NY TSB-A-10(28)S Sales Tax 2010-07-02

Is a transfer of prewritten software taxable in NY, and how is the sale sourced when the code sits out of state but is used here?

Short answer: Yes, it's taxable, and it's sourced to where the software is used in New York. Prewritten computer software is tangible personal property regardless of how it's conveyed (Tax Law 1101(b)(6)), so the company's sale of it to the client is taxable under 1105(a) -- even though it was delivered under a 'consulting services agreement.' The location of the code is irrelevant: when the client's employees access and use the software, the client gains constructive possession and the right to use, control, or direct the use of it (20 NYCRR 526.7(e)(4)). So the company must collect tax based on where the software is used. If the client's employee-users are both in and out of New York, the company collects tax only on the portion of the receipt attributable to the NY users (Adobe Systems, TSB-A-08(62)S), and it may rely on usage information from the client (KPMG, TSB-A-03(5)S; Tax Law 1132(c)(1), 1142(4)). Separately stated, reasonable charges for custom modifications of the software are not taxable.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A company entered a "Consulting Services Agreement" with a New York-headquartered client and, as part of it, transferred prewritten software (for example, a travel-expense recording system its employees use as they travel). The software was installed on servers in Tennessee, invoiced to the client's agent in Tennessee, and the property was nominally held "in trust in New York" -- but the client used the software in New York and at other U.S. locations. The company asked whether the transfer is taxable and, if so, how to source it.

The Office of Counsel concluded the transfer is taxable and is sourced to where the software is used in New York.

Taxable as prewritten software. Prewritten computer software is tangible personal property "regardless of the medium by means of which such software is conveyed" (Tax Law 1101(b)(6)). So the sale is taxable under 1105(a) -- the "consulting services" label and the electronic/no-medium delivery don't change that. (Prewritten software stays prewritten even when modified for a specific buyer.)
The location of the code doesn't matter. A sale is taxed where possession transfers, and for a license to use, that includes transfer of constructive possession or the "right to use, or control or direct the use of" the property (20 NYCRR 526.7(e)(4)). When the client's employees access and use the software, the client gains constructive possession -- even though it never receives the code on a tangible medium or by download.
Source to where it's used. The company must therefore collect tax based on where the software is used (Adobe Systems, TSB-A-08(62)S). If the client's employee-users are both in and out of New York, the company collects tax only on the portion of the receipt attributable to the NY users.
The vendor can rely on the customer's information. To figure that NY portion, the company may rely on usage information from the client (KPMG, TSB-A-03(5)S; Tax Law 1132(c)(1), 1142(4)).
Custom modifications. Separately stated, reasonable charges for custom modifications of the software are not taxable (TSB-M-93(3)S).

What this means for you

Selling software to multi-state customers

Where the code physically sits -- and where you bill -- doesn't control. Prewritten software is sourced to where the customer's people actually use it. If users are spread across states, you collect NY tax only on the NY-user share, and you can rely on the customer's good-faith usage data to apportion. Calling the deal "consulting" or delivering with "no medium" won't make taxable software nontaxable.

Keep custom work separate

Custom modifications can be carved out as nontaxable, but only if they're separately stated and reasonable. Lump them into the software price and they're taxed as part of the software.

Common questions

Q: Our software lives on out-of-state servers and we invoice an out-of-state office. Is it still NY-taxable?
A: Yes, to the extent the customer's employees use it in New York. The code's location and the billing address don't control -- usage does.

Q: How do I figure the New York portion when users are in several states?
A: Apportion by the share of employee-users located in New York. You may rely on the customer's information to do this (KPMG; Tax Law 1132(c)(1), 1142(4)).

Q: Are charges for customizing the software taxable?
A: Not if they're for genuine custom modifications and are separately stated and reasonable. Otherwise they're taxed with the software.

Citations and references

Tax Law section 1105(a) (sales of tangible personal property)
Tax Law section 1101(b)(6) (tangible personal property; prewritten software)
Tax Law section 1132(c)(1) (vendor may rely on purchaser information)
Tax Law section 1142(4) (purchaser information)
20 NYCRR 526.7(e) and 526.7(e)(4) (place of delivery; license to use; constructive possession)
TSB-M-93(3)S (sales of computer software)
TSB-A-08(62)S (Adobe Systems) (sourcing prewritten software to where used)
TSB-A-03(5)S (KPMG) (vendor may rely on purchaser data)

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_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(28)S
Sales Tax
July 2, 2010

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

PETITION NO. S090223B

Petitioner, name redacted. asks whether the transaction described below, involving the transfer of
prewritten software, is subject to tax, and if so how the sale should be sourced. We conclude that the
transaction is subject to tax and should be sourced based on where the software is used in New York.
Facts
Petitioner entered into an agreement entitled “Consulting Services Agreement ("CSA") with
Client A to provide Client A with computer-related consultation. Petitioner asserts that the CSA involves
the sale of prewritten software (“property”). Any property sold or created as part of the CSA was
necessary for completion of the covenants in the CSA. Client A is headquartered in New York but has
operations throughout the United States. Pursuant to the CSA, any property created globally was to be
held in trust in New York for Client A's benefit. Moreover, Client A retained the sole right to transfer
such property among its other affiliates globally. The property was installed on servers in Nashville,
Tennessee at the direction of Client A, and invoices were provided to an agent of Client A in Hermitage,
Tennessee. That property, since its implementation, is used by Client A in New York and at other
locations in the United States. The property would include, for example, a travel expense recording
system that Client A’s employees’ use as they travel to customer sites all over the United States.
Analysis
Tax Law section 1105 imposes sales and use tax on retail sales of tangible personal property and
enumerated services. 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 the purchaser.” Tax
Law §1101(b)(6). Thus, petitioner’s sale of prewritten computer software to Client A is subject to tax as
the sale of tangible personal property. See Tax Law §§1101(b)(6), 1105(a). Prewritten software, even
though modified or enhanced to the specifications of a specific purchaser, remains prewritten software
subject to tax. However, if a charge for the custom modification or enhancement is reasonable and
separately stated on the invoice or billing statement, then the separately stated charge for the custom
modification or enhancement is not subject to tax. See Tax Law §1101(b)(6); State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software, TSB-M-93(3)S.
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 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.”
Petitioner asserts that the CSA involves the sale of prewritten software. The location of the code
embodying the software is irrelevant, because the software can be used just as effectively by the

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TSB-A-10(28)S
Sales Tax
July 2, 2010

customer, even though the customer never receives the code on a tangible medium or by download. The
accessing of Petitioner’s software by Client A’s employees constitutes a transfer of possession of the
software, because Client A gains constructive possession of the software and gains the “right to use, or
control or direct the use of" the software. Therefore, petitioner should collect tax from Client A based on
where the software is being used. See Adobe Systems, Inc., TSB-A-08(62)S.
For this purpose, petitioner may rely on information received from Client A as described in the
KPMG, LLC, Advisory Opinion, TSB-A-03(5)S. See Tax Law §§ 1132(c)(1), 1142(4). If the customer’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 Adobe
Systems, Inc., supra.
To the extent that the CSA also involves custom modifications of software, separate charges for
that service would not be subject to tax if the charges are reasonable in relation to the total charges. See
TSB-M-93(3)S, supra.

DATED: July 2, 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.