Which of a railroad IT provider's hosted products are taxable, and how are they sourced for NY sales tax?

Plain-English summary

The petitioner provides hosted IT management services to railroads from data centers in Atlanta. Customers access everything over the Internet; they don't download software. The Department sorted nine products into three buckets and explained how to source the taxable ones.

The rules:
- Prewritten software is taxable tangible personal property even when accessed remotely (Tax Law 1101(b)(6)). When a customer uses the provider's hosted software to manipulate its own information, that's a taxable software sale.
- Information services are taxable under 1105(c)(1) -- unless the information is personal or individual (relates exclusively to that customer and isn't, or may not be, substantially incorporated into reports for others). Information from a common database does not qualify (Towne-Oller).
- Sourcing: taxable software and taxable information services are sitused to the location of the customer's employees who use them (TSB-A-03(5)S / 09(33)S); allocate NY vs. out-of-state users.

Product-by-product:

• Taxable prewritten software (sourced to user location): Transportation Management (P4), e-Repair/e-Bol (P6), Business Intelligence (P8) -- the customer uses the software to handle data already in its possession.
• Taxable information service: Car Hire Marketplace (P2) -- furnishes current market-rate info from a common database; the personal/individual exclusion doesn't apply.
• Not taxable (personal/individual exclusion or data processing): Car Hire Payables (P1, processing/relaying the client's data to the Intermediary = nontaxable data processing); Car Hire Receivables (P1, info relating only to that customer -- aggregating it into Marketplace doesn't destroy the exclusion as long as individual transactions can't be gleaned); Revenue Management (P3); Freight Management (P5).
• Software support exempt under 1115(o): M-Crew (P7) -- exempt if the charge is separately stated and reasonable when sold with prewritten software.
• Pass-through Electronic Data (P9): taxable when billed with a taxable service (an expense of providing it, 1101(b)(3)); not taxable when used for a nontaxable service.

What this means for you

SaaS and hosted-service providers

The same platform can produce taxable and nontaxable lines. Ask, product by product: is the customer using your software (taxable software), are you selling information from a common database (taxable info service), or are you conveying information that relates only to that one customer (nontaxable personal/individual)? Aggregating one customer's data into a shared marketplace can be fine -- but only if no one can reverse-engineer individual transactions from it.

Multistate customers

Tax on taxable software and information services follows where your employees access it, not your billing address. Be ready to give your vendor a reasonable allocation of NY vs. non-NY users.

Common questions

Q: I access the software remotely and never download it -- is it still taxable?
A: Yes. Prewritten software is taxable even when hosted and accessed over the Internet, when you're using it to work with your own data.

Q: Why is the marketplace product taxable but the receivables product isn't?
A: The marketplace draws on a common database open to many customers (a taxable information service); the receivables information relates exclusively to the one customer (the personal/individual exclusion).

Q: How is the tax sourced?
A: To the location of the customer's employees who use the software or service, with NY and out-of-state users allocated.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property; prewritten software)
• Tax Law section 1101(b)(6) (prewritten computer software is tangible personal property)
• Tax Law section 1105(c)(1) (tax on information services; personal/individual exclusion)
• Tax Law section 1115(o) (exemption for services to prewritten software)
• Tax Law section 1101(b)(3) (receipts include expenses of providing a taxable service)
• TSB-A-03(5)S (software sourced to location of subscriber's employee users)
• TSB-A-09(33)S (sourcing access to prewritten 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_52s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(52)S
Sales Tax
October 18, 2010

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

PETITION NO. S090707B

Petitioner, name redacted, asks whether (1) its products, as described below, are taxable, and (2) if
so, how to source the sales of those products. We conclude that some of the products constitute the sale of a
taxable information service, some constitute nontaxable information services, and the remaining are sales of
prewritten software. We further hold that the sales of the prewritten software and taxable information service
products should be sourced based on the location of Petitioner’s customers’ employees who access the
software or services.
Facts
Petitioner is a provider of information technology management services to the railroad industry in
North America. Its customers include railroads, rail shippers, and railcar leasing companies. The overall
goal of Petitioner’s service offerings is to provide automated solutions to operational and administrative
processes such as tracking and accounting for the use and location of railroad company equipment and
shipments. Petitioner develops, maintains, and delivers all computer services through and from its Data
Centers in Atlanta, Georgia.
Petitioner’s services include systems that:
•
•
•

improve rail fleet utilization and control inventory flow;
allow customers to manage and control daily operations; and
provide tracking and accounting control for rail equipment and shipments.

