Are sales of an automated speech-application program -- delivered as licensed, hosted, or managed-on-premise -- subject to New York sales and use tax?

Plain-English summary

A company provides automated speech applications that its clients use to handle phone calls -- natural-language call routing, self-service transactions, and product/warranty support (for example, looking up a caller's warranty expiration and transferring in-warranty callers to a call center). It offers the application in three deployment models and sometimes charges separately for professional services. It asked whether its sales are subject to sales and use tax.

The Office of Counsel concluded all three models are sales of taxable prewritten software.

• All three models = taxable prewritten software. Prewritten software is tangible personal property "regardless of the means by which it is conveyed" (Tax Law 1101(b)(6)), and retail sales of TPP are taxable (1105(a)); a "sale" includes a license to use. In each model -- (1) licensed for the client's internal use, (2) hosted at the company's out-of-state network operations center, and (3) managed-on-premise on the client's (or a partner's) hardware -- the client can access the software to make configuration changes and interact with its customers. Granting those rights to use or control the software makes each a taxable sale of prewritten software.
• Sourced to where the client's users are. A license to use is sourced to where possession is transferred (20 NYCRR 526.7(e), (e)(4)). "Constructive possession" / the right to use or control software is determined by where the client uses or directs use of the software -- not where the code sits (TSB-A-08(62)S). So the situs is the location of the client's employee-users (those who make configuration changes, staff the call centers that receive forwarded inquiries, or otherwise interact with the software). If users are in and outside New York, the company collects tax on the NY-attributable portion of the receipt (TSB-A-03(5)S), and may rely on the client's information to determine user locations (Tax Law 1142(4)). The company was cautioned that this is fact-dependent and each transaction must be analyzed separately.
• Maintenance and support. Charges for training, consulting, and diagnostic/troubleshooting support are not taxable (Tax Law 1115(o); TSB-M-93(3)S). But if maintenance bundles both prewritten software and those services for a single charge, the whole charge is taxable; separately stated, reasonable charges for the services are not taxable.
• Telephony. The company's charges for telephony (including its added "convenience fee") are taxable to the extent the service is intrastate (Tax Law 1105(b)(1)(B); 20 NYCRR 527.2(d)). By providing telephony, the company is also subject to the 186-e excise tax on telecommunication services; its own purchases of telecom may qualify for the resale exclusion from both taxes if resold to clients as such.

What this means for you

Software/SaaS and speech/IVR providers

Don't assume that hosting the software or running it at an out-of-state data center makes it nontaxable. If your customers get the right to use, configure, or control the program -- even just to make predefined configuration changes or to have it interact with their callers -- New York treats it as a sale of taxable prewritten software. Then source the sale to where the customer's users are, allocate the NY share, and (you may) rely on the customer's information for those locations. If you bundle nontaxable support with the software, separately state the reasonable support charges or the whole bill is taxable.

Anyone who also provides telephony

Providing telephone/telephony service can pull you into two taxes: sales tax on intrastate telephony (1105(b)(1)(B)) and the 186-e telecom excise. Telecom you buy to resell can qualify for the resale exclusion.

Common questions

Q: Our software is hosted out of state and customers just call a toll-free number -- is that still taxable?
A: Yes, if the customer gets the right to use or control the software (e.g., make configuration changes, have it interact with its callers). The hosting location and the location of the code don't control; the customer's use does.

Q: How do we decide how much tax to collect when the customer has users in many states?
A: Source the sale to the location of the customer's employee-users of the software and collect NY tax on the portion attributable to NY users. You may rely on the customer's information about where its users are (Tax Law 1142(4)).

Citations and references

• Tax Law section 1101(b)(6) (prewritten software is tangible personal property)
• Tax Law section 1105(a) (sales tax on tangible personal property); section 1105(b)(1)(B) (intrastate telephony)
• Tax Law section 1115(o) (services performed on software exempt); section 1142(4) (vendor may rely on purchaser info)
• Tax Law section 186-e (excise tax on telecommunication services)
• 20 NYCRR 526.7(e), 526.7(e)(4) (situs / constructive possession of a license to use); 20 NYCRR 527.2(d)
• TSB-A-08(62)S (situs = where software is used, not where code sits); TSB-A-03(5)S; TSB-M-93(3)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a10_10s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(10)S
Sales Tax
March 16, 2010

