Is a hosted email-marketing service performed through the provider's software taxable, and are its training and consulting charges taxable?

Plain-English summary

The petitioner is a California company whose clients use its hosted "Hosted Offering" to run email and messaging marketing campaigns. Clients log into the provider's software (hosted on the provider's servers/data centers), load their own data and content, use the software to target recipients and compile/send messages, and then track results and run reports via web access. The provider grants a right to use the software for a set number of users, keeps title to the software (clients can't download it), and charges no separate "license fee" -- instead it charges a set-up fee and a per-message charge. It also separately sells optional services: training on the software, plus consulting, creative, and campaign-execution help (these require its staff, not software). The provider asked whether its hosted service and related charges are taxable.

The Office of Counsel concluded:

• The hosted service is taxable prewritten software. Prewritten software is tangible personal property "regardless of how it's conveyed" (Tax Law 1101(b)(6)), and a "license to use" is a sale (1101(b)(5)). By giving clients the right to use and control its software to run campaigns, the provider is making taxable sales of prewritten software (TSB-A-09(44)S). Even without a separate license fee, the set-up fee and per-message charges are the consideration for the right to use the software, so they're taxable.
• Local tax situs = where the users are. For a "license to use," possession occurs where the customer has constructive possession / the right to use or control the software (20 NYCRR 526.7(e)(4)). That's the location of the client's employee-users, not where the code sits (TSB-A-08(62)S). So the provider sources the sale to the users' locations, collects NY tax on the portion attributable to NY users, and may rely on customer information to apportion (TSB-A-03(5)S; Tax Law 1142(4)).
• Training and consulting aren't taxable. A separately stated charge for training in the use of the software is exempt (Tax Law 1115(o); TSB-M-93(3)S). The remaining optional consulting/creative/campaign services are non-taxable consulting (TSB-A-07(16)S).

What this means for you

SaaS and hosted-software providers

If your customers use your software (even on your servers, even with no "license fee" line item), New York generally treats it as a taxable sale of prewritten software -- and it will look at the substance of your charges (set-up, per-use, subscription) as payment for the right to use that software. Source the tax to where your users are, apportion for in/out-of-NY users, and you may rely on customer-provided user locations. Keep your training and genuine consulting/creative services separately stated -- those are not taxable (training under 1115(o); consulting as an unenumerated service).

Customers

Expect NY sales tax on the hosted-software charges allocable to your NY-based users; separately billed training and consulting should not carry tax.

Common questions

Q: We don't charge a license fee -- is our hosted service still taxable software?
A: Yes. If clients use and control your software, your set-up and usage charges are consideration for the right to use prewritten software, which is taxable.

Q: Where is the sale taxed -- our servers or the client?
A: Where the client's employee-users are. You apportion to NY users; the code's physical location doesn't control.

Q: Are our training and consulting charges taxable?
A: No -- separately stated training on the software (1115(o)) and consulting/creative services are not taxable.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• 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 1115(o) (training in the use of computer software)
• Tax Law section 1142(4) (reliance on customer information)
• 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_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a11_17s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-11(17)S
Sales Tax
June 1, 2011

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S110309A

Petitioner, name redacted, asks whether its hosted marketing service, which it performs
through software, and its related services, are subject to New York State sales and use taxes.
We conclude that the hosted marketing service constitutes the sale of prewritten software and its
charges for that service are subject to sales and use tax, but that its charges for optional training
and consulting services are not taxable.
Facts
Petitioner is a California-based company that provides marketing services to clients that
use email, direct mail, and other marketing channels to reach their customer bases. Petitioner's
branded software and related services help clients evaluate their potential and existing customers
and then plan and implement marketing campaigns. Because Petitioner maintains the software
that it uses to perform the service on its own servers, Petitioner can easily apply its software to
different types of clients or adapt it to existing clients' changing needs. Petitioner's clients
include airlines, hotels, retail sales stores, auto rental companies and a host of other commercial
and retailing establishments.
Specifically, Petitioner has developed a proprietary program, called "Hosted Offering,"
that allows clients to create, manage and deliver email campaigns. Petitioner's software enables
clients to take information that they accumulate about their customers or prospects (such as their
email address, demographic data, web browsing history and any other data about the customer)
and apply search criteria against that information to derive a list of targeted recipients to whom a
message designed for those recipients is to be sent. Clients load their own content and data onto
servers maintained by Petitioner in data centers. Using Petitioner’s software, the client is able to
match the content for each recipient based on the criteria that the client has entered into the
software. The software then compiles the message and sends the message to the recipient.
While the vast majority of messages are sent via email, they can also be sent to a mobile device
(e.g. cell phone or smart phone) or posted to a social site that the client’s customer maintains.
Petitioner’s software is able to track the history and activity of emails that clients send, including
all of the events that happen to a message once it has been sent (open rates, bounce rates etc).
That information is stored and made available to the client via web access.
Clients load their own content and data via the Internet and their data are kept separate
from any data belonging to other clients of Petitioner. The data remains the property of the
client. The messages are sent out of Petitioner's servers/data centers in California. The data

