Does an out-of-state data backup company owe New York sales or use tax on its subscription service and the connector software it installs on subscribers' computers?

Plain-English summary

Connected Corporation runs two lines of business. Most customers ("subscribers") pay a subscription fee for the DataProtector service, which backs up their own data to Connected's Massachusetts data centers so it can be recovered if lost, stolen, or damaged. Connected sends subscribers a piece of DataProtector software whose sole function is connecting their computer to Connected's data centers — it does nothing else, adds no functionality, isn't usable standalone, and is DISABLED entirely if the subscriber cancels. Separately, Connected also LICENSES a fuller version of DataProtector (including server software) to larger customers who run their own backup equipment in-house, and collects sales tax on those licenses when the customer is in New York.

For the subscription service, the Department found nothing taxable: the customer isn't buying "information" from Connected (it's just getting its own data back, not new information — following the same personal-information logic as other information-service rulings), the storage charge isn't taxable either (§ 1105(c)(4)'s storage tax only reaches TANGIBLE personal property, and data isn't tangible — plus the storage itself happens outside New York), and Connected retains full operational control of its own servers, so there's no taxable equipment rental either. Because data backup/recovery isn't listed among the Tax Law's enumerated taxable services at all, the whole subscription fee escapes sales tax.

But Connected itself doesn't get off scot-free on the connector software. Since Connected is USING (not selling) that stripped-down connector software to deliver its own service, and Connected DOES sell a similar/related software product (the fuller licensed version) in the regular course of business, Connected owes New York USE TAX on its own use of the connector software for subscribers located here — computed narrowly on the cost of the physical medium (like a disk) the software is delivered on, not on the software's full value. Separately, the fuller version Connected actually LICENSES to its bigger customers is an ordinary taxable sale of prewritten software whenever that customer is in New York.

What this means for you

SaaS, cloud storage, and data backup providers

A pure backup/recovery subscription service — where you retain operational control of your own servers and the customer just gets its own data back — generally escapes New York sales tax as a nonenumerated service. But watch the "connector" or client-side software you install on customer machines: if you separately sell a related, fuller version of that software elsewhere, your OWN use of the stripped-down connector version to deliver your service can trigger New York use tax on you, even though your customer never pays sales tax on the subscription itself.

Companies with both a subscription-service and a licensed-software product line

This ruling shows how the SAME underlying codebase can be taxed completely differently depending on how it's delivered: as a locked-down connector enabling your own hosted service (nontaxable to the customer, use-tax exposure for you), versus as a licensed standalone product the customer runs on its own equipment (an ordinary taxable software sale).

Accountants and tax professionals

Useful two-track template for hybrid SaaS/licensed-software businesses — the "author/creator" use tax rule under § 1110(a)(F)/(g) (computed only on the storage medium's cost, not the software's full value) is a narrower tax than most practitioners expect, and applies specifically when a company uses its own software to deliver a service while also separately selling similar software.

Common questions

Q: Is a data backup subscription service taxable in New York?
A: No — it's not an enumerated taxable service, the data itself isn't taxable tangible property, and the provider (not the customer) retains control of the storage equipment.

Q: Does the backup company owe any New York tax on the connector software it installs on customers' machines?
A: Yes — use tax, computed narrowly on the cost of the software's storage medium, since the company also sells a related version of the software elsewhere.

Q: Is a fuller, in-house-installable version of the software taxable when licensed to New York customers?
A: Yes — that's an ordinary taxable sale of prewritten computer software.

Q: Can another SaaS or data-backup provider rely on this Advisory Opinion?
A: No. It binds the Department only for the petitioner and facts described; another company's software architecture and licensing model should be checked independently.

Citations and references

Statutes and guidance:

• Tax Law §§ 1101(b)(4)(i), (5), (6), (7), (14); 1105(a), (c)(1), (c)(4); 1110(a), (g)
• TSB-M-93(3)S (prewritten computer software taxability)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a05_40s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-05(40)S
Sales Tax
October 26, 2005