Customers access all of Petitioner’s services from the customers’ own locations via the Internet or
other network connection. Petitioner does not provide any telecommunication service or Internet access
service. Customers must, at their sole expense, obtain all the equipment and communications connections to
allow access to Petitioner’s services. Customers do not download or otherwise obtain copies of any of
Petitioner’s software. According to Petitioner, its customers are not licensed to use Petitioner’s software.
Petitioner’s suite of information management services is modular and transaction-based, which
allows its customers to use and pay for only the services they choose. The services are not billed on a flat fee
or per-user method; rather each service has its own unique pricing. The software Petitioner uses to provide
its services resides on computer servers located and managed in two secure data centers in Atlanta, Georgia.
Many of Petitioner’s customers having New York billing addresses own multiple railroad businesses
that operate both within and without New York. Some customers may have businesses that operate wholly
outside New York. Thus, Petitioner’s customers typically have multiple employees accessing Petitioner’s
services from multiple locations both inside and outside New York.
Except as described below, data acquired by Petitioner from each customer and third party are
unique to the specific customer and are not, and cannot by agreement be, shared with any other customer

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Sales Tax
October 18, 2010

since they are confidential information. Processed data are also unique and specific to each customer and
allow each customer to manage its own specific railroad and operations.
Petitioner generally bills its customers on a transaction-by-transaction basis and invoices the
customer based on the total number of transactions at the end of each month. If data are acquired from a
third party at the request of the customer, the cost of acquiring these data is captured and re-billed to the
customer on a pass-through basis. Where a single customer owns multiple railroads, Petitioner will either
send the customer a separate invoice for each railroad or a single invoice for all railroads, at the customer’s
request.
Petitioner’s principal place of business is in Atlanta, Georgia. No software or hardware owned by
Petitioner is located in the State of New York. All services provided by Petitioner to its customers (including
data processing and telephone support services) are conducted in the State of Georgia, except for some
customer training services that are provided at the location of the customer. Petitioner’s only contacts with
New York involve customer sales contacts by phone or Internet and occasional visits to customers for
training and/or implementation.
Analysis
Tax Law section 1105 imposes sales and use tax on retail sales of tangible personal property and
enumerated services. The sale of prewritten computer software is subject to tax as the sale of
tangible personal property. See Tax Law §§1101 (b)(6); 1105(a). The situs of a sale of tangible personal
property 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 the subscriber’s employees that use the software) (See TSB-A-03(5)S).
If the subscriber’s employees that 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.
(Id.)
Tax Law section 1105(c)(1) imposes sales tax on the “furnishing of information by printed,
mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner,
including the services of collecting, compiling or analyzing information of any kind or nature and furnishing
reports thereof to other persons.” Tax Law section 1105(c)(9) imposes sales tax on information and
entertainment services provided via telephony or telegraphy or telephone or telegraph service of whatever
nature. Section 1105(c)(1) excludes from tax the sale of “information which is personal or individual in
nature and which is not or may not be substantially incorporated in reports furnished to other persons”
(hereafter referred to as the “personal or individual exclusion”). If the information conveyed relates
exclusively to the customer in question and the service provider is prohibited from selling the same
information to third-parties, the information service will qualify for this exclusion (Matter of New York Life
Ins. Co. v. State Tax Comm’n, 80 A.D.2d 675, aff’d sub nom. Matter of Metropolitan Life Inc. Co. v. State
Tax Comm’n, 55 N.Y.2d 758 [1981]). Information gleaned from a common database that could be
substantially incorporated into reports furnished to others does not qualify for this exclusion (Matter of
Towne-Oller and Assocs. v. State Tax Comm’n., 120 A.D.2d 873 [Third Dept 1986]).
Another enumerated service subject to tax is the repair, maintenance, or servicing of tangible
personal property. Section 1115(o) of the Tax Law, however, exempts charges for installing, maintaining,
servicing, or repairing prewritten software from sales tax, provided that, if such services are sold in
conjunction with the sale of prewritten software, the charges must be reasonable and separately stated on an
invoice or other statement of the price given to the purchaser.

