Is a hosted IT cost-management service taxable -- as an information service, as software, or both?

Plain-English summary

A company offers a hosted platform that helps customers analyze and allocate their IT costs. It has four offerings: a core "Line-Item IT Billing" service (it collects the customer's IT-usage data, validates/processes it, and delivers reports and a general-ledger file), plus three optional products -- budgeting/financial reporting, service costing, and business-unit planning. It asked whether its service is taxable.

The Office of Counsel split the answer:

• Line-Item IT Billing = nontaxable information service. Furnishing reports by collecting/compiling/analyzing information is an enumerated information service (Tax Law section 1105(c)(1)), but the statute excludes information that is personal or individual and not incorporated in reports furnished to others. Both tests are met: the data comes solely from that customer (not a common source -- Allstate, ADP, Rich Products), and it's available only to that customer and contractually can't be resold or shared (New York Life). The customer's ability to customize reports on the platform is incidental to the service's primary function (information), so it's not a software sale (DZ Bank; TSB-A-13(1)S).
• The three optional products = taxable prewritten software. They're analytical software tools the customer accesses for consideration -- taxable under section 1105(a). The situs is where the customer's users are located (20 NYCRR 526.7); for users in and out of New York, collect on the New York portion.
• Bundling rule. If the billing service is sold with the optional products for one price, the entire charge is taxable (section 1132(c)). But because the billing service can be bought alone, a reasonable, separately stated charge for it is not taxable.

What this means for you

Data / analytics / SaaS providers

A service that processes a customer's own data and reports it back only to that customer can be a nontaxable personal/individual information service -- the keys are single-customer source data and no sharing/resale. But if you also give the customer software tools to run analyses themselves, those tool offerings look like taxable prewritten software.

Watch the bundle

Mixing a nontaxable information service with taxable software for one price makes the whole thing taxable. If the nontaxable piece is genuinely separately purchasable, separately state a reasonable charge for it to keep it nontaxable.

Source software to the user's location

Taxable software access is sitused to where the customer's employees use it -- allocate multistate users and collect on the New York share.

Common questions

Q: Why is the core billing service nontaxable?
A: It's a personal/individual information service -- it processes only the customer's own data and reports it back to that customer alone, with no sharing or resale.

Q: Why are the add-on products taxable?
A: They're prewritten software tools the customer accesses for a fee to run its own analyses -- taxable as software.

Q: We sell everything for one monthly price -- how is that taxed?
A: The entire bundled charge is taxable. Separately state a reasonable charge for the standalone billing service to keep that piece nontaxable.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

• Tax Law section 1105(c)(1) (information services; personal/individual exclusion)
• Tax Law section 1105(a) and 1101(b)(6) (prewritten software as tangible personal property)
• Tax Law section 1132(c) (burden of proof; bundled charges)
• 20 NYCRR 526.7 (situs of sale; license to use software)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_36s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(36)S
Sales Tax
September 18, 2015

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

PETITION NO. S131125A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Petitioner REDACTED. Petitioner asks whether its information technology service is subject to
sales and use tax in New York. We conclude that, to the extent that Petitioner sells its Line-Item
IT Billing service with its three remaining products for one price, Petitioner’s total charge for the
bundle is taxable. However, because the Line-Item IT Billing service may be purchased without
buying Petitioner’s additional products, if it sells the Line-Item IT Billing service with the
remaining services, but separately states a reasonable charge for the Line-Item IT Billing service,
that charge will not be taxable.
Facts
Petitioner delivers a group of related services that helps its customers better analyze,
manage and communicate the cost, quality and value of the information technology (IT) services
used by different units within the customer’s organization. Using Petitioner’s services,
customers can allocate the cost of various IT business units within their organization.
Petitioner's hosted platform is integrated with the customer’s systems in order to collect
system utilization and consumption data from the customer’s underlying storage systems,
telecom systems, and other IT systems of record. Through Petitioner’s proprietary data
acquisition process, all collected data are mapped, normalized, and verified by Petitioner for
subsequent importing, processing, and reporting.
Following an implementation process described in more detail below, Petitioner’s
services are delivered through four key offerings: (1) Line-Item IT billing, (2) budgeting and
financial reporting, (3) service costing, and (4) business unit planning.
Petitioner involves the client in the implementation process, which generally takes 60 to
90 days. By interviewing the customer on-site, Petitioner reviews its use of IT resources,
including desktops, servers, storage, and cloud-computing resources. Petitioner also gathers
information about the customer’s existing corporate and financial information software.
Subsequent analysis and set-up occurs off-site. This process determines the set-up of Petitioner’s
platform for gathering data to meet the customer’s objectives as well as the solutions to meet
those objectives. The platform is not customized, but is configured to meet the client’s data
objectives.