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S050124A

On January 24, 2005, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Connected Corporation, 100 Pennsylvania Avenue, Framingham, MA
01701.
The issues raised by Petitioner, Connected Corporation, are:
1) Whether the New York State sales and use taxes apply to its subscription service, which
provides customer access to a data backup and recovery system at Petitioner’s off-site
data center.
2) Whether the New York State sales and use taxes apply to software provided by Petitioner
to customers as described below.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner has two lines of business, described as follows. Most of Petitioner’s customers
subscribe to Petitioner’s Connected DataProtector service in order to ensure the safe storage of
data in the event that subscribers’ original data is lost or stolen. All data is stored at data centers
operated by Petitioner and located in Massachusetts.
Subscribers use the service for data backup and recovery either because they do not own
data storage equipment or because they choose to have a third party service provider operate and
manage the data; in effect outsourcing the data storage work to Petitioner’s data centers. These
subscribers access Petitioner’s data centers solely so that subscribers may archive data in
Petitioner’s data centers. Petitioner ensures that received data cannot be altered, a critically
important feature for companies subject to governmental or other recordkeeping requirements.
All of the services are provided at the data centers and relate to ensuring that an accurate copy of
the data is maintained and easily available if a subscriber’s computer is damaged, lost or stolen.
DataProtector software is sent to each subscriber. This software is placed on the
subscribers’ computers solely to connect the subscribers’ computer to Petitioner’s data centers in
Massachusetts. The software can only be used in conjunction with Petitioner’s data centers, and
the software has no commercial value to subscribers on a stand-alone basis. The software
provides no functionality and does not expand any functionality of the subscribers’ computers.
The software does not save data on the computers or otherwise improve the features, speed or
operation of the subscribers’ computers. The sole purpose of the software is to establish a link
between the subscribers’ computers and Petitioner’s data centers, allowing subscribers to backup
their data onto the servers at Petitioner’s data centers. Without purchasing the license and

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appropriate associated server software, subscribers are unable to perform these same backup and
retrieval processes in their own offices. No customer would purchase or license the software
Petitioner provides for use by customers subscribing to Petitioner’s backup and storage services
unless the customer were receiving the services provided by Petitioner.
A subscriber who disconnects from Petitioner’s data center has its DataProtector software
disabled so it is not able to use the software with third party technologies or data center
equipment. Thus, there is no possibility of the subscriber using the DataProtector software at its
own location without Petitioner’s knowledge.
Petitioner’s second line of business is the licensing to larger customers a version of
DataProtector software that customers can use on their own data backup equipment without
entering into subscription service agreements. If these customers are located in New York State,
Petitioner collects sales tax from the customer and remits the tax to the state of New York. This
version of DataProtector software contains server software and configuration information in
addition to the DataProtector software provided to customers which only enter into subscription
services agreements (subscribers).
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:
*

*

*

(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....
*

*

*

(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 therefore, including the
rendering of any service, taxable under this article, for a consideration or any agreement
therefore.
(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven

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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....
(7) Use. The exercise of any right or power over tangible personal property or
over any of the services which are subject to tax under section eleven hundred ten of this
article or pursuant to the authority of article twenty-nine of this chapter, by the purchaser
thereof, and includes, but is not limited to, the receiving, storage or any keeping or
retention for any length of time, withdrawal from storage, any installation, any affixation
to real or personal property, or any consumption of such property or of any such service
subject to tax under such section eleven hundred ten or pursuant to the authority of such
article twenty-nine....
*

*

*

(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 . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
*

*

*

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(c) The receipts from very sale, except for resale, of the following services:
(1) The furnishing of information by printed, mimeographed or
multigraphed matter or by duplicating written or printed matter in any other
manner, including the services of collecting, compiling or analyzing information
of any nature and furnishing reports thereof to other persons, but excluding the
furnishing of information which is personal or individual in nature and which is
not or may not be substantially incorporated in reports furnished to other
persons....
*

*

*

(4) Storing all tangible personal property not held for sale in the regular course of
business and the rental of safe deposit boxes or similar space.
Section 1110 of the Tax Law provides, in part:
(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, (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,…
*

*

*

(g) For purposes of clause (F) of subdivision (a) of this section, the tax shall be at
the rate of four percent of the consideration given or contracted to be given for 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.
Technical Services Bureau Memorandum, entitled State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software, March 1, 1993,
TSB-M-93(3)S, provides, in part:

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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 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.
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 . . . .
*

*

*

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.
*

*

*

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
Issue 1
Petitioner’s subscribers pay a subscription fee for access to Petitioner’s service which
ensures accurate backup and safe storage of their data. Petitioner provides the data backup and

