New York Advisory Opinion TSB-A-09(37)S: Is a monthly license fee for the right to use a payroll processing provider's software, and are related payroll processing charges, subject to New York sales tax?

Plain-English summary

The National Football League, headquartered in New York, paid a provider a monthly fee for processing payroll checks and tracking payroll data. NFL personnel entered payroll data into computers in New York, which was transmitted via the provider's secure website to the provider's own computers in Michigan. The provider then printed employees' paychecks, pay statements, and management reports, delivering them to the NFL's New York office for distribution to employees nationwide, and separately filed the NFL's payroll tax returns using the same data. The provider's agreement with the NFL granted a license to use its "Application Programs" (prewritten human-resources and payroll software) solely for the NFL's own internal business purposes, hosted entirely on the provider's Michigan computers - no software code was ever delivered to or downloaded by the NFL. The provider charged a flat $6,000 monthly license fee for this software access, plus separate per-check and per-statement processing charges, a flat delivery fee, and a per-copy charge for management reports.

The Department analyzed the $6,000 monthly license fee first. New York's sales tax reaches "any transfer of title or possession or both, exchange or barter, rental, lease or license to use" for consideration, and prewritten computer software is expressly included in "tangible personal property" regardless of the medium by which it's conveyed to a purchaser. Because the license gave the NFL the right to use, access, and direct the use of the software for its own internal purposes - constructive possession, in other words - the fact that the underlying code physically resided only on the provider's Michigan servers was irrelevant. The software could be used "just as effectively" without ever transferring a physical copy. The Department concluded the monthly license fee was a taxable sale of prewritten computer software, with the taxable situs determined by where the NFL's employees actually used the software (apportioned if usage spanned inside and outside New York).

For the remaining charges, the Department drew several distinctions. Ordinary bookkeeping-type services (like filing the NFL's payroll tax returns) generally aren't separately taxed, and personal/individual information services can qualify for a narrow exclusion under section 1105(c)(1) if the information isn't substantially duplicated across multiple clients' reports. But if the per-check and per-statement charges, delivery fee, or management-report fees were really just charges for printing and physically delivering materials that the software had already processed, those charges would instead be taxable sales of printed tangible personal property. In all scenarios, though, the $6,000 monthly license fee for the software itself remained taxable regardless of how the other charges were characterized.

What this means for you

Businesses licensing remotely-hosted payroll, HR, or other software

A monthly license fee for the right to use software is generally subject to New York sales tax even if the software runs entirely on the vendor's own out-of-state servers and no code is ever downloaded - "constructive possession" through remote access is enough to make it a taxable license, and New York taxes it based on where your employees actually use the software.

Companies with employees using cloud/remote-hosted software both in and out of New York

Expect to apportion the taxable receipt based on the location of the employees actually using the software, not the location of the servers or the vendor - if usage spans multiple states, only the New York-attributable portion is subject to New York tax.

Payroll and HR service providers billing separately for software licenses, processing, and delivery

Structure invoices carefully: a genuine, separately-stated, reasonable charge for bookkeeping-type services (like tax return filing) may escape sales tax, but charges that are really just for printing and physically delivering already-processed materials are taxable sales of printed matter - and the software license fee itself is taxable regardless of how you characterize the other line items.

Common questions

Q: If a software vendor never gives us a physical copy or download of their software, is our license fee still taxable in New York?
A: Yes, under this ruling - a license granting the right to use, access, or control prewritten software constitutes a taxable transfer of possession even when the code stays entirely on the vendor's own servers and the customer only accesses it remotely.

Q: Where is this kind of software license taxed if our employees use it from multiple states?
A: Based on the location of the employees actually using the software - the ruling directs apportionment of the taxable receipt to the portion attributable to use from New York locations if usage spans in and out of state.

Q: Are all the fees a payroll provider charges taxable, or just the software license fee?
A: It depends on what each charge is really for - reasonable, separately-stated bookkeeping service charges (like tax filing) generally aren't taxed, and certain personal information services may be excluded, but charges that amount to printing and delivering finished materials are taxable sales of tangible personal property, and the software license fee itself is taxable in every scenario the ruling discusses.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a09_37s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(37)S
Sales Tax
August 25, 2009

