Are an IT firm's support-service charges taxable when one fee covers both software work and hardware/equipment servicing?

Plain-English summary

The petitioner provides outsourced IT support for small and mid-sized businesses under three agreement types. The core question: when one charge covers both work on software and work on hardware/equipment, is the charge taxable?

Two rules drive the answer:
- Prewritten computer software is tangible personal property (Tax Law 1101(b)(6)), and installing, maintaining, servicing, or repairing tangible personal property is a taxable service (1105(c)(3)).
- But those same services are exempt when performed on computer software (1115(o)) -- maintaining, monitoring, debugging, and adjusting software settings are exempt.

The Office of Counsel concluded:

• Agreement 1 (fixed monthly fee) and Agreement 3 (single negotiated amount): fully taxable. Both bundle exempt services to software with taxable services to hardware and equipment into a single charge with nothing separately stated. Under Tax Law 1132(c) (and 20 NYCRR 527.1), when taxable and non-taxable items are sold for one charge, the entire receipt is taxable unless the non-taxable part is reasonable and separately stated.
• Agreement 2 (hourly, as-needed): depends. If the work includes services to hardware/equipment (or a mix), the hourly charge is taxable unless the exempt software charge is separately stated and reasonable. If the work is only services to software, the charge is exempt (1115(o)).
• Separately stated tangible personal property is taxable. Hardware, equipment, and prewritten software (anti-virus, e-mail protection) that the firm separately invoices are taxable sales of tangible personal property (1105(a)). If those charges are reasonable, they don't taint the services; but if TPP is sold with nontaxable services for one charge, the whole amount is taxable.

What this means for you

IT service providers and managed-service firms

The exemption for software work is real, but you only get it on a bundled bill if you separately state the exempt portion and the amount is reasonable. Roll software maintenance and hardware servicing into one flat monthly or project fee and the entire fee becomes taxable. Itemize: separate the exempt software services from taxable hardware servicing and from any tangible property you sell.

Businesses buying IT support

If your managed-services invoice is a single lump sum, expect sales tax on the whole thing -- even the part that is conceptually exempt software work. Ask your vendor to break out software services from hardware/equipment work.

Common questions

Q: Is work on my software taxable in New York?
A: No -- maintaining, monitoring, debugging, and adjusting computer software are exempt under Tax Law 1115(o).

Q: Then why was the IT firm's charge taxable?
A: Because it bundled exempt software work with taxable hardware/equipment servicing into one charge without separately stating the exempt part. Bundling makes the whole charge taxable (1132(c)).

Q: How do I keep the exempt part exempt?
A: Separately state a reasonable charge for the software services (and for any nontaxable services) on the invoice. Hourly bills for software-only work are exempt.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1105(c)(3) (tax on installing/maintaining/servicing/repairing tangible personal property)
• Tax Law section 1101(b)(6) (prewritten computer software is tangible personal property)
• Tax Law section 1115(o) (exemption for services performed on computer software)
• Tax Law section 1132(c) (single charge for taxable plus non-taxable is fully taxable unless separately stated)
• 20 NYCRR section 527.1 (bundled 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_57s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(57)S
Sales Tax
November 16, 2010

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

PETITION NO. S100915A

Petitioner name redacted requests an Advisory Opinion about whether its sales of IT support services
are subject to New York State and local sales taxes.
We conclude that Petitioner’s charges for services rendered under their name redacted and name
redacted Agreements are subject to sales tax, because the services provided under these agreements include both
taxable and exempt services for a single charge. Petitioner’s hourly charges for services rendered under their
name redacted Agreements are subject to tax if the services rendered include both taxable and exempt services,
unless the charges for the non-taxable services are separately stated and reasonable in relation to the overall
receipt.
Facts
Petitioner is a provider of computer network services and technology solutions consulting for small to
medium-sized businesses. Petitioner provides professional Information Technology (IT) services, which are
designed to be an efficient and economical replacement or temporary augmentation of a customer’s staffing
needs. Customers receive the benefits of a diverse array of IT expertise, rather than being limited to the
knowledge of their in-house employees.
Petitioner’s employees are IT professionals that typically possess a minimum of a Bachelor’s Degree, as
well as additional specialized certifications. Job titles vary by skill level and certifications. Entry level
employees are “Support Specialists, followed by “Systems Engineers” and “Senior Systems Engineers.”
Petitioner does not operate a retail store and has no “walk-in” type business. Petitioner has never owned
or operated a retail sales facility for the purpose of selling or servicing tangible personal property to the general
public. Furthermore, Petitioner does not warehouse or hold in inventory any purchases of tangible personal
property for resale to current or potential customers or the general public.
Petitioner provides services to its customers under three types of agreements: (1) name redacted
(Agreement 1); (2) name redacted (Agreement 2); and (3) name redacted (Agreement 3). The primary objective
of all three agreement types is to provide customers IT personnel to assist with the management and monitoring
of their IT networks. Petitioner does not enter into agreements for the sole purposes of guaranteeing
functionality of a customer’s software or hardware components of the IT infrastructure. However, Petitioner’s
invoices indicate that the services provided include services to hardware and equipment. Each type of agreement
has multiple IT support features as described below.
Agreement 1
Petitioner’s Agreement 1 Service is designed to address the ongoing IT management and support needs
of Petitioner’s customers. This service primarily provides maintenance of the software that runs a customer’s
systems and networks. Proactive software monitoring and management reduces exposure to many common
problems IT environments experience due to neglect or the security issues inherent in Internet use. Customers
are billed in advance on a monthly fixed-fee basis. Agreement 1 services include:

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TSB-A-10(57)S
Sales Tax
November 16, 2010

Proactive Management and Support – software maintenance services provided for a reliable and
efficient IT environment with minimal downtime.
Monitoring and Reactive Support – 24/7 server monitoring and outage escalations provide timely
response and problem solving to active issues.
End-user Support – provides day-to-day end-user troubleshooting and support through diagnostics and
problem solving. This primarily consists of software setting changes, debugging, and problem solving.
Technology planning and strategic business reviews.

