Does New York's manufacturing exemption cover an Internet ad-serving company's purchases of servers, modems, and routers used to run its ad-delivery platform and store client data?

Plain-English summary

Doubleclick, Inc. runs a digital-marketing business out of New York City, built around its patented DART ad-serving technology. When a user visits a DART-enabled website, the platform identifies the user's network, matches an ad to that user from among Doubleclick's inventory, and delivers it within milliseconds — a service Doubleclick sells to publishers and advertisers rather than software they install themselves. Doubleclick also separately licenses its "AdServer" software product outright to some clients. During 1999 and up to September 1, 2000, Doubleclick bought servers, modems, routers, and similar hardware — physically segregated in its own production area — to house client data, serve ads, and run its network, and asked whether any of it qualified for New York's manufacturing exemption.

The Department split the answer by function. New York's manufacturing exemption (§ 1115(a)(12)) covers machinery used directly and predominantly to produce tangible personal property for sale, or certain telephone central-office equipment. Doubleclick's core ad-delivery business is a service delivered electronically — not a sale of tangible personal property — so hardware used to run that service doesn't qualify under the manufacturing exemption's first branch. The telephone-equipment branch failed too: Doubleclick isn't a telephone company selling call-switching service, and its hardware doesn't function as central-office or station equipment merely because it moves data over networks.

But there was a second, narrower opening. New York also exempts computer hardware used more than 50% of the time, and with an active causal role, in actually designing and developing computer software for sale (§ 1115(a)(35)) — as opposed to hardware used to run that software as a service for customers. So to the extent Doubleclick's hardware was genuinely used to build its licensed AdServer software product for sale (not to deliver DART as a service), that portion is exempt. Software written and then used only to provide a service to customers doesn't count as "software produced for sale," so the split turns entirely on what the hardware is actually doing, not on what business the company is in.

What this means for you

SaaS and ad-tech companies

If your product is delivered as an ongoing service (even one built on sophisticated proprietary technology), the servers and network hardware running that service generally won't qualify for the manufacturing exemption — electronic delivery of a service isn't "production of tangible personal property," even though prewritten software itself counts as tangible personal property when sold.

Companies that both license software and run it as a service

Track hardware use by function, not by product line. The same physical servers can be partly exempt (design/development work building software actually sold or licensed) and partly taxable (running that software to deliver services to customers) — the more-than-50%-direct-use test applies asset by asset.

Accountants and tax professionals

This opinion is a clean citation for distinguishing the manufacturing exemption's "production of tangible personal property" branch from the separate, narrower § 1115(a)(35) hardware-for-software-development exemption — useful any time a client's tech-sector purchases mix service delivery with in-house software engineering.

Common questions

Q: Is a company's data-center hardware exempt just because it "produces" something (like ads or reports) for customers?
A: No — the manufacturing exemption requires production of tangible personal property for sale. Delivering a digital marketing or information service electronically doesn't count, even if the underlying technology is complex and proprietary.

Q: Does hardware used to run licensed software for customers qualify as software-development hardware?
A: No. The exemption is for hardware used to design and develop software for sale, not hardware used afterward to operate or host that software as a service for customers — those are treated as separate uses.

Q: What activities count as "designing and developing" software under this exemption?
A: Systems analysis, program design, coding, testing, debugging, and documentation — the conceptual through testing stages of building the product. Administration, production, and distribution activities don't count as direct use.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(6) (tangible personal property includes prewritten software)
• Tax Law § 1105(a) (retail sales tax); § 1105(b)(1)(B) (telephony/telegraph service)
• Tax Law § 1110(a) (compensating use tax)
• Tax Law § 1115(a)(12) (manufacturing exemption); § 1115(a)(35) (computer hardware for software development)
• 20 NYCRR § 527.2(d) (telephony/telegraphy); § 528.13 (production/telephone equipment exemption)
• TSB-M-98(5)S (Exemption for Computer System Hardware, June 8, 1998)

Prior rulings and cases referenced:

• The Stock Market Photo Agency, Inc., TSB-A-99(48)S
• MCI Telecommunications Corp., et al, TSB-A-91(71)S
• Matter of Marriott Family Restaurants, Inc. v. Tax Appeals Tribunal, 174 AD2d 805
• Satellite Signals Unlimited, Inc., TSB-A-84(26)S
• Eastman Kodak Company v. Department of Taxation and Finance, Sup Ct, Monroe County (Nov. 22, 1989)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a03_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(19)S
Sales Tax
May 8, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S020212A