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

PETITION NO. S080430A

Petitioner, name redacted, asks whether its sales of its automated speech application programs are
subject to New York State sales and use taxes. We conclude that petitioner’s three deployment models
for its speech application program constitute sales of prewritten software and are subject to sales and use
tax.
Facts
Petitioner provides speech applications used by its clients to provide automated customer
experiences via the telephone. The applications automate virtually any type of call, including natural
language call-routing, self-service transactions and product support. The service does not involve taking
or relaying of messages. One example of petitioner’s service involves a client that wants to be able to
verify warranty information to its customers, including the expiration date. The client gives the warranty
expiration date information to petitioner. The client provides its customer with a toll-free number to call
for warranty information. The toll-free calls are answered by petitioner’s automated service, which is
able to provide the necessary information through software speech applications and transfer in-warranty
callers to a call center. While the voice application software is designed to resolve most caller inquiries,
generally the voice application software gives callers the option of connecting with a representative at the
purchaser's call center and in some cases even forwards information pertinent to the caller's inquiry to the
call center.
The applications can be delivered in the three different models. In addition, petitioner may also
provide professional services for a separate charge to its clients in certain deployment models.
1. LICENSED TO CLIENTS FOR INTERNAL USE. In this delivery model the client receives
prewritten software that the client deploys on its own computer hardware equipment for use internally.
The client has the option of purchasing additional software maintenance and support agreements, and
typically will do so, and continue to renew such maintenance and support agreements for extended
periods of time beyond the initial license period. All software (under both the original license and
subsequent updates/upgrades) is delivered electronically over the Internet.
2. HOSTED. In this delivery model the software running petitioner’s speech application is
hosted by petitioner remotely in its leased network operations center ("NOC"), which is not located in
New York. Petitioner manages the applications and related software and technology using its own
computer software and hardware equipment. The client purchases a toll-free number which connects to
petitioner’s NOC. The client then gives out that number for customers to call for pertinent information.
The client is given access to a website where it can view certain information about the calls being handled
by the speech application service, including the volume and length. The website enables the client to
print out a report exclusively regarding that information. The client has no control over the format of that
report. Petitioner does not furnish that information to anyone other than the client. Clients only have
limited control over how the speech application software runs; for example, through the website, clients

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can perform minor predefined configuration changes to the application (e.g., enabling emergency
messages or changing hours that their call center is open). Beyond this, the speech application software is
controlled by petitioner.
3. MANAGED ON PREMISE. In this delivery model, clients are granted a license to use the
service, and have remote access to the applications and related software and technology "managed" by
petitioner residing on the hardware equipment owned by the client or a third-party partner of the client.
The hardware equipment can be located either inside or outside of New York State. Under this
deployment model, the clients have the same degree of control over how the speech application software
runs as in the “hosted” model discussed above.
Under deployment models (2) and (3), petitioner may also obtain, at the client’s request,
telephony services to facilitate the service on behalf of the client. In these cases petitioner will charge
back the client (at petitioner's cost) for these additional services with an added “convenience fee” charge.
In certain deployment models, clients have the option of purchasing certain computer-related
services, such as assistance with software installation and configuration, user training, support,
troubleshooting, design, development, testing, and project management. These services can be performed
either on- or off-site.
Analysis
Prewritten software is considered tangible personal property “regardless of the means by which it
is conveyed to a purchaser” (Tax Law section 1101[b]6]). Retail sales of tangible personal property are
subject to sales tax (Tax Law section 1105[a]). A sale includes “[a]ny transfer of title or possession or
both” and includes a “license to use.” Here, under all three deployment models, petitioner’s clients have
the ability to access the software to at least make minor predefined configuration changes to the
application. Furthermore, depending on the particular voice application, the clients can use the software
to interact with their customers (e.g., a voice application that forwards details of a caller’s inquiry to a call
center representative who is then able to use that information to help the customer). By providing its
clients with these rights to use or control the voice application software, petitioner is making taxable sales
of prewritten software.
Sales Tax Regulation section 526.7(e) provides that, in general, “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.” Sales Tax Regulation section 526.7(e)(4) further
provides that, with respect to a “license to use,” a transfer of possession has occurred if the customer
obtains actual or constructive possession, or if there has been a transfer of “a transfer of the right to use,
or control or direct the use of tangible personal property.” “[C]onstructive possession” of software or “the
right to use, or control” software for purposes of Regulation section 526.7(e)(4) is determined based on
the location where the client uses or directs the use of the software and not on the location of the code
embodying the software (TSB-A-08(62)S, November 24, 2008). Accordingly, the situs of petitioner’s
sales for purposes of determining the proper local tax rate and jurisdiction is the location of the client’s
employees who use the software, including the employees who make the configuration changes, or who
staff call centers to which voice application forwards inquiries, or any other employees who interact with
the software. If the client’s employees who use the software are located both in and outside of New York
State, petitioner should collect tax based on the portion of the receipt attributable to the client’s employee
users located in New York. (See TSB-A-03[5]S). As described in that Advisory Opinion, petitioner may
rely on information received from its client to determine the location of its clients’ employee users (Tax

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March 16, 2010

Law section 1142[4]). Given the general nature of the facts provided by petitioner and the multiple ways
the voice application software is used by petitioner's clients, petitioner is cautioned that application of
these sourcing principles is fact-dependent and requires that each transaction be analyzed separately.
Petitioner’s additional charges for software maintenance and support services are not taxable to
the extent those charges consist of training, consulting, diagnostic and troubleshooting support (Tax Law
section 1115(o); Technical Services Bureau Memorandum, TSB-M-93(3)S, dated March 1, 1993). To the
extent that the maintenance involves both the sale of prewritten software and the above services for a
single charge, the whole charge would be taxable. Separately-stated and reasonable charges for the
described maintenance and support services would not be taxable (Id.). Petitioner’s additional charges for
providing telephony, including its added convenience fee charge, would also be taxable to the extent that
service is intrastate in nature (Tax Law section 1105[b][1][B]; Sales Tax Reg. section 527.2[d]).
Moreover, by virtue of providing telephony, petitioner is subject to Tax Law section 186-e, which
imposes an excise tax on intrastate and certain interstate and international telecommunication services.
Petitioner’s purchases of telecommunication services may qualify for the resale exclusion from both the
sales and excise taxes if the telecommunication services are resold to its clients as such (Tax Law sections
186-e[2][b][1]; 1105[b][1]).

DATED: March 16, 2010

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.