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TSB-A-11(17)S
Sales Tax
June 1, 2011

centers host all of the software developed by Petitioner and contain all of the electronic storage
where the data belonging to clients is maintained.
Via the web access, clients are able to monitor activity on campaigns they have sent out,
run reports on these campaigns, and plan future campaigns. A client’s employees use the Hosted
Offering via a website that they log into. These employees may be located in any location as
long as they have an Internet connection.
Petitioner grants to its clients a right to use the software on its server for a designated
number of interactive users. Title to the software and all its proprietary items remain with
Petitioner and the proprietary program is not allowed to be downloaded to the client's computers.
Petitioner does not charge any software license fee. Petitioner imposes two charges for this
service. First, it imposes an initial set-up fee for establishing connectivity between the client’s
computers and its data centers to the data centers. The set-up process involves chiefly (a)
configuring Petitioner's software to be compatible with the client's system, and (b) working with
third parties to ensure that the client's e-mails are specifically identified as not being spam.
Petitioner asserts a second charge that is based on the number of marketing messages that
Petitioner's client requests to send to its customers via email, text messaging or on their mobile
devices.
In addition to its Hosted Product, Petitioner sells related optional marketing services, for
which it separately charges. These related services are only provided on-line or from Petitioner’s
offices and include (i) training on use of the Hosted Offering; (ii) consulting on best practices;
(iii) creative services to design messages; and (iv) services to help execute campaigns by
providing marketing advice using the expertise Petitioner has developed in conducting e-mail
marketing campaigns. These optional services are not performed through software, but rather
require Petitioner’s staff to work intensively with the client’s personnel. The latter three services
all involve Petitioner sharing its marketing expertise to help the clients develop more effective
marketing campaigns. Charges for these services are based on the type of service and are either
hourly or for a fixed dollar amount. These services are primarily provided from Petitioner’s
offices in California, Washington, and Illinois and delivered via the Internet.
Petitioner does not provide any tangible deliverables in to any state and does not sell or
provide marketing data. Invoices are based on the bill-to location of the client.
Analysis
Prewritten computer software is considered tangible personal property “regardless of the
means by which it is conveyed to a purchaser” (Tax Law § 1101[b]6]). Retail sales of tangible
personal property are subject to sales tax (see Tax Law § 1105[a]). A sale includes “[a]ny
transfer of title or possession or both” and includes a “license to use” (Tax Law § 1101[b][5]).
Through its Hosted Product, Petitioner grants its clients a license to use the software on its
servers in order to conduct marketing campaigns via email and messages to other communication
devices. While Petitioner does not assert a charge for the use of the software denominated as

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Sales Tax
June 1, 2011

such, the set-up fee and the messaging charge appear to constitute consideration for the right to
use the software. By providing its clients with these rights to use or control its Hosted Product
for a consideration, Petitioner is making taxable sales of prewritten computer software (see
TSB-A-09[44]S). Thus, the "set-up" and "messaging" charges are subject to sales tax as receipts
from the retail sale of pre-written software.
The Sales Tax Regulations provide that, in general, “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” (20 NYCRR § 526.7[e]). The
regulations further provide that, with respect to a “license to use,” a transfer of possession has
occurred if the customer obtains 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” (20 NYCRR §
526.7[e][4]). “[C]onstructive possession” of software or “the right to use, or control” software
for purposes of Regulation section 526.7(e)(4) is determined based on the location where the
client uses or directs the use of the software and not on the location of the code embodying the
software (see TSB-A-08(62)S, November 24, 2008). Accordingly, the situs of Petitioner’s sales
for purposes of determining the proper local tax rate and jurisdiction is the location of the client’s
employees who use the software. If the client’s employees who use the software are located both
in and outside of New York State, Petitioner should collect tax based on the portion of the receipt
attributable to the client’s employee users located in New York. (See TSB-A-03[5]S). As
described in that Advisory Opinion, Petitioner may rely on information received from its client
to determine the location of its client’s employee users (see Tax Law § 1142[4]).
Petitioner’s separate charge for the optional service of providing training in the use of its
prewritten computer software is not taxable (see Tax Law § 1115[o]; State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software, TSB-M-93(3)S,
March 1, 1993). Petitioner’s remaining optional services are in the nature of consulting services,
which are not taxable under the Tax Law (see TSB-A-07(16)S).

DATED: June 1, 2011

NOTE:

/S/
DEBORAH LIEBMAN
Deputy 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.