Is e-discovery access taxable when the customer logs in and uses the vendor's software to review and organize data?
Plain-English summary
The petitioner provides litigation support and e-discovery. Customers upload their electronic documents to the vendor's servers, where text/metadata are extracted to make them searchable; the customers then log in and use the vendor's proprietary online review tool to classify, organize, batch, and index the data themselves. The vendor offers four access levels: Data Viewer (view/print/download own documents only -- no PDF production, pagination, or indexing); Data Capturer, Data Reviewer, and Data Manager (progressively more ability to capture, mark, review, manage, paginate, and index). The customer owns its documents throughout; the vendor doesn't resell the data. There are four optional services (project management, training, manual data capture/coding, e-discovery consulting). The vendor asked whether its receipts are taxable.
The Office of Counsel concluded:
- Customer-operated access = taxable software license. Prewritten software is tangible personal property "regardless of the medium" (Tax Law 1101(b)(6)), and a license to use is a sale (1101(b)(5)). When a customer with Data Capturer, Data Reviewer, or Data Manager access uses the software to classify and organize its data, it gains constructive possession and the right to use, control, or direct the software (20 NYCRR 526.7(e)(4); TSB-A-09(33)S) -- a taxable license to use prewritten software, even though no copy is transferred and the code's location is irrelevant. Calling it a "service" doesn't control.
- Situs = where the users are. The local tax is sourced to the location of the subscriber's employees who use the software; if they're in and out of New York, the vendor collects on the NY-apportioned portion (KPMG, TSB-A-03(5)S).
- Data Viewer = not taxable. A fee only for Data Viewer status is not taxable: the customer doesn't use the software -- it merely accesses its own data in a converted medium. That's not a software license and not an information service; it's a nontaxable data-processing service (Finserv; not enumerated under 1105(c)).
- Optional services. Management, consulting, manual data capture, and training are not taxable if billed for a separately stated, reasonable charge; if not separately stated/reasonable, they're treated as part of the taxable software receipt (TSB-M-93(3)S).
What this means for you
Litigation-support / SaaS-style vendors
The pivotal question is who operates the software. If your customers log in and use your tool to review/organize data, you're making a taxable license to use prewritten software -- source it to where the users are and apportion for NY. If a customer only gets view/print/download access to its own data (no operating your software), that's a nontaxable data-processing service. And if your technicians run the software and just hand back results, that's a nontaxable (personal/individual) service -- the contrast with the companion opinions TSB-A-10(59)S and TSB-A-10(20)S. Bill training/consulting/data-capture separately and reasonably to keep them nontaxable.
Customers
Expect tax on hands-on review/management seats (allocated to your NY users); view-only access shouldn't be taxed.
Common questions
Q: Is our e-discovery platform taxable?
A: If customers use your software to classify/organize data (Reviewer/Capturer/Manager seats), yes -- it's a taxable software license. View-only access isn't.
Q: Where do we source the tax?
A: To where the subscriber's users are located; apportion for users in and out of New York.
Q: Are our training and consulting charges taxable?
A: Not if separately stated and reasonable. Bundled into the software charge, they become taxable.
Citations and references
- Tax Law section 1101(b)(6) (prewritten software as tangible personal property)
- Tax Law section 1101(b)(5) (definition of sale; license to use)
- Tax Law section 1105(a) (sales tax on tangible personal property)
- Tax Law section 1105(c) (enumerated services)
- 20 NYCRR section 526.7(e)(4) (constructive possession; right to use)
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_60s.pdf
Original ruling text
New York State Department of Taxation and Finance
Office of Counsel
Advisory Opinion Unit
TSB-A-10(60)S
Sales Tax
November 24, 2010
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. S100726A
On July 26, 2010, the Department of Taxation and Finance received a Petition for Advisory
Opinion from name redacted (Petitioner), address redacted. Petitioner asks whether it owes sales tax on its
receipts from litigation support and e-discovery services. Some of Petitioner’s receipts are subject to
State and local sales tax. Petitioner is selling a license to use prewritten computer software when it
provides a customer with the capabilities to capture, review, or manage data. The receipts from the sale of
these products are subject to State and local sales tax when the software is used by the customer in New
York. Petitioner is not selling a license to use software if it provides a customer only with “data viewer”
access to documents and data stored on Petitioner’s computer system. Petitioner’s management,
consulting, manual data capture, and training services are not subject to sales tax if they are sold for a
reasonable, separately-stated charge.
Facts
Petitioner provides a variety of litigation support and e-discovery services to its customers.
Petitioner’s customers upload electronic information in the form of electronic documents and data files to
Petitioner’s servers. At upload, a unique record identifier is added to each document/file and text, and
metadata is extracted from the electronic data to make it searchable by key word and metadata entity.
Customers are then able to use Petitioner’s proprietary software, accessed via Petitioner’s secure email
portal, as an on-line review tool to classify like documents, organize, batch, and index the uploaded data.
These actions add to the intelligence contained in the original documents in preparation for
litigation. Classification, review, and organization of the documents for production are done solely by the
customer. When document metadata is not available for automatic extraction at time of upload, the
customer may request Petitioner to manually capture the viewable document data. These capture fields
would include document type, author, recipient, CC, BCC, title, document date, and time. (These tasks
are performed by a subcontractor.)
After documents are uploaded, a customer can print or download original data/documents. In
addition, a customer may also electronically paginate PDF versions of the uploaded documents at no
additional cost.
Petitioner offers customers four levels of access to its proprietary software:
1. Data Viewer – the holder of this login credential may view documents, document classifications tags,
and document metadata on Petitioner’s servers, as well as print and download documents in their native
(original) format. PDF production and download, pagination, and indexing are not available to this level
of user.