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Line-Item IT Billing
After the product implementation process, a typical monthly IT billing process is one in
which Petitioner’s employees are fully engaged with the customer to collect data and ensure
accuracy of the IT usage data. Petitioner uses the configured software platform to obtain the
appropriate data from customer systems. Petitioner establishes and manages the information
gathering and reporting process in accordance with the customer’s financial calendar.
The process begins when the customer’s software uploads usage data via a Secure File
Transfer Protocol to Petitioner’s platform. Petitioner is then responsible for processing the data
using its platform. As part of this service, Petitioner then performs the following tasks:
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Validates all customer data received to ensure accuracy and quality of the source data;
Updates the data if applicable or appropriate;
Applies customer specific business rules to the data to ensure results are consistent with
customer objectives;
Generates a “pre-bill” of all processed data for review and approval by customer before
finalizing the results of the monthly production;
Re-processes the data, if required, after review with the customer;
Obtains final approval of the pre-bill from the customer;
Loads all processed data onto Petitioner’s web-based bill or IT reporting platform for
access by the pre-defined customer specific users; and
Generates and delivers a general ledger file of the processed data in a format pre-defined
by the client for posting to the customer’s corporate general ledger system.

This service provides IT managers with information about the cost of each function
performed by the IT department (e.g., the cost of different applications, servers, and storage
solutions), and helps customers establish rules for billing. After Petitioner has loaded the
processed data onto its platform and delivered a general ledger file to the customer, specified
users have access to the data through Petitioner’s web-based application. Access to the data also
allows the data to be uploaded to the general ledger. The customer controls which of its
employees have access to the reports on Petitioner’s platform. Each month, Petitioner performs
a “post production” review with the customer to identify any issues with the monthly production
process and determine if any improvements can be made the following month.
Petitioner stores the raw data originally gathered from the customer, as well as the final
processed data. Only the specific customer on whose behalf the data was processed has access to
the data. Petitioner is forbidden by its contract with each customer to share the data with other
customers, or sell or use the information for any purpose other than making it available to the
customer.
Budgeting and Financial Reporting Product
Petitioner’s product allows customers to utilize Petitioner’s platform for IT budgeting and
financial reporting. IT costs are input by customers or the customer’s IT system. The customer
then uses the application to access and summarize costs for corporate submission or reporting in
the corporate-level general ledger. Examples of some of the costs that are summarized for a

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Sales Tax
September 18, 2015

customer could include equipment, maintenance, software, software amortization, hardware
depreciation, etc. IT costs may also be presented at the product level. This service does not
require additional information other than that produced by Petitioner’s line-item billing product.
Service Costing Product
Petitioner’s service costing solution enables customers to assign the costs captured from
its systems to the IT products and services in the customer’s service catalog. The application
calculates customers’ costs per unit of IT services, compares customers’ IT costs to industry
peers, identifies customers’ most expensive and least used IT services, benchmarks customers’
IT service costs against third-party alternatives, and breaks down fixed and variable IT costs.
This information is provided to the customer through the application. This service does not
require additional information other than that produced by the line-item IT billing.
Business Unit Planning Product
Petitioner’s business unit planning product gives the customer access to a forecast engine
on Petitioner’s platform that analyzes various “what-if” scenarios at the product, service,
application, and business unit levels. The application’s interface allows a customer to obtain
comparisons between forecasted and prior expenses. The application also predicts future effects
on IT costs for each business unit if alternative IT system technologies were adopted, if IT
services were outsourced, or if IT usage levels were changed. For example, if a customer were
planning to grow a certain aspect of its business, the service could estimate the cost to the
various areas of the company. Conversely, if a customer was planning to downsize, the business
unit planning product would be able to estimate the cost results of that option for the various
business units within the organization.
How Petitioner Bills for its Services
Petitioner generates two types of fees. The first is upfront implementation fees and the
second is monthly subscription fees. Implementation fees are earned for the work performed
with customers prior to the utilization of any of Petitioner’s service offerings. Monthly
subscription fees are paid to Petitioner to host the system and manage data. These fees vary
based upon the size of the customer’s IT budget, the number of solutions being used and the
number of data source files. The subscription fees cover the activities performed for customers
through Petitioner’s configured hosted platform, including the acquisition of data from
customers’ systems, processing of the acquired data, and client-established deliverables using the
processed data. Generally, if the fees for each type of solution (IT billing, budgeting and
financial reporting, service costing, and business unit planning) are separately stated in the
service agreement, they are separately stated on the invoices. In situations where the fees for a
comprehensive solution are not separately stated in the service agreement, they are not separately
stated on the invoice.
Analysis
Tax Law § 1105(a) imposes sales tax on the retail sale of tangible personal property,
including prewritten software. See Tax Law §§ 1101(b)(6); 1105(a). Tax Law § 1105(c)