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TSB-A-10(52)S
Sales Tax
October 18, 2010

Below we apply these provisions to Petitioner’s various services.
Product 1:

Car Hire Payables and Car Hire Receivables

Railroads must pay each other when they borrow each other’s railcars to complete a shipment. The
industry has created a third-party intermediary entity ("Intermediary") to operate and control the Car Hire
Data Exchange settlement process. Petitioner works with the Intermediary to help customers determine the
amount of revenue they are entitled to receive based on the number of railcars that are being used by another
railroad (Car Hire Receivables) and the amount that they must pay to another railroad for the use of its
railcars (Car Hire Payables). For both services, Petitioner acquires and processes the data; no data are
provided or entered by the customer. In the case of Car Hire Payables service, Petitioner collects data from
its customers, processes the data to put them in the necessary format and provides the information to the
Intermediary. The Intermediary then processes the information through the Car Hire Data Exchange
settlement system and distributes the resulting payables to participating rail companies. In the case of the Car
Hire Receivables service, Petitioner must obtain the authorization of its railroad customer to get information
from the Intermediary about other railroads’ use of the customer railroad’s cars. Petitioner pays the
Intermediary for the receivables data. Petitioner then processes each customer's unique data into a format
that is compatible with the customer's system and provides the information to the customer, which is then
able to issue bills. The customer pays Petitioner on a per-transaction basis for each payable and receivable
transaction processed through Petitioner.
The Intermediary provides only the information that specifically applies to the individual rail line to
each rail line and is prohibited from sharing one rail line's information with another. While Petitioner
incorporates the Car Hire receivables data into its Car Hire Marketplace service discussed below, otherwise
Petitioner’s contract with its customer requires it to keep the information confidential.
Answer: The Car Hire Payables part of this product involves processing and relaying information
from the client to the Intermediary. Thus, it is a nontaxable data processing service. The Car Hire
Receivable part of this product involves Petitioner’s purchase of information from the Intermediary,
changing its format to make it compatible with the customer’s system, and conveying that information to the
customer. The information that Petitioner purchases from the Intermediary and then re-sells to its customer
relates only to that customer and can be provided to only that customer or its authorized representative.
Accordingly, the information qualifies for the personal or individual exclusion from the section 1105(c)(1)
tax. The fact that Petitioner aggregates that information into its Car Hire Marketplace service in order to
provide customers with information about market rates for railroad cars does not destroy the applicability of
that exclusion to the Car Hire Receivable information, assuming that the information is aggregated in such a
way that information about individual transactions cannot be gleaned from the Car Hire Marketplace
database (TSB-A-09(55)S).
Product 2:

Car Hire Marketplace

This product provides customers with access to current railcar hire rate information, which Petitioner
obtains from the customer as part of the car hire receivables service discussed above. Customers submit
queries to Petitioner’s system specifying the type of railcar equipment they require. The customer is then
provided with information from Petitioner’s database, including the current market rate applicable to hiring
the specified equipment. This service also allows the customer to initiate, communicate and manage bids
and offers electronically with other railroads and equipment owners, thus providing an efficient, automated
platform for such transactions in place of less efficient, non-automated means traditionally used for bid and
offer transactions.

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TSB-A-10(52)S
Sales Tax
October 18, 2010

Answer: It appears that the primary function of this product is to provide information to the purchaser. It
does not qualify for the personal or individual exclusion because the product involves the conveyance of
information from a common database (Matter of Towne-Oller, supra). Therefore, this product is a taxable
information service.
Product 3: Revenue Management Services
This product allows a customer to determine the amount of revenue that the customer generates from
the use of its rail lines, as well as the amount that it must pay to other railroads for the use of their lines. For
example, if a car is traveling from point A to point B, it may travel across lines owned by three different
railroads. There will be one charge to the shipper of the railcar by one of the rail line owners, but the receipts
generated by that railcar’s travel must be shared with the other line owners.
For this product, similar to the procedure for the Car Hire Payables and Receivables product,
Petitioner collects rail usage data from its customers and provides them only to the Intermediary. The
Intermediary processes the data through the Interline Settlement System ("ISS") and distributes the rail line
usage payables to participating rail companies. Similarly, data that are processed by the Intermediary through
the ISS are purchased by Petitioner. Petitioner then processes the rail line usage data and distributes the
resulting freight revenue receivables to its customers. At no time does Petitioner share common data
between customers involved in a common transaction. Petitioner charges a fee for this service based on the
number of waybills that are settled for each customer. As with the Car Hire Payables and Receivables
services, no data are provided or entered by the customer. All data is gathered and entered into Petitioner’s
system by Petitioner in Atlanta.
Answer: This product is not taxable. While the part of the product in which Petitioner transfers information
from the Intermediary to the customer constitutes an information service, that part qualifies for the personal
or individual exclusion and is thus not taxable because the Intermediary will only distribute the information
to the railroads involved in a particular transaction (or their authorized representatives), and Petitioner will
only forward the information it purchases to its customer.
Product 4: Transportation Management Services
This product provides purchasers with information to enable them to manage their railroad
operations, including inventory and yard control, train operations, and management reporting. It allows
customers to monitor each individual railcar and to produce reports and information needed to manage their
business and for various reporting requirements. This product requires the purchaser to enter certain data into
Petitioner’s system. Alternatively, the data can be obtained from customers’ systems by third party service
providers and then downloaded to Petitioner’s system. This product gives customers access to an automated
system that allows the customer to monitor, query information, and generate reports with regard to status and
location of rail cars, equipment, and shipments.
This product is generally billed to the headquarters of the railroad or railroad holding company.
However, any manual data entry (if performed by the customer) and database access takes place from
multiple customer locations throughout the country. The charge to the customer is based on the amount of
data entered and processed.
Answer: This product provides a customer with access to prewritten software that allows it to more
effectively manipulate information already in the customer’s possession. Thus, this product constitutes the

