I run pay-per-minute Internet cafe workstations and offer an optional 'premium' upgrade that lets customers edit documents in real desktop software instead of just viewing them -- is the basic Internet time exempt, and is the premium software upgrade taxable?

Plain-English summary

Icor Systems, LLC places Internet-connected workstations (chair, desk, computer) inside existing coffee bars, food-service businesses, and other retail locations across New York City, generally on a profit-sharing basis with the host merchant (occasionally a fixed rent instead). Icor doesn't sell food or drink itself; customers separately buy food/beverages from the unrelated host business if they want to, with no requirement to do so. For basic service, a customer logs in with a ticket-based ID, browses the web and uses instant messaging, and can view (but not edit or save) documents through viewer-only versions of Word, Excel, and PowerPoint — no games, no downloading, no inserting media. Pricing runs from prepaid cards ($2 for 10 minutes up to $8 for 60 minutes) to cash or credit card purchases at roughly 20¢/minute, with volume discounts. For an extra 2.5¢/minute, customers can opt into premium service, which unlocks the actual licensed Microsoft Word/Excel/PowerPoint software — letting them download and genuinely edit/save content, not just view it — after clicking through a confirmation pop-up. Icor already collects and separately states 8.375% NYC sales tax on the premium add-on charge.

Icor asked whether (1) its basic-service fee, (2) its premium-service fee, and (3) its notice/collection practice for premium-service tax are each handled correctly under New York law.

The Department held Icor's basic-service charges are exempt as Internet access service under Tax Law §1115(v), which exempts the "service of providing connection to the Internet" — consistent with a 2004 opinion (Wealth and Tax Advisory Services, Inc.) reaching the same result for a similar access-fee model.

But the premium-service charges are taxable, because they're really charges for a license to use prewritten computer software (the full-featured Microsoft Office suite) — and New York's definition of tangible personal property specifically includes prewritten software regardless of delivery medium, taxable under §1105(a). Since the premium charge bundles together Internet access (already exempt) with the newly-taxable software license, the Department applied the federal Internet Tax Freedom Act's bundling rule: if Internet access charges are combined with taxable charges into one bill, the whole thing becomes taxable unless the provider can reasonably separate out the Internet-access portion from its own books and records. Because Icor's system tracks time and pricing precisely enough to isolate exactly what portion of the premium charge represents ordinary Internet access (versus the software-upgrade portion), that access-equivalent slice of the premium fee stays exempt, and only the true incremental software-upgrade charge is taxed.

Finally, on the collection-mechanics question: the Department found Icor's practice adequate — its end-of-session summary screen shows the time used, the premium charges, and the associated tax, satisfying the requirement that tax be "stated, charged and shown separately" on the first statement of charges given to the customer.

What this means for you

Internet cafe, kiosk, or shared-workstation operators

Pure Internet access — browsing, messaging, viewing (not editing) documents — is exempt under New York's Internet access exemption regardless of how you price it (per-minute, prepaid card, etc.). But the moment you sell an upgrade that grants real software functionality (editing, saving, downloading via licensed applications), that upgrade is a taxable software license, separate from the underlying access.

Businesses bundling Internet access with a taxable add-on into one price

If you want any part of a bundled access-plus-extra charge to stay exempt, you need books and records precise enough to reasonably identify the Internet-access portion of the bundled fee — otherwise, under the federal Internet Tax Freedom Act's rule, the whole bundled charge becomes taxable.

Accountants and tax professionals

This is a clean, quantified illustration of how the ITFA bundling rule interacts with New York's software-taxability rules — useful for any client selling tiered digital access (basic vs. premium) where the premium tier crosses from "access" into "software functionality."

Common questions

Q: Is pay-per-minute Internet cafe access taxable in New York?
A: No — basic Internet connectivity (browsing, messaging, view-only document access) is exempt under Tax Law §1115(v)'s Internet access exemption.

Q: If I offer an upgrade that lets customers actually edit documents using real software, is that upgrade taxable?
A: Yes — a charge for the ability to use licensed software (not just view content) is a taxable license to use prewritten computer software, separate from the underlying exempt Internet access.

Q: What happens if I bundle Internet access and a taxable add-on into a single price?
A: Under the federal Internet Tax Freedom Act, the whole bundled charge becomes taxable unless you can reasonably identify the Internet-access portion from your own books and records — if you can, that portion stays exempt.

