My company licenses customers access to markdown-recommendation software hosted on our own server, with separate charges for implementation, support, and hosting — which of these charges are subject to New York sales tax?

Plain-English summary

A company (referred to in the ruling as "Company," represented by petitioner Jeffrey J. Coren, CPA) built software that generates weekly markdown recommendations for retailers based on the retailer's own sales data. The software and each customer's data live on Company's server; customers access weekly reports and recommendations over the Internet, but can't manipulate the underlying data, run ad hoc reports, or download the software itself. Customers pay a monthly license fee, plus separately stated charges for implementation (configuring the software to the customer's needs), technical support, and — optionally — hosting.

The Department held the monthly license fee is taxable as a sale of prewritten computer software under Tax Law §1105(a). The reasoning tracks a rule this corpus has seen apply consistently in other 2009 SaaS opinions: possession doesn't require ever receiving a copy of the code. New York's regulations treat a "transfer of possession" as occurring whenever there's a constructive transfer of the right to use, control, or direct the use of property — so remote access alone, through a license granting the right to use the software, is enough to make the fee taxable, "regardless of the medium by means of which such software is conveyed."

The other charges came out differently, because they were separately stated:

• Implementation services (custom configuration to the customer's needs) — exempt, since they're reasonable, separately-stated charges for modifying software to a specific customer's requirements.
• Technical support — exempt, as a reasonable, separately-stated service performed on software.
• Hosting fees — it depends: exempt if hosting is truly optional (Company also sells hosting to people who don't license its software, and the license can be used without Company's hosting) and the hosting charge is separately stated and reasonable. But if a customer can only get the software license bundled with Company's hosting — no option to self-host or use another host — then the hosting charge is treated as part of the taxable software expense and becomes taxable too, even if billed as a separate line item.

What this means for you

SaaS and hosted-software companies

Charging a monthly access/license fee for software your customers only ever reach through their browser doesn't avoid sales tax — remote access, without any code ever touching the customer's own machine, is still a taxable "transfer of possession" under New York's constructive-possession rule. Where you have real, separately-billable room to save your customers money is in implementation, custom configuration, and support charges — keep those genuinely separate and reasonably priced.

Structuring hosting charges

If you want your hosting fee to stay untaxed, make sure hosting is actually optional: your license needs to be usable without your hosting (e.g., a customer could self-host or use a competitor), and you need to actually sell hosting on its own to people who aren't licensing your software. If your license can only be bought bundled with your hosting, the hosting fee rides along as taxable, no matter how you label the invoice line.

Accountants and tax professionals

This opinion is a clean four-way split (license fee taxable; custom implementation exempt; support exempt; hosting conditionally exempt) worth using as a checklist template whenever a SaaS client bundles a core software fee with several ancillary service charges. It cites the bundling rule from Penfold v State Tax Commission for the "must-buy-together" hosting scenario.

Common questions

Q: Our customers never download our software or receive any code — does that mean our fees are untaxed?
A: No. New York's rule is that the location of the code is irrelevant; a customer who can use software just as effectively through remote access has received a taxable transfer of the right to use it, even without ever receiving a physical copy or download.

Q: We charge separately for implementation and support — are those taxed too?
A: Not if the charges are reasonable and genuinely separately stated. Custom modifications to meet a specific customer's requirements, and repair/service (technical support) work performed on the software, are both exempt services under Tax Law §1115(o).

Q: We bundle a hosting fee with our software license — is that hosting fee taxable?
A: It depends on whether hosting is optional. If customers can only get your software license along with your hosting (no self-hosting, no other host option), the hosting charge is folded into the taxable software sale. If hosting is truly optional — you sell it standalone too, and the license works without it — a separately stated, reasonable hosting charge is not taxable.

