Are receipts for managed IT support services -- monitoring, management, backup, security -- subject to NY sales tax?

Plain-English summary

The petitioner sells managed IT support services -- IT asset monitoring, IT asset management, and offsite data backup -- delivered from a New Jersey data center over the Internet, using software agents installed on the customer's equipment that only the petitioner uses. It asked which of these are taxable. The answer splits by what is actually sold.

The Office of Counsel concluded:

• Integrated monitoring/management packages = not taxable. The sales tax status of an integrated service follows its primary function. Here that function is to help the customer operate and manage its IT system, which is not an enumerated taxable service. Offsite data backup and help desk support are also unenumerated and not taxable.
• Sold separately, each item keeps its own status:
• Software upgrades are taxable if they are prewritten software (1105(a)); custom software developed to a purchaser's specs is not taxable.
• Installing software or upgrades is not taxable (1115(o)), even if the software is tangible personal property.
• Protective services are taxable under 1105(c)(8) when the customer's IT assets are in NY: security against unauthorized access, anti-virus/anti-spyware, monitoring for unauthorized use with reports, and monitoring that just notifies the customer of a malfunction. But monitoring that gives operational information beyond malfunction notice (efficiency reports, unused storage capacity) is not a protective service even if it touches firewalls.
• Services performed on software are exempt -- any otherwise-taxable 1105(c) service is exempt when performed on computer software, if the charge is reasonable and separately stated.
• Remotely changing hardware settings to fix malfunctions (when no software is modified) is maintaining/servicing tangible personal property, taxable under 1105(c)(3).
• The provider's own software agents: the petitioner isn't selling the agents (they act for and report to the petitioner). But if it installs an agent in NY, it owes sales or use tax on that software (1110(a)) unless the software was created specifically for it or by it and not sold.

What this means for you

Managed IT service providers (MSPs)

Bundle and your integrated monitoring/management offering rides as a nontaxable unenumerated service. Unbundle and the pieces light up individually: prewritten software, anti-virus/security/protective monitoring, and hardware repair are taxable; backup, help desk, software installation, and work performed on software are not. Separately state and keep reasonable any work done on software to preserve its 1115(o) exemption -- and remember you owe use tax on the agents you deploy in NY.

Business customers

A flat managed-IT package generally won't carry NY sales tax, but line-item add-ons -- a security/anti-virus service, a prewritten software upgrade, or a hardware fix -- can.

Common questions

Q: Is a managed IT monitoring package taxable in NY?
A: No -- its primary function (helping you run your IT system) is an unenumerated service.

Q: Why is anti-virus taxable but backup isn't?
A: Anti-virus and security monitoring are protective services taxable under 1105(c)(8); offsite backup is an unenumerated service.

Q: Is fixing my hardware remotely taxable?
A: Yes, if only hardware is adjusted -- that's servicing tangible personal property under 1105(c)(3). Work done on your software is exempt under 1115(o) if separately stated.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property; prewritten software)
• Tax Law section 1105(c)(3) (tax on maintaining/servicing tangible personal property)
• Tax Law section 1105(c)(8) (tax on protective and detective services)
• Tax Law section 1110(a) (compensating use tax)
• Tax Law section 1110(g) (use tax on self-produced software sold in regular course)
• Tax Law section 1115(o) (services performed on computer software exempt)
• Tax Law section 1101(b)(14) (definition of prewritten computer software)
• TSB-M-93(3)S (taxation of computer software)

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_14s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-10(14)S
Sales Tax
April 8, 2010

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S081121A

On November 21, 2008 the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted. Petitioner asks whether its receipts for providing managed
information technology (IT) support services are subject to sales tax. Some of the services in question may
be subject to New York sales tax; others are not subject to sales tax.
Facts
Under the product name, name redacted, Petitioner sells a number of IT support services involving
IT asset monitoring, IT asset management, and offsite data backup management. All the type of services
redacted services in question are delivered through servers located at a data center in New Jersey. The
services are administered by connecting to the customer location over the Internet.
The services employ software agents that are used by Petitioner to administer the services and
installed at the customer’s location on IT assets. The agents can be used to monitor a customer’s IT assets, to
apply software upgrades to the IT assets, or to change system settings or configurations. Only Petitioner uses
the software agents.
Some of the type of services redacted services in question are sold as standard packages: Basic,
Standard, Enhanced, and Premium. Each of these packages has multiple IT support features and functions:
automated systems management (e.g., scheduling the cleanup or defragmenting of computer disks or files);
help desk systems (systems for routing internally or externally requests for assistance with IT problems and
the tracking of how the requests for assistance are being handled); management and operational reporting
(e.g., providing a customer with an inventory of its IT assets); PC remote control and remote technical
support (remotely accessing customer IT assets to diagnose and fix problems); anti-virus/anti-spyware
protection, performance monitoring, patch management, security management, software deployment (i.e.,
installing software or software upgrades); and security management (e.g., detecting new devices, blocking or
controlling network access). Petitioner sells some of the components of the packages as discrete services and
also sells optional IT monitoring and management services that are not part of the packages.
For offsite data backup, the customer installs on its server(s) a software agent that periodically backs
up the customer’s data over the Internet to Petitioner’s data center. If a customer has a large volume of data
to back up, Petitioner supplies a backup appliance, which looks like a small server. This appliance will back
up all the servers at that location, and then transmit data via the Internet to Petitioner’s data centers.
Petitioner monitors all backup activities for the customer to make sure all backup jobs are working properly.
When needed, Petitioner remotely assists the customer to recover lost files or data from the backup.
Analysis
Petitioner’s packages of integrated IT monitoring and management services are not subject to sales
tax. The sales tax status of an integrated service depends on the primary function of the service. The
primary function of Petitioner’s integrated IT monitoring and management service is to assist a customer in