Q: Does this ruling apply to my Internet cafe or kiosk business?
A: Not automatically. This is an Advisory Opinion binding only on Icor Systems, LLC and only as to the facts it described. Your specific software features and billing/record-keeping systems may differ.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law §1101(b)(6) (tangible personal property includes prewritten software)
• Tax Law §1101(b)(14) (definition of "pre-written computer software")
• Tax Law §1105(a) (tax on tangible personal property)
• Tax Law §1115(v) (Internet access service exemption)
• Tax Law §1132(a)(1) (tax must be separately stated on receipts)
• Sales and Use Tax Regulations §532.1(b) (statement of tax on receipts)
• Internet Tax Freedom Act §1106(a) (bundled charges rule, note following 47 U.S.C. §151)

Prior opinions referenced:

• Wealth and Tax Advisory Services, Inc., TSB-A-04(27)S (Internet access exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_47s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Taxpayer Guidance Division

TSB-A-08(47)S
Sales Tax
October 16, 2008

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S071019B

On October 19, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Icor Systems, LLC, 152 West 36th Street, Suite 306, New York,
New York 10018.
The issues raised by Petitioner, Icor Systems, LLC, are:
1.

Whether Petitioner’s fee for basic services described below is subject to
New York sales and use tax.

2.

Whether Petitioner’s fees for premium services described below are subject to
New York sales and use tax.

3.

Whether Petitioner’s notice and collection of sales tax as described below for
premium services, provided such services are subject to sales tax, meet the
requirements in section 1132 of the Tax Law.

Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner provides Internet access to customers at coffee bars, food service businesses,
and other retail locations within New York City. Petitioner helps create an Internet cafe by
placing Internet workstations in service inside existing retail businesses. The workstations
consist of a chair, desk, and an Internet-connected computer that runs Petitioner’s proprietary
software.
Petitioner provides pay-per-use Internet service in conjunction with retail merchants and
hotels on a profit-sharing basis. However, in rare cases, Petitioner enters into a fixed rent
agreement whereby it pays a fixed fee to the merchant in exchange for the right to install its
equipment at the location.
Petitioner does not sell food or beverages. Customers may, however, purchase food and
beverages from the unrelated vendor in which Petitioner’s Internet workstations are located.
Food and beverage purchases by customers from the vendors are made independent of the
purchase of Internet access by customers from Petitioner. There are no cover fees, minimum
purchase requirements, or requirements that Internet access customers purchase food or
beverages.

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October 16, 2008

Basic Service
A customer logs on at any available workstation computer to access the Internet. The
customer cannot reserve a specific workstation or time to use the workstation. Before access to
the Internet is granted, the customer must enter a unique User ID printed on a ticket purchased
for Internet access time. Upon logon, a banner across the top of the screen shows the customer
how much credit is remaining and the amount of time, if any, which has already been deducted.
The customer can then begin to browse the Internet.
Customers can browse the Internet for varying periods of time by using search engines.
Customers may also send and receive instant messaging. Although the workstation computers
have certain software applications, such as Microsoft Word Viewer, Excel Viewer, and
PowerPoint Viewer, the customer cannot edit or save documents related to such software or
insert a diskette or CD into the computer to download or save information. The customer can
merely launch documents from Websites or e-mail and view such documents at the workstation.
The computers do not have games or other “canned” entertainment software packages (e.g., the
customer cannot upload or download music). Some workstations have the ability to print
documents, but a separate, additional charge upon which sales tax is collected is made for such
service.
Payment and Pricing for Basic Service
Petitioner provides several payment methods as follows:
1.
2.
3.

Purchase a prepaid card.
Insert cash into an automated bill acceptor.
Use credit card by entering card number manually or by swiping the credit card at
a workstation.

Not all payment methods are available at every location, but all locations include the
ability to accept a credit card either by swiping the card at the workstation or manually entering
the information.
Customers utilizing Petitioner’s service receive a fixed amount of Internet time up front
for a specific price. Pricing for the service typically begins at 20¢ per minute, but is generally
structured so that large dollar purchases enable the customer to purchase time at a lower rate. If
prepaid cards are sold, the customer has the ability to purchase one of several pricing options.
The least expensive card entitles the holder to 10 minutes and costs $2.00. The most expensive
prepaid card entitles the holder to 60 minutes and costs $8.00. At locations with automated bill
acceptors, customers can purchase any dollar amount of time at a rate of 20¢ per minute, but are
awarded bonus minutes at the purchase thresholds of $5.00, $10.00, and $20.00. When
customers purchase time with a credit card, they choose from a list of price and minute

