My company licenses mortgage brokers access to our loan-origination software hosted entirely on our own out-of-state servers, with no download and no code ever touching the subscriber's computer — is our subscription fee subject to New York sales tax, and does the federal Internet Tax Freedom Act protect us?

Plain-English summary

Electronic Mortgage Affiliates sells subscription access to "Encompass Anywhere," a loan origination and processing product used mostly by mortgage brokers. Subscribers access the product over the Internet to prequalify borrowers (checking FHA county loan limits, mortgage insurance pricing, and third-party loan/pricing data), connect to lenders and other third parties to find suitable loan products, generate required disclosure forms, and route loan information to document providers who compile the closing paperwork. The software runs entirely on the company's own out-of-state servers — the license expressly states the subscriber does not receive a copy of the software "in tangible or other form" and cannot alter, change, or control it; subscribers just use free third-party download software to reach the host server. Subscribers pay an initial setup fee and a monthly per-user fee.

The Department held the subscription fees are taxable as a sale of prewritten computer software under Tax Law §1105(a) — applying the same constructive-possession framework this corpus has now seen consistently across multiple 2009 SaaS opinions. Even though the license agreement labels the product a "service" and says the subscriber can't "alter, change, or control" the software, that labeling doesn't control the tax analysis: the substance is a transfer of the right to use, control, or direct the use of the software, since subscribers can access it to determine loan eligibility, check product availability, and generate forms. The location of the underlying code is legally irrelevant — a subscriber who never receives a download or tangible copy has still received a taxable transfer of possession, as long as they can use the software just as effectively through remote access. Tax is due based on where the subscriber's employees who actually use the software are located, allocated proportionally if some are in New York and some aren't.

The Department also flagged, but didn't need to resolve, whether the product's data-compiling and eligibility-checking features separately made it a taxable information service — since the software classification alone already produces the same tax rate and the same location-based sourcing rule, that question didn't need answering.

Finally, the Department rejected an argument under the federal Internet Tax Freedom Act (ITFA): ITFA bars taxing Internet access service and bars discriminatory e-commerce taxes, but this product isn't Internet access — it's software — and New York taxes prewritten software the same way and at the same rate whether it's sold electronically or by any other means, so there's no discrimination.

What this means for you

SaaS and hosted fintech/mortgage-technology companies

Contract language calling your product a "service" and denying customers any right to "alter, change, or control" the software doesn't determine its tax treatment. If your customers can use the software's functions remotely — even purely through your hosted interface, with zero code ever touching their machine — expect New York to treat that as a taxable transfer of possession of prewritten software.

Companies relying on the Internet Tax Freedom Act

ITFA protects Internet access service and bars taxing e-commerce more heavily than equivalent offline sales — it does not shield a hosted software product from being taxed as software, since New York taxes prewritten software identically regardless of delivery mechanism.

Accountants and tax professionals

This opinion is a near-identical companion to other 2009 SaaS opinions in this corpus (the constructive-possession/§526.7(e)(4) analysis, and citing KPMG LLP, TSB-A-03(5)S for the same in-state/out-of-state allocation rule) — useful confirmation that the Department applied this framework consistently across different industries (retail, financial services, and here, mortgage technology) throughout 2009.

Common questions

Q: Our license agreement says the subscriber has no right to "alter, change, or control" our software — doesn't that keep us out of the sales tax net?
A: No. The Department held this contractual language isn't controlling; what matters is that subscribers can access the software to perform real tasks (checking eligibility, generating forms), which constitutes a taxable transfer of the right to use and control the software regardless of how the agreement characterizes it.

Q: We never let subscribers download anything — the software stays entirely on our servers. Does that keep us out of the sales tax net?
A: No. The location of the code is irrelevant under New York's regulations; remote access alone, if it lets the subscriber use the software just as effectively, is a taxable constructive transfer of possession.

Q: Doesn't the Internet Tax Freedom Act protect our Internet-delivered software product from state sales tax?
A: No, per this opinion. ITFA protects Internet access service and bars discriminatory e-commerce taxation; it doesn't exempt a software product just because it's delivered over the Internet, especially where the state taxes the same software identically regardless of delivery method.

Q: How is the tax sourced if our subscribers' users are spread across multiple states?
A: Tax is based on the location of the subscriber's employees or agents who actually use the software; if some users are in New York and some are elsewhere, the receipt is allocated proportionally between in-state and out-of-state use.

Q: Can any SaaS company rely on this exact opinion?
A: No. An advisory opinion binds the Department only as to the taxpayer who requested it and the facts described. A genuinely different product or licensing structure could be analyzed differently, though this opinion is consistent with the Department's broader 2009 SaaS/constructive-possession approach.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(5), (6) (definition of sale; prewritten software as tangible personal property)
• Tax Law §1105(a), (c)(1) (tax on tangible personal property; information services)
• 20 NYCRR §526.7, §526.7(e)(4) (place of delivery; constructive possession/transfer of right to use, control, or direct use)
• Internet Tax Freedom Act, 47 USC §151 note (§1101 et seq.) (bars taxing internet access and discriminatory e-commerce taxes; does not exempt software)

Cited opinion:

• KPMG LLP, TSB-A-03(5)S (allocating receipts between in-state and out-of-state software users)

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(15)S

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(15)S
Sales Tax
April 15, 2009

