sales and use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a full service new media company providing technology solutions for corporate
clients. Petitioner will design, produce, implement, and maintain interactive media solutions,
including commercial and corporate Web sites, intranets, kiosks, online advertising, and e-commerce
and network-based software applications. Web sites may be furnished to clients in the form of a
CD-ROM.
Prior to the design phase, Petitioner will learn about its client’s business; what the market
is, how the client got started, and where it hopes to go in the future. Petitioner will try to understand
specifically what the client hopes to accomplish by using interactive media to enhance its marketing
and sales efforts. Once Petitioner has reached an understanding of a client’s goals, Petitioner
suggests particular solutions based on the scope of the project and starts designing those solutions.
The design phase of a project involves conceiving the actual structure of a Web site, intranet,
etc., to determine how many parts it is going to have, how a user will move from one part to another,
what kind of content it will have, and what it will look like. Before moving to the production stage
of a project, Petitioner estimates the scope of the work necessary to make the design a reality. This
outline details software and staff needs, as well as time and budgetary limits.
During the production stage, programmers code software and applications. Designers format
the look and feel of a Web site, including how it will be navigated and how a user will interact with
it. As work progresses, the project is tested to make sure it is functioning as planned.
Implementation can be as simple as posting a banner ad on a Web site or as complicated as
setting up an e-commerce Web site that allows for products to be purchased on-line. E-commerce
involves on-line credit card transactions and requires customers to fill out forms. Each piece of data
on a form may be stored in a different data base.

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Maintenance agreements vary from project to project. Petitioner sometimes provides
ongoing service to clients after the project is completed, such as updating portions of a Web site, or
adding a new element to a database system when needed.
Applicable Law
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:
*

*

*

(6) Tangible personal property. Corporeal personal property of any
nature. . . . 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 of the Tax Law provides, in part:

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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.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(3) Installing tangible personal property . . . or maintaining, servicing or
repairing tangible personal property . . . not held for sale in the regular course of
business . . . whether or not any tangible personal property is transferred in
conjunction therewith . . . .
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*

*

(5) Maintaining, servicing or repairing real property, property or land, as such
terms are defined in the real property tax law, whether the services are performed in
or outside of a building . . . .
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.
Technical Services Bureau Memorandum, TSB-M-93(3)S, March 1, 1993, pertaining to the
taxability of computer software and certain related services 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.
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. . . . certain software previously

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May 30, 2002
considered "custom" may now be considered prewritten computer software and
subject to such taxes. . . .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.
*

*

*

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. . . .
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.
*

*

*

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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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
The Web site development services provided by Petitioner to its clients, which involve
consulting, designing, and the actual creation of Web sites, do not constitute the sale of tangible
personal property and are not included among the enumerated services that are subject to New York
State and local sales and compensating use taxes. See Alan J. Goldstein/The Computer Studio, Adv
Op Comm T & F, July 31, 2001, TSB-A-01(21)S. This is so, regardless of whether the Web sites
are created for purposes of advertising or promotion, Internet commerce, intranets or other
communications and support functions (see David H. Posmantier, Adv Op Comm T&F, June 7,
1999, TSB-A-99(31)S; K2 Design Incorporated, Adv Op Comm T&F, July 23, 1997,
TSB-A-97(43)S; Pat Rolland, Adv Op Comm T&F, July 23, 1997, TSB-A-97(41)S; Ski Soft, Inc.,
d/b/a Ski Areas of New York Internet Publishing Services, Adv Op Comm T&F, June 25, 1997,
TSB-A-97(35)S). Accordingly, Petitioner’s charges to its clients for such services are not subject
to sales or compensating use tax. Petitioner’s charges for Web site development are not taxable
whether the Web site is uploaded electronically to the World Wide Web or delivered to a client in
the form of a CD-ROM or other media. When a client purchases Web site development from
Petitioner and receives the Web site in the form of a CD-ROM or other media, the transfer of the
medium such as a disk or tape to the client as an incident to the Web site development is not subject
to tax under Section 1105(a) of the Tax Law. See EMCON, Adv Op Comm T&F, December 16,
1996, TSB-A-96(79)S respecting the transfer of items as an incident to nontaxable engineering
services.
Petitioner’s purchase of pre-written software for use in performing its Web site development
services is subject to tax under Section 1105(a) of the Tax Law as a purchase at retail of tangible
personal property. See Section 1101(b)(6) of the Tax Law. The purchase by Petitioner of custom
software designed and developed to Petitioner’s specifications is not taxable. Pre-written software,
even though modified or enhanced to the specifications of a specific purchaser, remains pre-written
software subject to tax. However, if a charge for the customization or enhancement is reasonable
and separately stated on the invoice or billing statement, then the separately stated charge for the
customization or enhancement is not subject to tax. See TSB-M-93(3)S, supra.
Petitioner’s use in its Web site development service of software that it develops in-house is
not subject to compensating use tax if similar software is not offered for sale by Petitioner in the

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regular course of business. If Petitioner offers similar software for sale in the regular course of
business, then Petitioner’s use of the software would be subject to tax based on the cost of the
medium that contains or is used in conjunction with the program. See TSB-M-93(3)S, supra.
It is noted that Web site maintenance services generally are not subject to sales tax. See
Salomon & Leitgeb CPA’s, LLP, Adv Op Comm T&F, July 23, 1997, TSB-A-97(44)S. If a
nontaxable service, however, is performed in conjunction with the sale of tangible personal property,
the entire receipts from the sale are subject to tax unless the charges for the service and tangible
personal property are separately stated and reasonable, and the service and property may be
separately purchased. See Salomon & Leitgeb CPA’s, LLP, supra. Section 1105(c) of the Tax Law
imposes tax on the services of maintaining, servicing or repairing tangible personal property or real
property. Maintenance services performed by Petitioner on computer hardware or kiosks, therefore,
are subject to sales tax unless otherwise exempt.

DATED: May 30, 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.