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

PETITION NO. S070730A

On July 30, 2007, the Department of Taxation and Finance received a Petition for Advisory
Opinion from National Football League, 280 Park Avenue, New York, New York 10017
The issue raised by Petitioner, National Football League, is whether its purchases of payroll
processing and related items described below are subject to sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner pays a provider (hereinafter “Provider”) a monthly fee for processing payroll
checks and tracking payroll data. Petitioner's personnel enter Petitioner's payroll data into
Petitioner's computers in New York. This data is transferred via Provider’s secure website to
Provider’s computers located in Michigan. Using this information, Provider prints Petitioner's
employees’ payroll checks, pay statements, and management reports and has them delivered to
Petitioner's corporate office in New York. The checks are subsequently distributed by Petitioner's
personnel to Petitioner's employees throughout the United States. Provider also uses this data to
track Petitioner's payroll taxes, produce W-2’s for distribution to Petitioner's employees, and file
payroll tax returns for Petitioner.
Annex B of the agreement between Provider and Petitioner (the Agreement) states that
Provider will perform payroll services for Petitioner. Annex Z of the Agreement specifies that the
payroll services include payroll processing (including check stuffing and signing, direct deposit, and
check reconciliation services); tax filing services; furnishing pay statements; and providing various
payroll reports.
The Agreement also provides that Provider will furnish computer software (“Application
Programs”) to Petitioner in connection with the payroll services. Annex F of the Agreement refers
to the software as “services,” but defines these “services” as “(i) the grant to [Petitioner] of a license
to the Application Programs listed in Annex Z . . . and (ii) operation of the System….” The
“System” is defined as “the Application Programs as run on the [Provider] hardware using the
operating system software.” The Agreement grants to Petitioner a “right and license to use solely
for [Petitioner’s] internal business purposes the Application Programs listed in Annex Z.” Annex
Z of the agreement lists as Application Programs various software products used for human
resource and payroll administration functions. The Agreement provides that Petitioner “will use the
Application Programs only to process its own internal data and only in connection with its receipt of
[Provider’s] Payroll Services.” The Application Programs are hosted on Provider’s computers in
Michigan.

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Sales Tax
August 25, 2009

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A sample Provider invoice charges Petitioner a monthly license fee of $6,000 for the
“services" covered by Annex F of the Agreement. In addition to the monthly license fee, Provider
also bills Petitioner separate charges for:
(1)

processing and printing checks and payroll statements based on the number of
checks processed (@$1.00 each) and statements printed (@$ .19 each);

(2)

delivering checks and statements to Petitioner’s corporate office (a flat fee [$7.00]);
and

(3)

providing copies of management reports ($50.00 each) to Petitioner.

The filing of Petitioner's monthly payroll taxes is included in the above-stated fees.
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, or any agreement therefor,
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. . . .
*

*

*

(14) Pre-written computer software. Computer software (including prewritten 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

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Sales Tax
August 25, 2009

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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(a) of the Tax Law provides, in part:
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 1105(c) of the Tax Law imposes sales tax upon the receipts from every sale,
except for resale, of certain enumerated services.
Section 526.7 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. (1) The words sale, selling or purchase mean any transaction
in which there is a transfer of title or possession, or both, of tangible personal
property for a consideration.
(2) Among the transactions included in the words sale, selling or purchase are
exchanges, barters, rentals, leases or licenses to use or consume tangible personal
property.
*

*

*

(b) Consideration. The term consideration includes monetary consideration,
exchange, barter, the rendering of any service, or any agreement therefor. Monetary
consideration includes assumption of liabilities, fees, rentals, royalties or any other
charge that a purchaser, lessee or licensee is required to pay.
*

*

*

TSB-A-09(37)S
Sales Tax
August 25, 2009

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(e) Transfer of possession. (1) Except as otherwise provided in paragraph (3)
of this subdivision, 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.
*

*

*

(4) Transfer of possession with respect to a rental, lease or license to use, means that
one of the following attributes of property ownership has been transferred:
(i) custody or possession of the tangible personal property, actual or
constructive;
(ii) the right to custody or possession of the tangible personal property;
(iii) the right to use, or control or direct the use of, tangible personal property.
Opinion
Petitioner's personnel enter Petitioner's payroll data into Petitioner's computers in New York.
This data is transferred via Provider’s secure website to Provider’s computers located in Michigan.
Using this information Provider prepares and provides Petitioner with its employees’ paychecks and
pay statements which are delivered to Petitioner in New York, for fixed fees per check and
statement. Petitioner then provides the payroll checks and statements to its employees both within
and outside New York. Provider furnishes management reports to Petitioner and charges $50.00
per copy. Provider also files Petitioner's payroll tax returns for no additional charge. Provider’s
monthly charges to Petitioner include a license fee of $6,000 for “services” relating to Petitioner’s
use of Provider’s Application Programs.
The Agreement between Provider and Petitioner makes clear that Provider’s license fee is a
charge for granting to Petitioner a license to use the Application Programs. The Application
Programs are prewritten computer software. Accordingly, Provider's charges for the license to use
the Application Programs 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 a purchaser.” Section 1101(b)(6) of the
Tax Law. The sale of prewritten computer software is subject to tax as the sale of tangible personal
property. See sections 1101(b)(6) and 1105(a) of the Tax Law. 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), conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor.” Section
1101(b)(5) of the Tax Law. Section 526.7(e) of the Sales and Use Tax Regulations 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.” Section 526.7(e)(4) further provides that, with respect to a “license to use,” a transfer of