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Sales Tax
October 16, 2008

combinations that start at $5.00 for 30 minutes, including purchases of up to 600 minutes for
$39.00.
Premium Service
When using the basic Internet work stations, customers can also purchase certain
premium services for an additional charge. The premium services allow customers access to the
following software:
•
•
•

Microsoft Word
Microsoft Excel
Microsoft PowerPoint

Premium services also allow customers to download information from the Internet to the
local computer and allow the customer to use the selected software functions. For example
rather than just being able to view screens, customers will also be able to use the software to edit
the content which they download.
Once a customer attempts to access a premium service, a user notification pop-up
window is displayed on the screen. This initial pop-up window presents the customer with “OK”
and “cancel” buttons asking the customer to confirm that he or she wishes to access the set of
premium services and agrees to the additional charge for the service. If the customer makes no
decision within 20 seconds, the window screen closes and the customer is directed back to the
basic Internet access service. If the customer does accept the additional charges, the customer is
permitted to use the premium services.
Payment and Pricing for Premium Service
Petitioner charges an additional 2.5¢ per minute for the use of its premium service.
Petitioner collects and remits the New York State and New York City sales tax at the rate of
8.375% on the additional charge associated with the premium service. Accordingly, the
additional per minute cost of the service, including sales tax, is 2.7¢ per minute.
The following is an example of a typical premium service transaction:
A customer purchases a 10-minute card for $2.00 and will incur a charge for the
use of Petitioner’s basic service of 20¢ per minute. If such customer chooses to utilize
Petitioner’s premium service, he or she will incur an additional fee for such service at the
rate of 2.5¢ per minute. At the conclusion of the customer’s usage of the premium
service, Petitioner will collect New York State and City sales tax on such additional fee.
Assuming that the customer utilizes Petitioner’s premium service for 5 minutes, he or she
will incur a charge of 12.5¢. In addition, Petitioner will collect and remit 1.05¢ of

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Sales Tax
October 16, 2008

New York State and City sales tax on such charge. Thus, including the charge of $1.00
for access to Petitioner’s basic service, the customer will incur total fees of $1.14
(rounded) during his or her 5 minute session.
In this example, the time deduction associated with the basic charge of $1.00 (i.e.,
5 minutes) is made in real-time as the customer uses the service. In addition to such 5
minute deduction, the time deduction associated with the additional 14¢ in fees is accrued
while the premium service is used at a translated rate of one second deducted per 7.4
seconds of usage (20¢ per minute / 2.7¢ per minute). The accrued time deduction for the
14¢ additional charge will amount to roughly 41 seconds after 5 minutes of use. At the
end of the 5 minutes of premium usage, the additional accrued balance of 41 seconds will
be deducted from the main balance. The customer will have 4 minutes 19 seconds
remaining instead of the full 5 minutes that they otherwise would have had remaining if
they had only used the basic service and had not used the premium service.
At the conclusion of the session, a session summary screen will summarize the
total time accrued in accessing the Internet, the time spent on the premium service, the
charges for the premium service, and New York State and City sales tax associated with
those charges.
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:
*

*

*

(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,. . . .
*

*

*

(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,

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October 16, 2008

as a separate component, or otherwise, and regardless of the medium by means of which
such software is conveyed to a purchaser. . . .
*

*

*

(14) Pre-written computer software. Computer software (including pre-written
upgrades thereof) which is not software designed and developed by the author or other
creator to the specifications of a specific purchaser. The combining of two or more prewritten 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.
Section 1115(v) of the Tax Law provides:
Receipts from the sale of Internet access service, including start-up charges, and
the use of such service, shall be exempt from the taxes imposed under this article. For
purposes of this subdivision, the term "Internet access service" shall mean the service of
providing connection to the Internet, but only where such service entails the routing of
Internet traffic by means of accepted Internet protocols. The provision of communication
or navigation software, an e-mail address, e-mail software, news headlines, space for a
website and website services, or other such services, in conjunction with the provision of
such connection to the Internet, where such services are merely incidental to the
provision of such connection, shall be considered to be part of the provision of Internet
access service.