Q: Can any SaaS company rely on this specific opinion?
A: No. An advisory opinion binds the Department only as to the taxpayer who requested it and the facts described. A different bundling structure, or a genuinely custom (not prewritten) software product, could change the analysis.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(5), (6), (14) (definition of sale; tangible personal property; prewritten vs. custom software)
• Tax Law §1105(a), (c) (tax on tangible personal property and enumerated services)
• Tax Law §1115(o) (exemption for services performed on software)
• 20 NYCRR §526.7(e)(4) (constructive possession; transfer of right to use/control)
• TSB-M-93(3)S (prewritten software and related services)

Cited cases and opinions:

• Penfold v State Tax Commission, 114 AD2d 696 (1985) (bundled sale where items can't be purchased separately)
• Alan J. Goldstein/The Computer Studio, TSB-A-01(21)S
• CAV CORP d/b/a Stone Soup Multimedia, TSB-A-97(87)S
• KPMG LLP, TSB-A-03(5)S (allocating receipts across in-state/out-of-state use)

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(19)S

Original ruling text

New York State Department of Taxation and Finance
TSB-A-09(19)S
Sales Tax
May 21, 2009

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

PETITION NO. S060411C

On April 11, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Jeffrey J. Coren CPA, P.C., 450 Seventh Avenue, Suite 2710,
New York, New York 10123.
The issue raised by Petitioner, Jeffrey J. Coren, is whether charges for providing access
to an on-line computer software program pursuant to a software license agreement are subject to
New York State sales and use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Company has developed software that provides each customer with weekly markdown
recommendations based upon weekly sales data supplied by the customer. The software and
customer related data are stored on Company’s server. Company’s software collects, analyzes
and compiles each customer’s data according to the customer’s specifications. The data is
assembled into reports accessible by or furnished only to the customer.
Via an Internet connection, the customer or its employees can access or download
weekly reports and recommendations generated by Company’s software. These reports and
recommendations assist each customer in managing its clearance of merchandise. The customer
may accept, reject, or change the markdown recommendations.
According to Petitioner, customers or their employees cannot access or use the software
to manipulate their data stored on Company’s server. Customers cannot generate ad hoc reports,
test marketing hypotheses, or request additional analysis. Company’s software is generally not
downloaded by customers and does not reside on customers’ computers.
The information being processed and the resulting reports and recommendations are
confidential in nature, for the exclusive use of the customer, and are not provided to any other
persons.
Company enters into a Master Software License and Services Agreement (Agreement)
with customers. Pursuant to the Agreement, customers pay a monthly license fee for the initial
term of the license. The license may be renewed for an additional two year term, or renewed for
a perpetual term. Customers may be charged additional fees for implementation services
required to make Company’s software system operational by configuring the software to the
customer’s business requirements, technical support services, and hosting services which also
include technical support.

-2TSB-A-09(19)S
Sales Tax
May 21, 2009

Petitioner provided a sample Agreement that provides, in part, as follows:
1.1. Delivery of Licensed Software; Grant of License. Subject to the terms and
conditions of this Agreement and in consideration for the fees set forth on Exhibit A,
[Company] grants to Customer a non-transferable . . . and non-exclusive license to use
the Licensed Software . . . “Licensed Software” means the computer programs provided
by [Company] to Customer. . . “License” means the license to use the Licensed Software
granted to Customer in this Agreement.
1.2. Restrictions. Customer may not itself, or through any parent, subsidiary,
affiliate, agent or other third party: (a) sell, lease, rent, display, license, sublicense,
operate as a service bureau, or timeshare, the Licensed Software to any third party; . . .
[Company] reserves the right to use technical means to verify that Customer’s use of the
Licensed Software comports with the terms of this Agreement and to terminate any
unlicensed use of the Licensed Software.
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1.5. Copies. Customer may make one copy of the Licensed Software for
installation on a server or other host computer. Customer may make additional copies of
the Licensed Software in the normal course of its back-up and archival operations but
none of such copies may be used and all of such copies will remain subject to the terms
of this Agreement.
EXHIBIT A

1. Licensed Software:
   Description of Licensed Software. The Licensed Software is designed to provide
   Customer with weekly markdown recommendations based upon certain weekly sales data
   of Customer to assist Customer in managing its clearance of merchandise. Commencing
   on the Go Live Date . . . on a weekly basis during the Term, Customer will provide
   [Company] with a data feed indicating units sold by style and price in a format specified
   by [Company]. The data feed will include, at a minimum, the most recent Customer
   weekly sales and inventory data. It is initially agreed that Customer will provide such
   data feed on or before noon on each Sunday and [Company] will utilize such data in
   conjunction with the Licensed Software to produce new markdown recommendations
   which will be made available to Customer within the Licensed Software within 24 hours,
   on or before noon on the immediately following Monday. From time to time the parties
   may mutually agree upon a revised delivery schedule for Customer’s data feed and/or the
   weekly markdown recommendations.