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TSB-A-09(37)S
Sales Tax
August 25, 2009

possession has occurred if there is a transfer of 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.
Provider’s Application Programs perform a variety of automated payroll or other human
resource and administrative functions, and the license to use the software gives Petitioner the right
to access and use the software “for [Petitioner’s] internal business purposes” and “to process its own
internal data.” The sale to Petitioner of the license to use the software constitutes a transfer of
possession of the software. In such case, Petitioner has constructive possession of the software, and
gains the “right to use or control or direct the use” of the software. Petitioner has the right to use
the software to upload and manipulate its payroll information, and to perform other human resource
and administrative functions. This would be true even if no “copy” of the software is transferred to
Petitioner. Absent a showing that Provider’s software was created and designed specifically for
Petitioner’s use, the monthly license fee of $6,000 for the license to use Provider’s software
constitutes receipts from the sale of prewritten computer software.
Accordingly, the sale of the license to use Provider’s Application Programs to Petitioner in
New York, as described in the preceding paragraph, would be subject to State and local 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 associated with the license to use (i.e., the location of
Petitioner’s employees that use the software). If Petitioner’s employees used the software from
locations both in and out of New York State, Petitioner would owe tax based on the portion of the
receipt attributable to its use from locations in New York.
In addition to licensing to Petitioner the use of its software (“Application Programs”), it
appears from the facts in this Opinion and terms of the Agreement that Provider may be performing
other services for Petitioner. After Petitioner’s payroll has been processed by the software, Provider
for additional fees will print the actual paychecks and pay statements, and for a separate charge
physically deliver the checks and statements to Petitioner in New York. Petitioner then distributes
the checks and pay statements to its employees. Using the information obtained via the software,
Provider will file payroll tax returns with the appropriate authorities on Petitioner’s behalf and send
management reports to Petitioner.
To the extent these additional services include components that might be considered to be an
information service they may be exempt from tax under section 1105(c)(1) of the Tax Law as
information services which are personal or individual in nature, provided that the information
furnished to a client is not or may not be substantially incorporated in reports furnished to other
persons. Provider’s accounting/bookkeeping service of filing Petitioner’s payroll tax returns is not
an enumerated service of a kind subject to sales tax. Petitioner states that no separate charge for
such service is noted on its customer invoices. However, if a reasonable and separate charge for
such service were made, the amount for such service could be excluded from the taxable receipts.
If, using the information compiled by the software, Provider sells additional book-keeping services

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TSB-A-09(37)S
Sales Tax
August 25, 2009

to Petitioner, the charges for these services (i.e., producing individual employees’ paychecks and
pay statements in connection with the bookkeeping services) based on the number of checks
processed @$1.00 each and statements printed @$.19 each, and the flat fee of $7.00 for delivery of
the checks and statements are not subject to sales tax, provided that these charges are reasonable.
See Cincinnati Bell Information Systems, Inc., Adv Op Comm T & F, July 27, 1999, TSB-A99(37)S. However, if the software has processed the payroll information as discussed above, and
Provider is merely charging Petitioner for printing and delivering checks and pay statements, then
Provider will be selling printed materials to Petitioner and these charges (including the charge for
delivery) will be subject to sales tax under section 1105(a) of the Tax Law. See MGI Output
Technologies, Inc., Adv Op Comm T&F, December 13, 1996, TSB-A-96(77)S. In either
circumstance, the monthly license fee of $6,000 for the use of the software (“Application
Programs”) is subject to tax.
If Provider’s charges to Petitioner for the management reports are merely a taxable
photocopying or printing charge for a report produced by the software, then such charges are
subject to sales tax under section 1105(a) of the Tax Law as charges for sales of tangible personal
property. Alternatively, if Provider adds significant intelligence to Petitioner's data that is derived
from a database the provision of the management reports may be subject to the tax on information
services pursuant to section 1105(c)(1) of the Tax Law, unless the reports come within the
exclusion for personal and individual information discussed above.

DATED: August 25, 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.