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Sales Tax
October 16, 2008

Section 1132(a)(1) of the Tax Law provides:
Every person required to collect the tax shall collect the tax from the customer
when collecting the price, amusement charge or rent to which it applies. If the customer
is given any sales slip, invoice, receipt or other statement or memorandum of the price,
amusement charge or rent paid or payable, the tax shall be stated, charged and shown
separately on the first of such documents given to him. The tax shall be paid to the person
required to collect it as trustee for and on account of the state.
Section 532.1(b) of the Sales and Use Tax Regulations provides, in part:
Statement of and reference to tax. (1) Whenever the customer is given any sales
slip, invoice, receipt, or other statement or memorandum of the price, amusement charge,
or rent paid or payable, the tax shall be stated, charged and shown separately on the first
of such documents given to him.
(2) Whenever the sales and use tax is separately stated on such document, it may
be referred to as tax.
(3) The words tax included or words of similar import, on a sales slip or other
document, do not constitute a separate statement of the tax, and the entire amount
charged is deemed the sales price of the property sold or services rendered.
(4) No written receipt. For sales other than sales of gasoline and diesel fuel a unit
price method of accounting for sales may be used where no written receipt is given to the
customer. The unit price is the price, including sales tax, at which the sale is recorded.
Since the customer must be made aware of the inclusion of sales tax in the total sales
price, every business establishment employing the unit price method must visibly display,
to all customers a placard stating that the prices of all taxable items include sales tax. If
the sale is recorded on a cash register it may be rung up on a single ring, a quantity of
individual items may be rung up in total, or a quantity of items can be rung up
individually with a total. In addition, the vendor shall, for the benefit of his customers,
distinguish between taxable and nontaxable items offered for sale. This may be done by
such methods as:
(i) attaching labels to merchandise to indicate taxable or nontaxable status;
(ii) displaying taxable and nontaxable merchandise separately; or
(iii) having available detailed listings of taxable and/or nontaxable items. It is the
responsibility of every vendor who sells both taxable and nontaxable items to maintain
accurate records indicating such sales.

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October 16, 2008

Section 1106(a) of the federal Internet Tax Freedom Act (cited in the note following 47
U.S.C. § 151) provides:
In general. If charges for Internet access are aggregated with and not separately
stated from charges for telecommunications or other charges that are subject to taxation,
then the charges for Internet access may be subject to taxation unless the Internet access
provider can reasonably identify the charges for Internet access from its books and
records kept in the regular course of business.
Opinion
Petitioner operates an Internet cafe located in New York City. Petitioner provides
customers with a pay-per-use Internet service also described by Petitioner as basic service. Basic
service is available for a specified per-minute charge. After a customer logs-on to use
Petitioner’s basic service the customer is also offered the option of accessing prewritten software
described by Petitioner as premium service for an additional charge. Customers choosing to use
the premium service will incur a per-minute charge for the premium service in addition to the
basic service charge.
Petitioner’s charges for basic service are considered to be for Internet access. Charges
for such Internet access are exempt from sales tax under section 1115(v) of the Tax Law. See
Wealth and Tax Advisory Services, Inc., Adv Op Comm T&F, December 14, 2004,
TSB-A-04(27)S.
Section 1101(b)(6) of the Tax Law provides that prewritten software is deemed to be
tangible personal property for sales tax purposes. Petitioner’s receipts for premium service
include additional charges for the use of prewritten software. The fee paid for the lease or
license to use or consume prewritten computer software, regardless of the medium by means of
which such software is conveyed to the purchaser, is subject to New York State sales tax under
section 1105(a) of the Tax Law. When the charge for Internet access is aggregated with the
charge for use of the prewritten software for a single lump sum charge, the entire charge will be
subject to sales tax unless the Internet access provider can reasonably identify the charges for
Internet access from its books and records kept in the regular course of business. See section
1106(a) of the Internet Tax Freedom Act (cited in the note following 47 U.S.C. § 151). Since in
this instance, the charges for Internet access bundled into the charge for premium service are
separately determinable, the amount charged to provide Internet access as part of the premium
service (i.e., the cost for basic Internet access service) is excludible from the receipt subject to
sales tax. However, Petitioner’s additional charge for premium service is subject to sales tax
under section 1105(a) of the Tax Law.

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October 16, 2008

At the conclusion of the session, a screen will summarize the total time accrued in
accessing the Internet, the time spent on the premium service, the charges for the premium
service, and New York State and City sales tax associated with such charges. While it is not
clear if a customer may also obtain a printout of a session summary screen, it does appear that
the tax is stated, charged, and shown separately on the first of statement of charges provided to
the customer by Petitioner as required by section 1132 of the Tax Law.

DATED: October 16, 2008

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.