On February 12, 2002, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Doubleclick, Inc., 450 W. 33rd Street, 16th floor, Tax Dept. Attn: Eric Ruff,
New York, NY 10001. Petitioner, Doubleclick, Inc., provided additional information pertaining to
the Petition on March 25, 2002.
The issue raised by Petitioner is whether, for purposes of the State and local sales and use
taxes imposed under Article 28 of the Tax Law and pursuant to Article 29 of the Tax Law, its
purchases in 1999 and prior to September 1, 2000, of computer hardware that is used in its business
described below qualify for exemption as purchases of production equipment.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a digital marketing solutions company whose clients include marketers and Web
publishers. Petitioner is headquartered in Silicon Alley in New York City, occupying three floors
and over 30,000 square feet. Through its patented DART (Dynamic, Advertising, Reporting and
Targeting) ad serving technology, the platform for many of Petitioner’s solutions, Petitioner services
ads for its clients worldwide, and delivers targeted advertisements to Internet users worldwide.
Petitioner provides the infrastructure that makes marketing work in the digital world.
Combining media, data, and technological expertise, Petitioner’s products and services enable
marketers to timely deliver their advertising message to the appropriate audience, while helping
publishers maximize their revenue and build their business online. Through the infrastructure it
provides, Petitioner offers planning, execution, measurement, and refinement of online media
campaigns to its clients. Petitioner tackles all of these facets of the digital marketing process
through its three business units described below.
•

DoubleClick TechSolutions. Offers publishers, advertisers, and merchants worldwide the
leading technology and service bureau solutions for their digital marketing needs. Through
its application service provider solutions (DART technology) or licensed software solution
(the DoubleClick AdServer software), Petitioner enables Web sites to generate advertising
revenue.
-

Petitioner’s DART technology platform provides Web publishers with a
comprehensive solution for ad inventory management and ad targeting, delivery, and
reporting, and allows advertisers and their agencies to streamline and control their
online ad campaigns right across the Web. When a user visits a site enabled with
DART technology, Image Tags that are embedded in the page link the user’s browser
to the DART server and a connection is established between the two. A graphic file
is requested from the DART server to fill the ad space on the Web page being loaded

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on the user’s screen, usually near the top of the page. The user’s IP address is
referenced and identifies the user. The user’s network address is noted. These
network addresses are referenced against the DART server’s database of more than
400,000 mapped networks. Each mapped network reveals the user’s Domain (e.g.,
att.net, microsoft.com, etc.). DART assembles and reviews all the information it has
collected on the user to this point, including referencing the content (news, sports,
etc.) of the sites being visited. DART assigns each individual user a unique user ID
number, primarily to track the number of times a user has seen each banner in order
to control frequency, or deliver sequential banners to that user. DART then scans the
many ads waiting for delivery, matching the ad and its targeting criteria with the user
and the information gathered. The appropriate ad is selected and delivered to the
user within milliseconds. When the user “clicks-through,” DART redirects the
user’s browser to the site that placed the ad.
Since DART is a service, there are no costs associated with lengthy installment
periods, and there is no need for Petitioner’s client to have an in-house engineering
department. There is no equipment to buy, install, maintain, or fix. With one
payment, DART includes bandwidth for all ads, in addition to overhead for
managing and continually improving the client’s system.
Through its DARTmail Service, Petitioner offers its clients e-mail marketing
solutions powered by a newly-developed platform based on the DART technology.
This service enables Petitioner’s clients to deliver highly personalized e-mail
communications to their customers for the purposes of building long-term, profitable
relationships with their existing customers and acquiring new customers.
–

Petitioner’s AdServer software products offer its clients online advertising and
marketing management software solutions. AdServer software automates critical
processes needed to run a successful online marketing business, including
sophisticated inventory and order management, precision targeting, dynamic
delivery, tracking, and detailed campaign reporting.
DoubleClick TechSolutions’ offerings are backed worldwide by support teams
offering service 24 hours a day, seven days a week. Petitioner provides
comprehensive education and consulting services that help its clients maximize the
value of its services and products.