2. Data Capturer – the holder of this login credential may view documents as well as capture document
classification tags, authors, recipients, dates and notes and mark the documents as captured as well as
-2print and download documents in their native (original) format.
pagination, and indexing are not available to this level of user.
TSB-A-10(60)S
Sales Tax
November 24, 2010
PDF production and download,
- Data Reviewer – the holder of this login credential may view documents as well as capture document
classifications tags, authors, recipients, dates and notes and mark the documents as reviewed as well as
print and download documents in their native (original) format. PDF production and download,
pagination and indexing are also available to this level of user. - Data Manager – the holder of this login credential has unlimited access to the documents and
documents classification fields and can print and download the documents in their native (original)
format. PDF production and download, pagination and indexing are also available to this level of user.
A customer can assign different levels of login access for the persons it designates as users.
Ownership of the original documents remains at all times with the customer and the documents are not
used by Petitioner for any purposes. Petitioner does not process and resell the electronic data; it merely
acts as a host for the electronic information and provides a vehicle whereby the electronic information
may be searched, reviewed, and organized for production. No added intelligence as a result of using the
on-line review tool is included in the downloaded native (original) and /or PDF documents and no reports
with this added intelligence can be produced for dissemination.
Petitioner offers four optional services: - project management – offering advice in defining the project scope and specifications;
- customer training – instruction in the use of the online review tool;
- data capture and document coding services - Petitioner manually captures the viewable document data
that cannot be automatically captured; and - E-discovery consulting – providing E-discovery advice throughout the course of litigation.
Analysis
The critical element of Petitioner’s product is the software that resides on Petitioner's server.
Customers use Petitioner’s proprietary software, accessed via the company’s secure email portal, as an
on-line review tool to classify like documents, organize, batch, and index the uploaded data. These
actions add to the intelligence contained in the original documents. Classification, review, and
organization of the documents for production are done solely by the customer.
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). 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).
“Sale” is defined as “[a]ny transfer of title or possession or both, exchange or barter, rental, lease
or license to use or consume (including with respect to computer software, merely the right to reproduce)
conditional or otherwise, in any manner or by any means whatsoever for a consideration, or any
agreement therefor.” Tax Law § 1101(b)(5). Sales and Use Tax Regulation section 526.7 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.” Regulation
section 526.7(e)(4) further provides that a transfer of possession has occurred if there is actual or
constructive possession, or if there has been a transfer of “the right to use, or control or direct the use of,
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TSB-A-10(60)S
Sales Tax
November 24, 2010
tangible personal property.” 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.
Petitioner’s customers are accessing its software when they classify and organize documents and
data for litigation purposes, i.e., when a customer pays for data reviewer, data capturer, or data manager
access status. The accessing of Petitioner's software by customers with any of these access statuses
constitutes a transfer of possession of the software, because the customers gain constructive possession of
the software, and gain the “right to use, or control or direct the use” of the software. See Adv Op Comm
T&F, August 13, 2009, TSB-A-09(33)S. Although Petitioner characterizes its product as a “service,” this
characterization is not controlling as to data reviewer, data capturer, or data manager access status.
Petitioner's customers obtain the right to access the software and to classify and organize documents and
data for litigation purposes. This is true even if no “copy” of the software is transferred to the customer.
Accordingly, the sale of a license to use Petitioner's software to a New York customer with data reviewer,
data capturer, or data manager access status is subject to State and local sales tax.
The conclusion that Petitioner is licensing software is not inconsistent with the conclusions
reached in Adv Op Comm T&F, May 6, 2010, TSB-A-10(20)S. The vendor of the litigation support
services addressed in the May 2010 advisory opinion did not transfer the software to the customer or
allow the customer to access the software by remote means, nor did the customer have the ability to enter
data, manipulate data or run reports using the software. The vendor’s technicians used proprietary
software to index and sort the data to make it searchable by the customer, according to the customer’s
specifications. In contrast, Petitioner’s customers access software when they sort, batch or otherwise
organize documents.
The situs of the software license 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). 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. See KPMG, Adv Op Comm T&F, January 31, 2003,
TSB-A-03(5)S.
A fee paid by a customer merely for Data Viewer status is not subject to sales tax. The fee does
not represent a charge for the license of software because a customer with Data Viewer status does not
access Petitioner’s software or otherwise employ it. Data Viewer status does not constitute the provision
of an information service because Petitioner is merely providing the customer with access to the
customer’s data that has been converted into a different medium. Finserv Computer Corp. v. Tully, 463
N.Y.S.2d 924 (1983), affd 61 N.Y.2d 947 (1984); see also CyCare Systems, Inc., Adv Op Comm T&F,
March 22, 1993, TSB-A-93(18)S. Petitioner is providing a data processing service when it permits a
customer to access online versions of documents that Petitioner has uploaded and stored. Such a data
processing service is not among the enumerated services subject to tax under 1105(c) of the Tax Law.
Elaine K. Hoiska, CPA, Adv OpComm T & F, August 25, 1997, TSB–A–97(53)S.
Petitioner's management, consulting, manual data capture, and training services, by themselves,
are not among the enumerated services subject to sales tax. If these services are sold by Petitioner for a
separately stated and reasonable charge, they are not subject to sales tax. However, if the charge for these
services is not separately stated and reasonable in relation to the entire charge for Petitioner's taxable
software product, the charges for management, consulting, manual data capture, and training services are
considered to be part of the receipt from the sale of prewritten computer software and are subject to sales
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TSB-A-10(60)S
Sales Tax
November 24, 2010
tax. See State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer
Software, TSB-M-93(3)S.
DATED: November 24, 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.