The “Professional Services Schedule” of the sample Master Services Agreement between Petitioner and
its customers covers the following components: workstations and laptops; Internet connectivity; network
management; remote access and thin client computing; e-mail environment; backup/disaster recovery; internal
security; external security; virus protection; software license compliance. Also included within the monthly fee
is “e-mail protection service,” which includes “[s]pam, virus, and content filtering, including ‘spooling’ of
messages when server is unavailable.” The e-mail protection and security services consist of software licensed
directly to customers by the creator of the software and separately invoiced by Petitioner. As part of the IT
management services provided under Agreement 1, Petitioner reviews reports on the effectiveness of the
security software and makes recommendations to customers as needed.
Agreement 2
Petitioner’s Agreement 2 services include reactive troubleshooting and end-user support for customers
who prefer to contract for “as needed” support, rather than the proactive and preventative solutions afforded by
Agreement 1. Like Agreement 1 service, Agreement 2 service primarily consists of software setting changes,
debugging, and problem solving. However, Petitioner’s invoices indicated that services to hardware and
equipment are sometimes included. Customers are billed on an hourly basis after services are rendered.
Agreement 3
In the event a potential or existing customer seeks the creation, expansion, or relocation of their
integrated IT network system, Petitioner’s engineers will provide assistance and guidance through the many
stages of the project from planning through implementation. Customers are billed a single negotiated amount,
based on the nature of the work to be performed.
Procurement of Hardware or Software
In January 2007, Petitioner began reselling hardware and software by drop shipment from
manufacturers and distributors, as well as software licenses and warranties, and maintenance agreements for
hardware and software. Procurement services are available under all three of the agreement types described
above. Petitioner does not bundle the procurement purchases with the service fees. Petitioner does not use the
sale of hardware to generate installation service sales. Procurement services are offered solely as a courtesy and
for the convenience of the customer. Petitioner states that it bills separately for procurement and collects sales
tax on all procurement sales when and if required.
Analysis
New York State and local sales and use taxes are imposed on all sales of tangible personal property,
unless otherwise exempt, and on certain enumerated services. See Tax Law §1105(a), (c). Prewritten computer
software is tangible personal property, “regardless of the medium by means of which such software is conveyed
to the purchaser.” Tax Law §1101(b)(6). Among the services subject to tax are the services of installing,

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TSB-A-10(57)S
Sales Tax
November 16, 2010

maintaining, servicing, or repairing tangible personal property. See Tax Law §1105(c)(3). Services that are
otherwise taxable under section 1105(c)(3) are exempt when performed on computer software. See Tax Law
§1115(o). Installing, maintaining, monitoring, and debugging software, and adjusting software settings are
among the services to software that are exempt from sales tax. However, if services to software are sold in
conjunction with other tangible personal property, the services are exempt only if the charge for the services is
reasonable and separately stated on an invoice or other statement of price given to the purchaser. See id.
If taxable property or services are combined with non-taxable property or services and sold to the
customer for a single charge, the entire charge will be subject to sales tax unless the charge for the non-taxable
property and services is reasonable and separately stated on the invoice or other statement of the price provided
to the customer. See Tax Law § 1132(c); 20 NYCRR § 527.1.
Petitioner’s services rendered under Agreements 1 and 3 include both services to software and services
to hardware and equipment. Petitioner’s invoices indicate that both types of services are performed. Petitioner
does not separately state the charges for these services. Rather, under Agreement 1, Petitioner charges its
customers a fixed monthly fee for all services rendered. Similarly under Agreement 3, Petitioner charges its
customers a single negotiated amount based on the nature of the work to be performed. Because these charges
include both exempt services to software and taxable services to hardware and equipment, the entire receipt is
subject to sales tax. See Tax Law § 1132(c); 20 NYCRR § 527.1.
Petitioner’s services rendered under Agreement 2 also appear to include both services to software and
services to hardware and equipment. However, these services are provided on an as-needed basis for a hourly
fee. If the services rendered by Petitioner constitute services to hardware and equipment, or some combination
of services to software and services to hardware and equipment, the hourly charge for the services will be
subject to tax unless the charge for the exempt services to software is separately stated and reasonable in
relationship to the overall receipt. See Tax Law § 1132(c); 20 NYCRR § 527.1. If the services rendered
constitute only services to software, the hourly charge for these services is exempt from sales tax. See Tax Law
§1115(o).
Petitioner avers that it separately states the charges for sales of tangible personal property, which
includes hardware, equipment, and prewritten computer software (e.g., anti-virus and e-mail protection
software). These separately stated charges are subject to sales tax. See Tax Law §1105(a). If the separately
stated charges for tangible personal property are reasonable in relation to the overall charges for the services,
they will not affect the taxability of the services. However, if hardware, equipment, and prewritten software are
sold with nontaxable services for a single charge, the entire amount will be subject to sales tax. See Tax Law §
1132(c); 20 NYCRR § 527.1.

DATED: November 16, 2010

NOTE:

/S/
DANIEL SMIRLOCK
Deputy Commissioner and 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.