•

DoubleClick Media. Offers Web publishers the opportunity to participate in and advertisers
the opportunity to advertise on the worldwide DoubleClick networks, which provide fully
outsourced advertising sales, delivery, and related services to Petitioner’s clients. For
example, the DoubleClick Network, Petitioner’s flagship media product, is a collection of
highly-trafficked and branded sites on the Web where Petitioner’s clients can advertise.
These media purchasing opportunities allow Petitioner’s clients to increase revenue without
the management costs of running their own sales forces and without incurring the expenses

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associated with establishing, maintaining, upgrading, and operating the technology
infrastructure for ad delivery.
DoubleClick Media uses the DART and DARTmail technologies to deliver, target, and
report on Petitioner’s campaigns.
•

DoubleClick Data. This unit is comprised of two components:
–

Abacus. Offers information products and marketing research services to the direct
marketing industry, both online and offline. Applying advanced statistical modeling
techniques to the Abacus Alliance database of consumer purchasing behavior (which
contains information contributed by over 1,800 direct marketing members), Abacus
identifies those consumers most likely to purchase a particular product or service,
and enables its members to reach identified consumers by direct mail and e-mail.
The Abacus Online Alliance was formed in late 1999 to extend the Abacus modeling
techniques, alliance relationships, and tools to the Internet and other interactive
media.
Also, by combining an expertise in database analysis with DART technology,
Abacus enables e-commerce merchants and Web publishers to deliver Web
advertising targeted to Internet users based on user interests inferred from
anonymous non-sensitive behavioral information.

–

DoubleClick Research. Offers sophisticated research about the online market and
advanced campaign measurement tools and planning systems. Petitioner’s targeting
planning systems provide advertisers with market research to identify the Web sites
visited by their target audience, and allow Web publishers to better define their
audience. Such targeting planning systems are Web based, allowing Petitioner’s
clients to perform searches, queries, and campaign planning on demand.
Additionally, Petitioner’s advertising effectiveness studies supply its clients with
tools to evaluate the performance and effectiveness of their online marketing efforts
using branding based measures. Using survey research, these studies measure
audience response to a marketing message.

During an extensive period of capital investments in 1999 and prior to September 1, 2000,
Petitioner purchased computer hardware including servers, modems, routers, repeaters, and other
similar equipment, used in its business to house client data, client Internet ads, marketing
intelligence, and demographics related to its Internet network. None of the referenced computer
hardware is used for any administrative, financial, or general business function and it is all
physically segregated in its own production area at Petitioner’s New York City headquarters.

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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:
*

*

*

(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. . . .
Section 1105(a) of the Tax Law imposes sales tax on “[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article.”
Section 1105(b)(1) of the Tax Law imposes tax, in part, upon:
The receipts from every sale, other than sales for resale, of . . . (B) telephony
and telegraphy and telephone and telegraph service of whatever nature except
interstate and international telephony and telegraphy and telephone and telegraph
service. . . .
Section 1110(a) of the Tax Law imposes a use tax “for the use within this state . . . of any
tangible personal property purchased at retail.”
Section 1115(a)(12) of the Tax Law, as in effect in 1999 and prior to September 1, 2000,
exempted from the sales tax imposed by Section 1105(a) and from the compensating use tax
imposed by Section 1110 of the Tax Law:
Machinery or equipment for use or consumption directly and predominantly
in the production of tangible personal property . . . for sale, by manufacturing,
processing, generating, assembling, refining, mining or extracting, or telephone
central office equipment or station apparatus or comparable telegraph equipment for
use directly and predominantly in receiving at destination or initiating and switching
telephone or telegraph communication or in receiving, amplifying, processing,
transmitting and retransmitting telephone or telegraph signals. . . . (Emphasis added)
Section 1115(a)(35) of the Tax Law, as in effect in 1999 and prior to September 1, 2000,
exempted from the sales tax imposed by Section 1105(a) and from the compensating use tax
imposed by Section 1110 of the Tax Law:

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Computer system hardware used or consumed directly and predominantly in
designing and developing computer software for sale. (Emphasis added)
Pursuant to Chapter 407 of the Laws of 1999 and effective March 1, 2001,
computer system hardware used or consumed directly and predominantly “in
providing the service, for sale, of designing and developing internet websites” is also
exempt.
Section 527.2(d) of the Sales and Use Tax Regulations provides, in part:
Telephony and telegraphy; telephone and telegraph service. (1) The
provisions of section 1105(b) of the Tax Law with respect to telephony and
telegraphy and telephone and telegraph service impose a tax on receipts from
intrastate communication by means of devices employing the principles of telephony
and telegraphy.
(2) The term telephony and telegraphy includes use or operation of any
apparatus for transmission of sound, sound reproduction or coded or other signals.
*