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TSB-A-10(14)S
Sales Tax
April 8, 2010

the operation and management of its IT system. This activity is not among the enumerated services subject
to sales or use tax.
If customers have the option to purchase separately goods and services offered under the rubric IT
asset management and monitoring service, each item that is purchased discretely will have a distinct sales tax
status, and sales tax will be due on the receipts for each taxable good or service. The following paragraphs
address the taxability of products if sold separately.
Petitioner is not selling software when it installs software agents on its customers’ IT assets. The
software agents, which act for and report to Petitioner, are used by Petitioner to perform its services. If
Petitioner installs a software agent at a customer location in New York State, Petitioner will owe sales or use
tax on the software unless it was created specifically for Petitioner or Petitioner created the software and does
not sell it. Tax Law section 1110(a). If the software was purchased by Petitioner from a third party and was
not created specifically for Petitioner (i.e., the software was prewritten software as defined in Tax Law
section 1101(b)(14)), Petitioner’s tax is based on the consideration paid for the software. If Petitioner
created the software and does sell it in the regular course of business, the use tax is based on the
consideration paid for the blank medium, such as disks or tapes, used in conjunction with the software. Tax
Law section 1110(g).
Petitioner’s receipts for the sale of software upgrades are subject to sales tax under Tax Law section
1105(a) if the upgrades constitute prewritten computer software as defined in Tax Law section 1101(b)(14).
If Petitioner is not furnishing prewritten computer software as part of a software upgrade, but rather is
furnishing custom software designed and developed to the specifications of a specific purchaser, the software
upgrade is not subject to sales tax. See TSB-M-93(3)S, State and Local Sales and Compensating Use Taxes
Imposed on Certain Sales of Computer Software, March 1, 1993.
Petitioner’s fees for installing software or software upgrades are not subject to sales tax even if the
software constitutes tangible personal property for purposes of Tax Law section 1101(b)(14). Tax Law
section 1115(o).
Any security services separately sold by Petitioner that are designed to prevent unauthorized access
to or use of a customer’s IT assets would be subject to sales tax under Tax Law section 1105(c)(8) as a
protective service, if the IT assets are located in New York. Similarly, the service of monitoring for
unauthorized access to or use of a customer’s IT assets and issuing reports to the customer about those
unauthorized activities would be taxable protective services if the IT assets are located in New York. Antivirus/anti-spyware protection comes within the definition of a protective service and would be taxable under
section 1105(c)(8) when the customer’s IT assets are located in New York. Further, the service of
monitoring a customer’s IT assets just to notify the customer when an asset malfunctions would constitute a
taxable protective service. However, the monitoring of IT assets in order to provide a customer with
operational information as to the functioning of IT assets that goes beyond just notice of IT malfunctions,
such as efficiency reports, is not a protective service even if the monitoring covers security features such as
fire walls. An example of a nontaxable monitoring/reporting service would be keeping the customer posted
on unused data storage capacity.
Services otherwise taxable under Tax Law section 1105(c) are exempt from tax when performed on
computer software. Accordingly, any protective services performed by Petitioner on a customer’s software
are exempt from tax if the charges for these services are reasonable and separately stated on the customer
invoice or other statement of price.

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TSB-A-10(14)S
Sales Tax
April 8, 2010

When Petitioner acts on IT assets by remotely changing system settings or configurations to fix
malfunctions and customer software is not modified by these changes (i.e., only customer hardware is
adjusted), Petitioner is maintaining or servicing tangible personal property. That is a service subject to sales
tax under Tax Law section 1105(c)(3). VIPCS, Adv Op Comm T&F, November 14, 2007, TSB-A-07(28)S;
Western New York Computing Systems, Inc., Adv Op Comm T&F, July 26, 2002, TSB-A-02(42)S.
Petitioner’s offsite data backup management is an unenumerated service for purposes of sales tax.
Therefore, the receipts for that service are not subject to sales tax. See Immediate Medical Records, Inc.,
Adv Op Comm T&F, January 31, 1992, TSB-A-92(7)S.
Petitioner’s help desk support services to a customer’s IT assets are not subject to sales tax. See
TSB-M-93(3)S, supra.
Petitioner does not provide any computer applications as part of the services in question. If it were
to provide such applications, these transactions may constitute the sale of software, the taxability of which
would depend on the type of software provided. The provision of applications that constitute prewritten
computer software would be subject to sales and use tax as the sale of tangible personal property.
If Petitioner provides both taxable and nontaxable products to a customer, but does not separately
bill for the taxable items, Petitioner’s entire charge to the customer will be subject to sales tax. See Tax Law
section 1101(b)(3); Penfold v State Tax Commission, 114 AD 2d 696; Hodgson, Russ, Andrews, Woods and
Goodyear, Adv Op Comm T&F, April 2, 1992, TSB-A-92(31)S; PricewaterhouseCoopers LLP, Adv Op
Comm T&F, March 25, 2003, TSB-A-03(11)S.

DATED: April 8, 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.