NY TSB-A-15(9)S Sales Tax 2015-03-19

Is a software maintenance and support contract taxable when it entitles the customer to upgraded versions of prewritten software?

Short answer: Yes -- if the upgraded software is prewritten software, the whole contract is taxable unless the support and upgrade charges are separately stated. Selling prewritten computer software (including prewritten upgrades) is taxable as a sale of tangible personal property, and a standardized modification of prewritten software is itself prewritten software -- so providing it is taxable even if billed as 'software maintenance.' A contractual commitment to provide a new version of prewritten software when it becomes available is itself a taxable license of software, taxable when the receipts are paid. Tax Law section 1115(o) can exempt the genuine service part (like telephone technical support), but only if that charge is reasonable and separately stated on the invoice. Because this developer bills one combined annual charge -- not separating the technical support from the right to receive upgrades -- its entire receipt for the maintenance contract is subject to sales tax. If it instead charged separate fees, the reasonable software-maintenance/technical-support fee would not be taxable, and only the fee for the software license/upgrade would be taxable.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

The Petitioner develops and sells software (with prewritten components, customized to the customer) and offers an optional one-year maintenance and support contract, billed annually. The contract includes telephone technical support/troubleshooting (rarely on-site) and entitles a continuously-enrolled customer, at no extra charge, to upgraded versions of the software released while the contract is in effect (new versions roll out every 3-5 years).

The Office of Counsel concluded the contract is taxable:

Prewritten software is taxable property. Section 1101(b)(14) defines prewritten software (including prewritten upgrades), and its sale is taxable as tangible personal property under section 1105(a).
A standardized modification is prewritten software. Providing such a modification is taxable even if billed as "software maintenance" (TSB-A-96(27)S).
The upgrade commitment is a taxable license. A contractual commitment to provide a new version when available is itself a license of software, taxable when the receipts are paid.
Section 1115(o) -- only if separately stated. Section 1115(o) can exempt services performed on software (e.g., technical support), but where provided with the sale of tangible personal property, the charge is exempt only if reasonable and separately stated.
Result: Because the Petitioner bills one combined charge (not separating support from the upgrade right), its entire receipt for the maintenance contract is taxable. If it charged separate fees, the reasonable technical-support fee would not be taxable, and only the software license/upgrade fee would be taxed.

What this means for you

Software vendors selling "maintenance + upgrades"

If your maintenance contract bundles genuine support with the right to receive prewritten upgrades, and you bill one price, the whole thing is taxable -- the upgrade right is a taxable software license, and an undifferentiated charge sweeps the support in too.

Separately state to save the service portion

To keep the technical-support part nontaxable, charge a separate, reasonable fee for support and a separate fee for the upgrade/license. Then only the upgrade/license fee is taxable (section 1115(o)). Lumping them together forfeits that.

"Maintenance" labels don't control

Calling a standardized software modification "maintenance" doesn't make it nontaxable -- a standardized modification is prewritten software, hence taxable. Substance over label.

Common questions

Q: Is my software maintenance contract taxable?
A: If it includes the right to prewritten upgrades and you bill one combined price, yes -- the entire charge is taxable.

Q: How do I keep the support portion nontaxable?
A: Separately state a reasonable charge for technical support and a separate charge for the software upgrade/license. Then only the upgrade/license fee is taxable (section 1115(o)).

Q: We call it "maintenance," not a software sale -- does that matter?
A: No. A standardized modification of prewritten software is itself prewritten software and is taxable regardless of the label.

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 1101(b)(14) (definition of prewritten computer software)
Tax Law section 1105(a) (sales tax on prewritten software as tangible personal property)
Tax Law section 1115(o) (exemption for services performed on software if separately stated and reasonable)

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_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-15(9)S
Sales Tax
March 19, 2015

Office of Counsel
Advisory Opinion Unit

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE

ADVISORY OPINION

PETITION NO. S111020B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTED “Petitioner”. Petitioner asks
whether its receipts from a software maintenance and support contract are subject to sales tax
when the contract entitles the customer to updated versions of software.
We conclude that, if the updated software being provided is prewritten computer software
as defined in Tax Law § 1101(b)(14), the receipts from the contract are subject to sales tax as the
receipts from the sale of tangible personal property.
Facts

Petitioner develops and sells software. The software has pre-written components and is
also customized to work with the customer’s specific needs. In addition, Petitioner offers
maintenance and support services to customers that purchase its software.
Petitioner’s software maintenance and support contract includes technical support and
troubleshooting over the telephone. On-site support is provided when necessary, but the need for
on-site service is rare.
The maintenance and support contract is optional; a customer does not have to purchase
the service contract if it purchases software from Petitioner.
The service contract is for a one year term, i.e., customers are billed annually.
Customers who continuously maintain a service contract from Petitioner after the
purchase of software from Petitioner are entitled for no additional charge to upgraded versions of
the software if the upgraded version becomes available for sale while the service contract is in
effect. However, Petitioner does not issue upgrades annually; new versions of its software are
typically rolled out every three to five years.

-2-

TSB-A-15(9)S
Sales Tax
March 19, 2015

Analysis

Pre-written computer software is defined in Tax Law § 1101(b)(14) as computer software
(including pre-written upgrades thereof) that is not designed and developed by the author or
other creator to the specifications of a specific purchaser. The sale of prewritten computer
software is subject to sales tax under Tax Law § 1105(a) as the sale of tangible personal
property. Tax Law § 1115(o) exempts from sales and use tax services otherwise taxable under
Tax Law §§ 1105(c) or 1110 where performed on computer software of any nature. However,
where these services are provided to a customer in conjunction with the sale of tangible personal
property, any charge for these services shall be exempt only when the charge for the service is
reasonable and separately stated on an invoice or other statement of the price given to the
purchaser.
A standardized modification of prewritten software is itself prewritten software. Thus,
the provision of such a software modification is subject to sales tax as the sale of tangible
personal property even if the modification is sold under the rubric of “software maintenance.”
See TSB-A-96(27)S. The contractual commitment to provide a new version of prewritten
software when available, also qualifies as a license of software, which is subject to sales tax at
the time the receipts for the commitment are paid. Because Petitioner does not separately state
the charges for the modification of the software purchased by the customer or for the provision to
the customer of an upgraded version of the software when available, its entire receipt for
software maintenance is subject to sales tax. See TSB-A-91(70)S; TSB-A-96(27)S, TSB-A10(10)S. If Petitioner were to charge a separate fee or fees for the modification of the existing
version of the software and for the provision of an upgraded version of the software, any
reasonable fee for software maintenance service (e.g. technical support) would not be subject to
sales tax and only the fee or fees for the license of the updated or upgraded software would be
taxable.

DATED: March 19, 2015

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