*

*

(4) A service is not considered telegraphy or telephony if either of these
services is merely an incidental element of a different or other service purchased by
the customer.
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
(a) Exemption. (1) Exemption from statewide tax. An exemption is allowed
from the tax imposed under subdivisions (a) and (c) section 1105 of the Tax Law,
and from the compensating use tax imposed under section 1110 of the Tax Law, for
receipts from sales of the following:
(i) Machinery or equipment (including parts with a useful life of more than
one year) used or consumed directly and predominantly in the production for sale of
tangible personal property. . . . (Emphasis added)
(ii) Telephone central office equipment or station apparatus or comparable
telegraph equipment (including parts with a useful life of more than one year) for use
directly and predominantly in receiving at destination or in initiating and switching
telephone or telegraph communication when such equipment or apparatus is
purchased or leased by the vendor of such service for sale. (Emphasis added)
*

*

*

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(f) Telephone and telegraph equipment. (1) Telephone and telegraph central
office equipment or station apparatus, used directly and predominantly in receiving
at destination or initiating and switching telephone and telegraph communication is
exempt, when such equipment and apparatus is purchased or leased by the vendor
of such service for sale.
(2) The purchase or lease of equipment by a person subscribing to a
telephone or telegraph service, which is comparable to telephone or telegraph central
office equipment or station apparatus is not eligible for exemption.
*
Example 2:

*

*

An airline company purchases consoles which initiate,
receive and switch telephone calls which are sent over
telephone company lines. The consoles are not exempt, as
they were not purchased by a telephone company in
connection with a telephone service for sale.

Technical Services Bureau Memorandum entitled Exemption for Computer System
Hardware, June 8, 1998, TSB-M-98(5)S, provides, in part:
. . . Section 97 of Chapter 56 amended the New York State Tax Law to
exempt from New York State and local sales and compensating use (use) taxes
purchases, leases or rentals of computer system hardware that is used or consumed
directly and predominantly in designing and developing computer software for sale.
This exemption, which is provided for under Tax Law §1115(a)(35), is effective
June 1, 1998.
*

*

*

Only the purchase of those components of the computer system hardware and
associated parts that are used directly and predominantly in the design and
development of computer software for sale is exempt from sales and use taxes under
section 1115(a)(35).
Computer System Hardware. Computer system hardware is any organized
assembly of physical equipment that is united and regulated by interaction or
interdependence to accomplish a set of specific computer system functions. The
term includes any connected or directly related device or equipment which enables
the computer to store, retrieve or communicate to or from a person, another computer
or another device, the results of computer operations, computer programs or
computer data.

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Examples of computer system hardware are: microcomputers; main-frame
computers; personal computers; external hard drives; portable disk drives; compact
disc read only memory (CD-ROM) drives; external modems; printers; scanners;
servers; monitors; keyboards; mouses; network interfaces; network hubs; and
network routers.
*

*

*

Directly and Predominantly. The purchase of computer system hardware
is eligible for the exemption only if the computer hardware meets the tests of direct
and predominant use.
Directly means that the computer system hardware is actually used in
designing and developing computer software for sale, or that the hardware has an
active, causal relationship in the design and development of computer software for
sale. For example, computer system hardware that is used to create, modify or store
computer programs under the control of a developer is considered to be used directly
in the design and development of computer software. . . .
Computer system hardware used in activities that are collateral to the actual
design and development process is not considered to be used directly in designing
and developing computer software for sale. For example, use of computer system
hardware in administration, production or distribution activities is not considered
direct use for purposes of this exemption. . . .
*

*

*

Predominantly means that the computer system hardware must be used more
than 50% of the time in the design and development of computer software for sale.
*

*

*

Designing and Developing. The term designing and developing includes
systems analysis, program design, coding, testing, debugging and documentation that
are part of the design and development of computer software for sale. Thus, the term
includes activities carried on from the conceptual stage, through the planning,
evaluation and testing stages of development.
*

*

*

Supplies. This exemption does not apply to consumable supplies such as
toner, ink, printer paper, floppy diskettes, removable disk cartridges, high capacity
disks, portable disk drive disks, writeable and erasable CD-ROM drive disks, mouse
pads, wrist pads, and the like.