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recovery system at its data centers located in Massachusetts. Petitioner provides subscribers with
a portion of its proprietary DataProtector software for installation on the subscribers’ computers.
The DataProtector software connects the subscribers’ computers to Petitioner’s data centers.
Petitioner assures subscribers that an accurate copy of their data will be maintained and that the
data will be readily available from the data centers. The software provided to subscribers does
not permit or enable the subscribers’ computers to perform these same backup and retrieval
processes on the subscribers’ equipment in its own offices without purchasing from Petitioner a
license and the appropriate additional associated server software. When a subscriber cancels its
subscription service, the DataProtector software provided by Petitioner for use in such service is
disabled.
Petitioner’s subscribers pay Petitioner a subscription fee to obtain access to data backup,
storage and recovery services. The primary function of Petitioner’s subscription service is to
provide its subscribers with a backup of their data. The subscribers’ data is transmitted from the
subscribers’ computers to Petitioner’s server. The information is then stored on Petitioner’s
server until such time as a subscriber needs the information, at which point the data is accessed
and transmitted from Petitioner’s server to the subscriber. Petitioner is receiving a fee for
securing and storing the subscriber’s information and for transmitting it back to the subscriber
when needed. A subscriber does not receive any new information from Petitioner but rather
receives a copy of its original data. Petitioner’s service, therefore, is not considered the sale of
information services pursuant to section 1105(c)(1) of the Tax Law. See Immediate Medical
Records, Inc., Adv op Comm T&F, January 31, 1992, TSB-A-92(7)S.
One of the elements of the services that Petitioner provides is storage of data. Section
1105(c)(4) of the Tax Law imposes tax on the storage of tangible personal property. Since the
data which is being stored is not tangible personal property, the charge for such storage is not
subject to tax. See Immediate Medical Records, Inc., supra. In addition, the data is not stored in
a facility located in New York.
Although subscriber data is stored on Petitioner’s equipment in the data center, Petitioner
operates the equipment, and maintains dominion and control of the equipment. Thus, charges for
subscriptions to Petitioner’s data backup and storage service are not considered receipts from the
rental of equipment by Petitioner subject to sales tax under section 1105(a) of the Tax Law.
Further, as discussed in Issue 2 below, Petitioner’s use of DataProtector software to provide data
backup and storage service does not constitute a sale of such software for purposes of section
1105(a).
Therefore, the charges for Petitioner’s data backup and storage services are not subject to
sales tax. These services are not included among the enumerated taxable services under section
1105(c) of the Tax Law.

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Issue 2
Petitioner’s service is provided through the use of Petitioner’s software and data center
equipment. The software which is installed on the subscribers’ computers is used solely to allow
the subscribers’ computers to transmit data to the data center servers. This software serves no
other purpose and is disabled if a subscriber discontinues the backup and retrieval service.
Petitioner is using this software in providing its backup and retrieval services to subscribers,
rather than making a sale or license of this software for purposes of Article 28 of the Tax Law.
Petitioner appears to sell similar software in the normal course of business since the connecting
software provided to subscribers to the backup and retrieval service appears to be included
within the software package sold to persons purchasing DataProtector software for use in their
own backup and recovery equipment and systems. Therefore, Petitioner’s use of the
DataProtector software to provide its services to subscribing customers in New York State is
subject to the use tax imposed under section 1110(a) of the Tax Law. The use tax is computed
on the cost of the medium (floppy disk, magnetic tape, etc.) that contains or is used in
conjunction with the software. See section 1110(g) of the Tax Law; and TSB-M-93(3)S, supra.
Lastly, it is noted that Petitioner also makes available for sale to its larger customers a
version of DataProtector software for use on the customer’s own data backup equipment. The
DataProtector software sold or licensed to these customers contains server software and
configuration information that is not contained in the version of DataProtector software provided
to subscribers. The licensed software allows customers to backup, secure, store and recover data
from the customer’s own data backup servers, and contains software facilitating the customer’s
transfer of data from its computers to the servers where the customer will backup and store the
data. Petitioner’s licenses of such software to customers located in New York constitute sales of
prewritten software subject to sales and compensating use tax. See sections 1105(a) and 1110(a)
of the Tax Law; and TSB-M-93(3)S, supra.

DATED: October 26, 2005

NOTE:

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

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