Are the hourly fees customers pay to sit at a gaming center's computers and play video games subject to New York sales tax?

Plain-English summary

A business runs a computer gaming center: customers pay an hourly fee to sit at the operator's workstations and play video games (many stored on the operator's own server) — often against each other, in a social setting. Customers can also buy an annual membership for discounted play, and the operator sells food and drink and hosts tournaments and parties. The operator asked whether the play fees are taxable.

The answer: yes — the play fees are taxable.

• § 1105(a) taxes receipts from the sale, rental, or use of tangible personal property. § 1101(b)(6) says prewritten computer software is tangible personal property for sales tax.
• The video games are prewritten software, so charging customers to use the operator's computers and play those games is a taxable charge for the use of tangible personal property.
• It doesn't matter that the software lives on the operator's server and the customer never gets a disc or download — the software is used just as effectively, so the location of the code is irrelevant (following the Adobe Systems opinion, TSB-A-08(62)S).
• Annual membership fees that buy discounts are also taxable, as prepayments for the taxable play fees.
• Food and drink are taxable under § 1105(d). If food/drink is included in a tournament or party charge, the entire charge is taxable under § 1105(d); if food must be bought separately, the tournament/party charge is taxable under § 1105(a).

What this means for you

If you charge customers to use your computers or equipment, that charge is generally taxable. New York treats prewritten software as tangible personal property, and it treats access to use that property — hourly, by subscription, or otherwise — as taxable, even when nothing physical or downloadable ever changes hands. A gaming center, internet café, or similar "pay to use our machines" business should collect tax on those fees.

Memberships that unlock discounts are taxable too. The Department looks at substance: a fee that is really a prepayment toward taxable play is itself taxable.

Mind the food rules and the bundling trap. Prepared food and drink you sell are taxable under § 1105(d). If you fold food into a single tournament or party price, the whole price becomes taxable under § 1105(d) — so consider whether to bundle or separately state food charges.

Common questions

Q: The software never leaves our server — is the fee still taxable?
A: Yes. New York treats prewritten software as tangible personal property, and where the code physically sits is irrelevant. Charging customers to use it is taxable under § 1105(a).

Q: Are annual membership fees taxable if they only give discounts?
A: Yes. They're treated as prepayments for the taxable play fees.

Q: How is food handled at tournaments and parties?
A: If food or drink is included in the tournament/party charge, the entire charge is taxable under § 1105(d). If food is bought separately, the tournament/party charge is taxable under § 1105(a) and the food is taxed on its own under § 1105(d).

Citations and references

Statutes:

• Tax Law § 1105(a) — taxes the sale, rental, or use of tangible personal property (the play and membership fees)
• Tax Law § 1101(b)(6) — prewritten computer software is deemed tangible personal property
• Tax Law § 1105(d) — taxes sales of food and drink by restaurants and other establishments

Related Department opinions cited: TSB-A-08(62)S (Adobe Systems, Inc. — location of software code irrelevant); TSB-A-92(66)S (Costco Wholesale) and TSB-A-94(10)S (John L. Buono) (membership fees as prepayments); TSB-A-98(21)S (UM Enterprises) and TSB-A-07(2)S (Billmar Amusements) (bundled food charges).

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_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(2)S
Sales Tax
January 20, 2010

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

PETITION NO. S090921C

Petitioner name and address redacted, asks whether the fees charged to its customers for playing
computer video games, as described below, are subject to New York State sales tax.
We conclude that the play fees charged by Petitioner are subject to sales tax under Tax Law
§1105(a).
Facts
Petitioner operates a business where individuals pay a fee to play video games on a computer.
Petitioner’s facility provides workstation desks, chairs, and computers for the customers. Petitioner’s
website indicates that the main reason for customers to use Petitioner’s facility is to play group-oriented
computer games on high end equipment in a social atmosphere. Most of the games that are played by
Petitioner’s customers at its facility are stored on Petitioner’s server. Petitioner may have to obtain
licenses to use the games which enable Petitioner to have multiple users of the games. Customers cannot
edit the games. Customers may play against each other or use Petitioner’s facility to participate in
Internet game competitions. In these cases, customers may have to access the games at third-party
websites.
Petitioner’s fees for playing the games are set on an hourly basis. Customers pay at the front desk
when they come in. A customer will pay for a set amount of time to play, and a computer is then
accessed for the customer at that time. When the time lapses, the customer will be shut out of the
computer. Customers may pay an annual membership fee in order to receive discounts on normal play
fees. Petitioner also has separate fee schedules for tournaments and parties at its facility. Petitioner does
not charge an entrance fee to its facility. Individuals may occupy the facility without paying to use the
workstations.
Petitioner sells food and drink at its facility. No third party vendors sell food or drink at
Petitioner’s facility. Generally, customers purchase food and drink separately from their purchase of time
at Petitioner’s workstations. There are no cover fees, minimum purchase requirements, or requirements
that customers purchase food or beverages. Food or drink may be included in Petitioner’s fees for
tournaments and parties. For example, the fee to participate in a tournament may be $15, or the fee may
be $20 if it includes pizza.
Analysis
Section 1105(a) of the Tax Law imposes sales tax on receipts from the sale or rental of tangible
personal property. Sales or rentals of computer hardware are subject to sales tax under Tax Law
§1105(a). Section 1101(b)(6) of the Tax Law provides that prewritten software is deemed to be tangible
personal property for sales tax purposes. The fee paid for the lease or license to use or consume
prewritten computer software, regardless of the medium by means of which such software is conveyed to

-2-

TSB-A-10(2)S
Sales Tax
January 20, 2010

the purchaser, is subject to New York State sales tax under Tax Law §1105(a). 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. See
Adobe Systems, Inc Adv Op Comm T & F, November 24, 2008, TSB-A-08(62)S. The computer games
offered by Petitioner to its customers are prewritten software products. Accordingly, based on the facts
presented in this Opinion, Petitioner’s fees for customers to use Petitioner’s computer equipment and play
computer games at its facility are subject to sales tax under Tax Law §1105(a) as charges for the use of
tangible personal property. Annual fees paid by Petitioner’s customers in order to receive discounts
onnormal fees are also subject to tax. These fees are, in substance, prepayments for the normal fees that
are taxable under Tax Law §1105(a). See Costco Wholesale Corporation, Adv Op Comm Tx & Fin,
September 17, 1992, TSB-A-92(66)S; John L. Buono, Adv Op Comm Tx & Fin, March 17, 1994,
TSB-A-94(10)S.)
Petitioner’s sales of food and drink are subject to sales tax under Tax Law §1105(d). If food or
drink is included in Petitioner’s charges for tournaments or parties, the entire charge is subject to sales tax
under Tax Law §1105(d). See UM Enterprises Ltd., Adv Op Comm T & F, March 24, 1998,
TSB-A-98(21)S; Billmar Amusements NY Party Works, Inc., Adv Op Comm T & F, February 8, 2007,
TSB-A-07(2)S. If food or drink is not included in the charge for a tournament or party, but must be
separately purchased, the charge for the tournament or party is subject to tax under §1105(a).

DATED: January 20, 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.