Is a license to access hosted law-office practice-management software subject to NY sales tax, and how is it sourced?

Plain-English summary

The petitioner designs and owns a hosted software system that helps law firms run their offices -- client/case file management, billing and credit, email and e-filing, attendance/personnel records. Attorneys access it over the internet for a contracted period, billed monthly; customers enter all their own data; the petitioner provides periodic upgrades and technical support. It asked whether selling access is taxable.

The Office of Counsel concluded yes -- it's a taxable sale of prewritten software:

• Prewritten software is tangible personal property. Tax Law 1101(b)(6) treats prewritten software as TPP regardless of how it's conveyed; 1105(a) taxes retail sales of TPP. "Prewritten" means not designed for one specific purchaser (1101(b)(14)); modifying prewritten software for a specific buyer leaves it prewritten unless the modification charge is reasonable and separately stated.
• A license to use is a taxable sale. A "sale" includes any transfer of title, possession, or license to use for consideration (1101(b)(5)). For a license to use, possession transfers where the customer has actual/constructive possession or the right to use/control/direct the software (20 NYCRR 526.7(e)(4)). By granting attorneys the right to use its system, the petitioner makes taxable sales -- even though no copy is downloaded or transferred.
• Sourcing (local rate/jurisdiction). The situs is the location of the customer's employees who use the software. If users are both in and out of New York, the petitioner collects tax on the portion of the receipt attributable to New York users (TSB-A-03(5)S).
• Custom modification. A reasonable, separately stated charge for custom modification or enhancement is exempt.

What this means for you

SaaS and legal-tech vendors

Hosting your software and billing monthly doesn't avoid New York sales tax: a license to use prewritten software is taxable whether or not anything is downloaded. Track where your users sit -- that drives the local rate and lets you properly apportion New York vs. out-of-state receipts.

Separate-state your custom work

If you do bespoke modifications for a customer, bill them with a reasonable, separately stated line so that portion can be exempt. Bundle it into the license and it's taxable.

Common questions

Q: Customers never download anything -- is access still taxable?
A: Yes. A license to use prewritten software is taxable even with no copy transferred, because the software is tangible personal property however delivered.

Q: Which jurisdiction's tax rate applies?
A: The location of the customer's employees who use the software. Mixed in/out-of-state users mean you collect on the New York portion.

Q: Can any part of my charge be exempt?
A: Yes -- a reasonable, separately stated charge for custom modification or enhancement is exempt.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1101(b)(6) (prewritten software is tangible personal property)
• Tax Law section 1101(b)(14) (definition of prewritten computer software)
• Tax Law section 1101(b)(5) (sale includes a license to use)
• 20 NYCRR section 526.7(e)(4) (license to use; constructive possession)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_32s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(32)S
Sales Tax
September 10, 2013

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

PETITION NO. S121031B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. (Petitioner). Petitioner asks whether the hosted software solutions
system that it provides to its customers is subject to New York State sales and use taxes. We
conclude that Petitioner’s sale of its hosted software solutions system constitutes the sale of prewritten computer software that is subject to New York State sales and use tax.
Facts
Petitioner designs, creates and owns a software solutions system that assists law firms in
the management and organization of their law offices. The software manages several aspects of
the day to day operations of a law office including: maintaining and organizing client and case
management files, tracking and processing client billing and credit management, handling
e-mails and e-filing scanned documents, and handling attendance and personnel records
internally. Access to the system is provided via the Internet to participating attorneys for a
contractually agreed upon period of time and is billed on a monthly basis. All data is entered
into the management software by participating attorney customers. Petitioner provides periodic
upgrades and on-going technical support for the software.
Analysis
Tax Law § 1105(a) imposes sales tax on the receipts from the sale of tangible personal
property. Tax Law § 1101(b)(6) defines tangible personal property to include pre-written
computer software. Pre-written computer software is any computer software that is “not
software designed and developed by the author or other creator to the specifications of a specific
purchaser.” Tax Law § 1101(b)(14). “Pre-written software or a pre-written portion thereof that is
modified or enhanced to any degree, where such modification or enhancement is designed and
developed to the specifications of a specific purchaser, remains pre-written software.” Id.
However, where there is a “reasonable, separately stated charge or an invoice or other statement
of the price given to the purchaser for the modification or enhancement, such modification or
enhancement shall not constitute pre-written computer software”. Id. Also, pre-written
computer software is considered tangible personal property regardless of the means by which it
is conveyed to a purchaser. Tax Law § 1101(b)(6).
The sale of pre-written software includes any transfer of title or possession or license to
use for consideration. Tax Law § 1101(b)(5). Sales and Use Tax Regulation §526.7 provides
generally that “a sale is taxable at the place where the tangible personal property is delivered or

-2-

TSB-A-13(32)S
Sales Tax
September 10, 2013

the point at which possession is transferred by the vendor to the purchaser or his designee.”
Regulation § 526.7(e)(4) further provides that, with respect to a “license to use,” 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 the tangible personal property.”
Petitioner must collect sales tax on sale of licenses to use his software solutions system where
delivery or access of the software will occur in New York.
Through its hosted solutions software system, Petitioner grants its customers a license to
use its software. By providing customers with the rights to use its software, Petitioner is making
taxable sales of pre-written computer software that are subject to New York State sales and use
tax. This is true even if no “copy” of the software is downloaded or transferred to the customer.
Pre-written software remains taxable even if it is enhanced or modified for a specific purchaser.
However, if the charge for custom modification or enhancement is separately stated on the
invoice or bill, the charge for custom modification is exempt.
The situs of the sale 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 customer’s employees
that use the software). If the customer’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, TSB-A-03(5)S.

DATED: September 10, 2013

NOTE:

/S/
DEBORAH R. 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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.