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Sales Tax
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imposes sales and use tax on certain enumerated services, including the service of “[t]he
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.”
That section 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.”
We conclude that Petitioner’s Line-Item IT Billing product is an information service.
However, the exclusion for information that is personal or individual in nature and that is not or
may not be substantially incorporated in reports furnished to other persons applies to this service.
The first criterion (information that is personal or individual in nature) is satisfied because the
information used is supplied by the customer and relates only to the customer. Matter of Allstate
Ins. Co. v. Tax Commn. of the State of New York, 115 AD2d 831 (1985), aff’d 67 NY2d 999
(1986); Twin Coast Newspapers, Inc. v., State Tax Commission, 101 AD2d 977(3d Dep’t 1978).
It is the source of the information that controls whether the reports prepared will meet the criteria
of "personal and individual." Matter of ADP Automotive Claims Service Inc., Tax Appeals
Tribunal, August 8, 1991. Information is not uniquely personal or individual in nature if it comes
from a common, widely-accessible, source, regardless of whether the information is customized
in some manner to respond to the raw data submitted by the customer. See Rich Products
Corporation v Chu, 132 AD2d 175 (3d Dep’t 1987); Towne-Oller & Assoc. v State Tax Comm,
120 AD2d 873 (3d Dep’t 1986); Alan/Anthony, Inc., TSB-A-92(51)S. Here, the information
Petitioner provides to its customer is obtained exclusively from that customer and not from a
common source.
Nor is the customer data that the Petitioner aggregates and then makes available to the
customer incorporated in reports furnished to other persons. It is available only to that customer
and, in fact, the Petitioner is barred from reselling or otherwise sharing it with others. (See
Matter of New York Life Ins. Co. v. State Tax Comm’n, 80 AD2d 675 (3d Dep’t 1980), aff’d sub
nom. Matter of Metropolitan Life Inc. Co. v. State Tax Comm’n, 55 NY2d 758 (1981). The fact
that the customer can elect to have, or not have, such statistics included in the reports that
Petitioner prepares for its customer does not make Petitioner’s charges to its customer for its
information service taxable.
As part of its Line-Item IT Billing service, Petitioner provides its customers with access
to prewritten software by allowing the customer to customize reports on its platform. Although
Petitioner asserts that it does not sell or transfer the software to its customers, the ability for its
customer to customize the reports has some attributes of the use of Petitioner’s software by the
customer in New York, and, thus, could be considered a sale by Petitioner of its software to the
customer. However, because the customer’s use of the software is a single aspect of a more
comprehensive information service, which appears to be the primary function of the Line-Item
IT Billing service, we conclude that Petitioner’s Line-Item IT Billing service constitutes the sale
of an information service, and not the sale of prewritten computer software. See Matter of DZ
Bank, Tax Appeals Tribunal, May 11, 2009; TSB-A-13(1)S.
Petitioner’s three remaining products all appear to provide its customers with additional
software tools to analyze on Petitioner’s platform the information produced as part of
Petitioner’s Line-Item IT-Billing service. Thus, while Petitioner’s Line-Item IT Billing service

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appears to be a nontaxable information service, these additional optional products appear to
constitute prewritten software. See TSB-A-15(1)S. The accessing of these software tools by
Petitioner’s customers for consideration constitutes the sale of prewritten computer software,
which is taxable under Tax Law § 1105(a). Sales and Use Tax Regulation § 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 § 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 tangible personal property.”
Thus, the situs of the sale of the remaining three services for purposes of determining the proper
local tax rate and jurisdiction is the location of the client’s employees that use the software. See
20 NYCRR § 526.7(e)(1) and (4); TSB-A-15(1); TSB-A-03(5)S. If the customer’s employees
who use the software are located both in and out of New York State, Petitioner should collect tax
based on the portion of the receipts attributable to the customer’s users located in New York.
See Id.
To the extent that Petitioner sells its Line-Item IT Billing service with its three remaining
products discussed above for one price, Petitioner’s total charge for the bundle would be taxable
(See Tax Law § 1132(c); Sales Tax Reg. § 527.1(b)). However, because the Line-Item IT Billing
service may be purchased without buying Petitioner’s additional products, if it sells the LineItem IT-Billing service with the remaining services described above, but separately states a
reasonable charge for the Line-Item IT-Billing service, that charge will not be taxable.

DATED: September 18, 2015

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.