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

PETITION NO. S080408A

Petitioner Electronic Mortgage Affiliates Inc., 4155 Hopyard Road, Suite 200, Pleasanton,
California, 94588, requests an advisory opinion about whether its charges to its subscribers for access to its
“Encompass Anywhere” loan origination and processing product are subject to New York State and local
sales taxes. We conclude that Petitioner’s product is prewritten computer software and is subject to
New York State and local sales taxes when sold to a subscriber located in New York.
Facts
Petitioner sells a product that assists subscribers in providing loan origination and processing
services. Subscribers, who are mostly mortgage brokers, access Petitioner’s product via the Internet. The
product allows the subscriber to do business with online mortgage lenders. One function of the product
allows the subscriber to “prequalify” a potential borrower by entering information about the potential
borrower. Petitioner incorporates certain data into the software, such as certain county dollar limits
established by the Federal Housing Administration (FHA), and mortgage insurance pricing. This data
helps the subscriber to search for loans for which a borrower qualifies and for the applicable insurance
costs. Loan data (e.g., a credit rating score) are analyzed against data provided by third parties, who
contract with Petitioner, to find the various loan products and pricing available to a specific borrower.
Petitioner’s software also screens loans to determine if they meet certain criteria (e.g., low-income housing
loans).
The potential borrower’s eligibility is rated using a database compiled by Petitioner that includes
information provided by third parties. If the potential borrower is found to be eligible, the subscriber then
uses Petitioner’s product to connect to third parties (e.g., banks, credit agencies, title companies) to obtain
information about the availability of mortgage loan products from various lenders that would be suitable for
the potential borrower and various information required to close the loan. Petitioner’s product also enables
the subscriber to obtain and print certain required forms (e.g., disclosure forms). Petitioner also shares the
loan information with document providers, including Petitioner’s own document service or third parties.
The document providers compile the actual hard-copy documents required to close a particular loan. The
document providers review the loan information to ensure completeness, accuracy, and compliance of the
loan documents.
Petitioner’s product consists of software hosted on Petitioner’s servers located outside New York
State. The “hosting” function performed by Petitioner includes loading and maintaining the software on
Petitioner’s servers, storage of subscriber data, data backup, security, and software updates. The subscriber
obtains from an unrelated third party freely downloadable software that enables the subscriber to access
Petitioner’s software on the host server.
The agreement between Petitioner and a subscriber grants a “non-exclusive, non-transferrable,
limited license to access and use the Services over the Internet for the sole purpose of performing loan
origination or loan processing services for Subscriber’s customers.” Petitioner’s subscribers are charged an

-2-

TSB-A-09(15)S
Sales Tax
April 15, 2009

initial set-up fee and a monthly fee based on the number of users. Petitioner installs and hosts the software
on Petitioner’s servers, which are located outside New York State. Petitioner states that the license does
not allow the subscriber to “alter, change or control the Software.” The license agreement states that the
subscriber does not receive a copy of Petitioner’s software in tangible or other form. Subscribers input
their customers’ information and data, which are stored on Petitioner’s servers in its data center. Petitioner
has tables built into its software that measure loan data against certain criteria (e.g., loan-to-value amounts,
debt-to-income ratios) to determine eligibility.
Opinion
Petitioner’s charges for use of the product described above are receipts from the sale of prewritten
computer software. Prewritten computer software is included in 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 §1101(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 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 subscriber even though the subscriber never receives the
code on a tangible medium or by download.
The accessing of Petitioner’s software by Petitioner’s subscribers constitutes a transfer of
possession of the software, because the subscriber gains constructive possession of the software and gains
the “right to use, control or direct the use” of the software. Although Petitioner’s contract with its
subscribers characterizes its product as a “service,” and states that the subscriber does not have the right to
“alter, change, or control” the software, this characterization is not controlling. Petitioner’s subscribers
have the right to access the software in order to determine loan eligibility, ascertain the availability of
certain loan products, and generate forms. This is true even if no “copy” of the software is transferred to
the subscriber. Accordingly, the sale of a license to use Petitioner’s software to a subscriber 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 subscriber’s
employees that use the software). If the subscriber’s employees who 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.
Petitioner’s product also has some aspects of an information service. Sales tax is imposed on
certain enumerated services. Among these is the service of “furnishing information by printed,
mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner,
including the service of collecting, compiling or analyzing information of any kind or 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.”
See Tax Law §1105(c)(1). It appears that Petitioner compiles and provides information from third parties
in order to evaluate the potential borrower’s eligibility, search for loan products, and ensure the
completeness and accuracy of the loan documents. These activities may constitute a taxable information
service. However, we need not resolve this question, because we conclude that Petitioner’s product is

TSB-A-09(15)S
Sales Tax
April 15, 2009

-3-

prewritten computer software, which is taxed at the same State and local rates, and the situs of the sale is
determined in the same manner as it is for an information service (see, e.g., TSB-A- 03(5)S).
Finally, Petitioner asks whether the federal Internet Tax Freedom Act (47 USC § 151 (note section
1101, et seq.) (ITFA) prohibits the application of sales tax to the receipts from the sale of its product. We
conclude that it does not. ITFA bars state and local taxation of Internet access service (generally, a service
that provides a connection to the Internet) and discriminatory taxation of e-commerce. A “discriminatory”
tax is one that is imposed on products sold in electronic commerce but not on similar products sold by other
means, or a tax imposed on products sold in electronic commerce at a higher rate or on a different person
than similar products sold by other means. Petitioner’s product is not Internet access; rather, it is
prewritten computer software. Moreover, the State and local taxes on prewritten computer software are not
discriminatory because they apply equally and at the same rates regardless of whether software is sold via
electronic commerce or other means.

DATED: April 15, 2009

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.