-3TSB-A-09(19)S
Sales Tax
May 21, 2009

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3. Scope of License: Customer’s License to the Licensed Software is limited to
   Customer’s . . . branded stores and . . . branded or co-branded internet “stores” or “sales
   areas” in existence during the Term, . . .
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5. Renewal Options: Customer has the option to continue use of the Licensed
   Software for a renewal term (“Renewal Term”) by selecting . . . one of the options below.
   In order to exercise one of such options, Customer must provide written notice to
   [Company] prior to the end of the Initial Term.
   (a) Renewal Option A: Two year term following expiration of the Initial Term.
   The License Fee for Renewal Option A is $50,000 per month, due on the first day of each
   month of the Renewal Term. . . .
   (b) Renewal Option B: Perpetual term. The effective date of Customer’s
   exercise of Renewal Option B may not be prior to end of the first year of the Initial Term.
   The License Fee for Renewal Option B is $1.2 million. . . .
   In order to exercise either Renewal Option set forth above, Customer must elect to
   either (i) have [Company] continue hosting the Licensed Software for an additional two
   year period following the Initial Term . . . (ii) host the Licensed Software internally and
   have [Company] provide Remote Software Management Services for a two year period
   following the Initial Term . . . or (iii) host the License Software internally, without
   [Company] providing Remote Software Management Services. . . .
   Petitioner also provided a sample Hosting Agreement which provides, in part, as follows:
   1.1. Hosting Services. [Company] agrees to provide to Customer services for
   hosting software licensed to Customer by [Company] (the “Licensed Software”) pursuant
   to the Master Software License and Services Agreement . . . between [Company] and
   Customer (the “License Agreement”), and for hosting all other software required for the
   operation of the Licensed Software, as specified in the License Agreement, including
   software provided to [Company] by Customer . . . The services provided by [Company]
   hereunder to permit Customer to remotely access and use the Software are referred to as
   the “Hosting Services”.
   1.2. Technical Support. As part of the Hosting Services, [Company] will provide
   the support and maintenance for the connection to the Licensed Software set forth under
   the Support Levels section of Exhibit A.

-4TSB-A-09(19)S
Sales Tax
May 21, 2009

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:
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(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
therefor.
(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,
as a separate component, or otherwise, and regardless of the medium by means of which
such software is conveyed to a purchaser. . . .
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(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. . . 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(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided.

-5TSB-A-09(19)S
Sales Tax
May 21, 2009

Section 1105(c) of the Tax Law imposes sales tax upon receipts from the sales, except
sales for resale, of certain enumerated services.
Section 1115(o) of the Tax Law provides:
Services otherwise taxable under subdivision (c) of section eleven hundred five or under
section eleven hundred ten shall be exempt from tax under this article where performed on
computer software of any nature; provided, however, that where such services are provided to a
customer in conjunction with the sale of tangible personal property any charge for such services
shall be exempt only when such charge is reasonable and separately stated on an invoice or other
statement of the price given to the purchaser.
Technical Services Bureau Memorandum entitled State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software dated March 1, 1993,
TSB-M-93(3)S, provides, in part:
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. . .
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. Thus, a payment made by a customer on or after September 1, 1991,
for a license to use, or for the rental or lease of prewritten software is subject to sales or
use tax. . . .
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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. . . .
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-6TSB-A-09(19)S
Sales Tax
May 21, 2009