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TSB-A-10(52)S
Sales Tax
October 18, 2010

sale of prewritten software and should be sourced based on information from the purchaser about the location
of the purchaser’s employees who are using the software, as described above (see TSB-A-09(33)S).
Product 5: Freight Management Services
This product allows customers to monitor their inventory and railcar fleet. Petitioner acquires, inputs,
and processes data that enables Petitioner’s system to trace the movement of railcars, predict times of arrival,
and track shipment, activities that would otherwise be performed on a manual basis by or for Petitioner’s
customers. Customers receive status reports via email from Petitioner but can also access the status reports
via Petitioner’s website. The charge for this product is based on the number of cars monitored.
Answer: The primary function of this product is the provision of information. However, because the
information being provided relates exclusively to the customer railroad, and assuming that Petitioner (or any
intermediary that may be involved) at no time makes the information available to other parties, the product
qualifies for the personal or individual exclusion and is thus not taxable.
Product 6: e-Repair and e-Bol
This product allows customers to generate repair cards generally accepted within the industry for
repairs performed on cars owned by other railroads while traveling on their line. The customer accesses
Petitioner’s website and inputs the required data. A repair card (invoice) is generated that includes the
required information in the proper format. The customer is charged based on the number of repairs entered.
Answer: This product constitutes the sale of prewritten software. Sales are to be sitused in the same manner
as described in the answer to Product 4 (see TSB-A-09(33)S).
Product 7: M-Crew
This is a monthly charge for support services for the prewritten software in use on the computers
onboard the locomotives while they are in transit.
Answer: Section 1115(o) of the Tax Law exempts these charges, provided that if Petitioner is providing this
service in conjunction with the sale of prewritten software, Petitioner is separately stating the charge for the
maintenance service and that charge is reasonable in relation to the total amount of the invoice.
Product 8: Business Intelligence
This product allows a purchaser to access Petitioner’s system through Petitioner’s website to make
inquiries related to the purchaser’s railroad and to extract information and reports. Most of the information
on Petitioner’s system derives from the purchaser’s own records and is either input by the customer or
transferred by a third-party service provider. Petitioner charges a flat fee for access to the system and,
typically, an additional flat fee for the extra bandwidth required for this query-intensive product.
Answer: This product constitutes the sale of prewritten software and should be sourced based on information
from the purchaser about the location of the purchaser’s employees who are using the software, as described
in the answer to Product 4 (see TSB-A-09(33)S).

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TSB-A-10(52)S
Sales Tax
October 18, 2010

Product 9: Electronic Data
In order to provide some products such as Transportation Management Services, it is necessary for
Petitioner to purchase data from third parties. The costs to do so are passed onto the customer in addition to
any processing that Petitioner is required to do to the data, and these charges are itemized on the monthly
invoice under the heading Electronic Data.
Answer: The taxability of these Electronic Data charges depends on whether they are provided in
conjunction with a taxable service. When these Electronic Data charges are made in conjunction with a
taxable information service, the charges are for expenses of providing that service, are included in the
receipts for the taxable service, and are thus taxable (Tax Law section 1101[b][3]). When the charges are for
data used by Petitioner in providing a nontaxable service, then the data charges are not subject to sales tax.

DATED: October 18, 2010

/S/
DANIEL SMIRLOCK
Deputy Commissioner and Counsel

NOTE: 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.