I sell access to hosted image-editing software that lets customers upload and manipulate product photos on my servers — no software is ever downloaded to the customer. Do I still owe New York sales tax on the license fees?

Plain-English summary

Adobe Systems Inc. sells access to a product called "OnDemand ASP Software," which lets a customer upload a product image (say, a clothing item) to Adobe's servers and manipulate it to show different views (front, back, zoom) and colors. The customer then links to the finished image from its own website, so online shoppers can see the item from multiple angles and colors. Customers pay an annual license fee and log in with an email and password Adobe provides; the software and the uploaded images stay on Adobe's servers, located outside New York. Adobe told the Department that customers never receive a copy of the software itself, in any form.

Adobe asked whether these annual license fees, charged to customers located in New York, are subject to New York sales tax.

The Department said yes. New York's definition of taxable tangible personal property specifically includes "prewritten computer software," regardless of the medium by which it's conveyed to the purchaser — and the statutory definition of a taxable "sale" expressly includes a license to use software. Under the regulations, a taxable transfer of possession happens if the customer gets actual or constructive possession, or the right to use, control, or direct the use of the software — it doesn't require the customer to receive a copy of the code on a disk, by download, or any other tangible medium. Here, letting a customer log in and use the software to upload and manipulate images is exactly that kind of constructive possession and right of use/control. Because the location of the underlying code is irrelevant to this analysis, the fact that Adobe's servers sit outside New York doesn't matter — what matters is where the customer that's exercising the license is located. For a customer with users both in and out of New York, Adobe should apportion and collect tax only on the portion of the fee attributable to the users located in New York.

What this means for you

SaaS and hosted-software companies

Hosting your software entirely on your own servers and never letting a customer download anything does not get you out of New York sales tax. If a customer can log in and use the software to do real work — upload data, manipulate content, run a process — New York treats that as a taxable license to use prewritten software, the same as if a CD had been shipped to them.

Multi-location business customers

If your users are spread across states, you (or your vendor) should be sourcing and taxing the license fee based on where the individual users who actually use the software are located, not where your billing contact sits or where the vendor's servers are.

Accountants and tax professionals

This opinion is a clean, frequently-cited illustration of New York's "constructive possession" doctrine for cloud/hosted software under Sales and Use Tax Regulation §526.7(e)(4) — useful shorthand for explaining to clients why "we never gave them a copy of the software" isn't a defense to New York sales tax on SaaS products.

Common questions

Q: If my customers never download any software, is my SaaS product exempt from New York sales tax?
A: Not necessarily. If the customer can log in and use the software to perform functions — even entirely on your servers — New York treats that as a taxable license to use prewritten software because the customer has constructive possession and the right to control its use.

Q: Does it matter where the software's servers are physically located?
A: No. The Department states outright that the location of the code is irrelevant; what matters is where the customer's users who are exercising the license are located.

Q: How do I handle sales tax if my customer has users in multiple states?
A: Apportion and collect tax on the portion of the license fee attributable to the customer's employees or users located in New York, following the approach described in this opinion and its cited predecessor, TSB-A-03(5)S.

Q: Does this ruling apply to my SaaS product?
A: Not automatically. This is an Advisory Opinion binding only on Adobe Systems Inc. and only as to the facts it described. It's a strong illustration of New York's approach to hosted software, but the specific features of your product could change the analysis.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(6) (prewritten computer software as tangible personal property, regardless of delivery medium)
• Tax Law §1105(a) (tax on retail sales of tangible personal property)
• Tax Law §1105(b)(5) (definition of "sale," including a license to use or the right to reproduce)
• Sales and Use Tax Regulation §526.7 (situs of a taxable sale)
• Sales and Use Tax Regulation §526.7(e)(4) (constructive possession under a license to use)

Prior opinions referenced:

• TSB-A-03(5)S (apportionment of software license fees among users in and out of New York)

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_62s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(62)S
Sales Tax
November 24, 2008

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S080724A

A petition dated July 17, 2008, requests an advisory opinion about whether Petitioner Adobe Systems Inc.’s
charges to its customers for access to its “OnDemand ASP Software” are subject to New York State and local sales
taxes. We conclude that the product sold by Petitioner is prewritten computer software that is subject to State and
local sales taxes when accessed by a customer located in New York.
Facts
Petitioner sells a computer software product that allows a customer to upload an image onto Petitioner’s
servers and manipulate the image to show various colors and views. For example, a customer may upload the image of
a clothing item. The software enables the customer to manipulate the image of the item to show it in different views
(e.g., front, back, zoom) or to show its appearance in selected colors. The customer may then provide a link to this
image when offering the clothing item for sale on the customer’s website. Potential purchasers would be able to view
the clothing item from various views and in the available colors.
The agreement between Petitioner and its customer grants a license to use Petitioner’s software. Customers
are charged an annual fee for use of the software. The software resides on Petitioner’s servers located outside New
York. Petitioner’s customers, some of which are located in New York, access the software using an e-mail address and
password provided by Petitioner. The images uploaded by Petitioner’s customers remain on Petitioner’s servers.
Petitioner states that the customer does not receive a copy of the software in tangible or other form.
Analysis
Petitioner’s charges for use of its software are receipts from the sale of prewritten computer software.
Prewritten computer software is included within the definition of tangible personal property, “regardless of the
medium by means of which such software is conveyed to the purchaser.” Tax Law §1101(b)(6). The sale of prewritten
computer software is subject to tax as the sale of tangible personal property. See Tax Law §§1101 (b)(6); 1105(a).
“Sale” is defined as “[a]ny 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) or otherwise, in any manner or
by any means whatsoever for a consideration, or any agreement therefor.” Tax Law §1105(b)(5). Sales and Use Tax
Regulation section 526.7 provides generally that “a sale is taxable at the place where the tangible personal property or
service is delivered or the point at which possession is transferred by the vendor to the purchaser or his designee.”
Regulation section 526.7(e)(4) further provides that, with respect to a “license to use,” a transfer of possession has
occurred if there is actual or constructive possession, or if there has been a transfer of “the right to use, or control, or
direct the use of tangible personal property.” The location of the code embodying the software is irrelevant, because
the software can be used just as effectively by the customer even though the customer never receives the code on a
tangible medium or by download.

TSB-A-08(62)S
Sales Tax
November 24, 2008

-2-

The accessing of Petitioner’s software by Petitioner’s customers’ constitutes a transfer of possession of the
software, because the customer gains constructive possession of the software, and gains the “right to use, control or
direct the use” of the software. Petitioner’s customers have the right to use the software to upload images of their
products and to manipulate those images to display various colors and views of the products. This is true even if no
“copy” of the software is transferred to the customer. Accordingly, the sale of a license to use Petitioner’s
“OnDemand ASP Software” to a customer in New York is subject to State and local sales tax. The situs of the sale for
purposes of determining the proper local tax rate and jurisdiction is the location associated with the license to use (i.e.,
the location of the customer’s employees that use the software). If the customer’s employees that use the software are
located both in and out of New York State, Petitioner should collect tax based on the portion of the receipt attributable
to the employee users located in New York. See TSB-A-03(5)S.

DATED: November 24, 2008

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

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.