Sale of Software Upgrades
Generally, the sale of a revision or upgrade of prewritten software is subject to tax
as the sale of prewritten software. If, however, the software upgrade is designed and
developed to the specifications of a specific purchaser, its sale to that specific purchaser
would be exempt as custom software.
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Services taxable under section 1105(c) of the Tax Law are exempt from tax under
section 1115(o) of the Tax Law where performed on any computer software. However,
where such services to be performed on software are sold in conjunction with the sale of
tangible personal property, such as prewritten software, the charge for such services is
exempt only if it is reasonable and separately stated on the invoice or billing statement
given to the customer.
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Programming and systems analysis are also exempt services. However, where
these services are rendered in conjunction with the sale of prewritten software, the charge
for the service is exempt from tax only when the charge for the service is reasonable and
separately stated on the invoice or billing statement given to the customer.
Opinion
Company has developed software that provides each customer with weekly markdown
recommendations based upon weekly sales data supplied by the customer. This software assists
each customer in managing its clearance of merchandise. The information being processed is
provided by the customer, is confidential in nature and is for the exclusive use of the customer.
The data and software may reside on a remote server. Company enters into a license agreement
(the Agreement) with customers which permits each customer or its employees to remotely
access the weekly reports generated by Company’s system. The customer has the option to
accept, reject or modify the recommended markdowns indicated in the report.
Pursuant to the Agreement, Company is selling a license to use prewritten computer
software to customers that is subject to sales tax under section 1105(a) of the Tax Law. Prewritten computer software is defined as tangible personal property subject to State and local sales
tax, “regardless of the medium by means of which the software is conveyed to a 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 “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),

-7TSB-A-09(19)S
Sales Tax
May 21, 2009

conditional 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
customer even though the customer never receives the code on a tangible medium or by
download.
The Agreement provides that the customer is granted a license to use Company’s
software, and makes numerous references to the customer’s use of the software. The Agreement
allows the customer to make a copy of the software for installation on a server or other host
computer. Upon renewal of the Agreement, the customer may elect to host the software
internally. The terms of the Agreement make clear that the customer receives the right to use
Company’s software. This software is considered to be prewritten software. Accordingly, the
monthly license fees charged by Company for its software are subject to sales tax under section
1105(a) of the Tax Law. The situs of the sale for purposes of determining the proper local tax
rate and jurisdiction is the location of the customer or its agents or employees who use the
software. If the customer’s employees who use the software are located both in and out of
New York State, Company must collect tax based on the portion of the receipt attributable to the
users located in New York. See KPMG LLP, Adv Op Comm T & F, January 31, 2003,
TSB-A-03(5)S.
Company makes separate charges for implementation services and technical support.
Such services appear to involve modifying Company’s software to meet a customer’s business
requirements, and repairing or servicing the software as necessary. Separately stated and
reasonable charges for making custom modifications to prewritten software, or for repairing or
servicing software are exempt from sales tax. Tax Law, §§ 1101(b)(14) and 1115(o). See
TSB-M-93(3)S, supra. Therefore, Company’s separately stated and reasonable charges for
implementation services and technical support are not taxable.
Company charges fees for hosting the software and client data on its server. Such fees
are separately stated from the software licensing fees. Hosting services by themselves are not
included among the enumerated services that are subject to tax. See Alan J. Goldstein/The
Computer Studio, Adv Op Comm T&F, December 29, 1997, TSB-A-01(21)S; CAV CORP d/b/a
Stone Soup Multimedia, Adv Op Comm T&F, December 29, 1997, TSB-A-97(87)S. However,
when hosting services are sold in conjunction with prewritten computer software, even though
the charges for the hosting services and software are separately stated, if such services and
software cannot be separately purchased, the combination of items must be considered
as one and, thus, subject to sales tax as a single purchase. See Penfold v State Tax Commission,

-8TSB-A-09(19)S
Sales Tax
May 21, 2009

114 AD 2d 696 [1985]. Accordingly, if a client can only purchase a license to use Company's
software in conjunction with hosting services provided by Company, then charges for the hosting
services are considered to be an expense of the software license and are subject to sales tax. If
Company’s hosting services are optional, and Company sells hosting services to persons who do
not purchase a license to use Company’s software, then in the case of bundled sales Company’s
charges for hosting services will not be taxable if the charges for software and hosting services
are separately stated and reasonable. In a bundled transaction, the separately stated charges for
hosting services and software will be considered reasonable if they reflect the charges for these
items when sold separately.

DATED: May 21, 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.