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Opinion
Petitioner provides Internet marketing solutions to online publishers and interactive
advertisers through its sale of digitized products and services over the Internet. Through its patented
DART ad serving technology, Petitioner’s clients are able to dynamically target and track ads
delivered to Internet users worldwide.
In this Opinion, Petitioner is seeking the benefit of any production exemption provisions
contained in the Tax Law for its purchases of computer hardware during 1999 and up to
September 1, 2000, used in its business to house client data, client Internet ads, marketing
intelligence, and demographics related to its Internet network.
Commonly referred to as the “manufacturing exemption,” Section 1115(a)(12) of the Tax
Law, as in effect during the period at issue, provided an exemption from sales and use tax for sales
of 1) machinery or equipment used or consumed directly and predominantly in the production of
tangible personal property for sale and 2) certain telephone communication equipment. Petitioner’s
electronic transfer of its digital products and services does not constitute the sale of tangible personal
property, except as noted below. See The Stock Market Photo Agency, Inc., Adv Op Comm T&F,
November 12, 1999, TSB-A-99(48)S. Accordingly, to the extent that the computer hardware
purchased for use in Petitioner’s digital marketing solutions business is not used to produce tangible
personal property for sale, it is not exempt from taxation under the first part of Section 1115(a)(12)
of the Tax Law. See Matter of Marriott Family Restaurants, Inc. v. Tax Appeals Tribunal,
174 AD2d 805 lv denied 78 NY2d 863. However, computer hardware used to produce prewritten
computer software for sale may qualify for exemption under Section 1115(a)(12), since prewritten
computer software is considered tangible personal property in New York State. See Section
1101(b)(6) of the Tax Law. Moreover, the exemption contained in Section 1115(a)(35) of the Tax
Law would apply to such hardware, as discussed below.
With regard to telephone communication equipment, in order to qualify for exemption such
equipment must meet the statutory tests of being classified as either central office equipment or
station apparatus and of being used both directly and predominantly in performing the function of
receiving, initiating or switching telephone communication or in receiving, amplifying, processing,
transmitting and retransmitting telephone or telegraph signals. In Eastman Kodak Company v.
Department of Taxation and Finance, Sup Ct, Monroe County, November 22, 1989, the court
declared that this part of Section 1115(a)(12) of the Tax Law was designed to eliminate pyramiding
of the sales tax by exempting equipment used by a telephone company and taxing, under Section
1105(b) of the Tax Law, only the distribution of the “finished product,” i.e., a telephone service.
Examples of qualifying equipment would be switch equipment used to route incoming circuits
(calls) and termination equipment which provides the interface between the facilities of a local and
long distance telephone company. See MCI Telecommunications Corp., et al, Adv Op Comm T&F,
November 12, 1991, TSB-A-91(71)S. The computer hardware at issue in this opinion does not
constitute telephone central office equipment or station apparatus as required by Section 1115(a)(12)
of the Tax Law. Moreover, the essence of telephone and telegraph services is the transmission of
intelligence from one point to another whereby the role of the purveyor is that of a mere conduit (see

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Satellite Signals Unlimited, Inc., Adv Op St Tx Comm, October 15, 1984, TSB-A-84(26)S). The
essential object of Petitioner’s service, however, is to provide digital marketing solutions.
Therefore, the computer hardware is not used by Petitioner to provide telephone services for sale
to its clients. Accordingly, since such computer hardware is not of the type or for the use intended
by the statute, it is not exempt from taxation under the second part of Section 1115(a)(12) of the Tax
Law either.
On the other hand, purchases by Petitioner of those components of computer system
hardware that are used directly and predominantly in the design and development of its AdServer
Software products for sale are exempt from sales and use taxes under Section 1115(a)(35) of the Tax
Law, both prior to September 1, 2000, and currently. See Technical Services Bureau Memorandum
Exemption for Computer System Hardware, June 8, 1998, TSB-M-98(5)S. Directly means that the
computer system hardware is actually used in designing and developing computer software for sale,
or that the hardware has an active, causal relationship in the design and development of computer
software for sale. Use of computer system hardware in administration, production, or distribution
activities is not considered direct use for purposes of this exemption. Predominantly means that the
computer system hardware must be used more than 50% of the time in the design and development
of computer software for sale. The term “designing and developing” includes activities carried on
from the conceptual stage, through the planning, evaluation, and testing stages of development. See
TSB-M-98(5)S, supra.
It is noted that to the extent computer hardware is used by Petitioner in providing services
to its customers rather than in the production of software for sale to customers, this exemption will
not apply. Software used by Petitioner to provide services to customers is not considered to be
software produced for sale.
Also, in any instance where Petitioner purchases an asset which will perform both taxable
and exempt functions, the predominant (more than 50%) use of such asset will determine the sales
tax status of such purchase. MCI Telecommunications Corp., supra.

DATED: May 8, 2003

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.