Which of a restaurant franchisor's charges to its New York franchisees are subject to sales tax?

Plain-English summary

An out-of-state restaurant franchisor bills its New York franchisees for a long list of items and asked which are subject to New York sales/use tax. (The opinion notes it could not determine whether the franchisor is even required to collect New York tax, but answered assuming it is.) The Office of Counsel sorted the charges:

Taxable
- Hardware — miscellaneous hardware and the device used to receive an internet connection — is tangible personal property (Tax Law section 1105(a)). The entire receipt is taxed, including any markup that passes along shipping or sales tax the franchisor itself paid (Tax Law section 1101(b)(3)).
- Hardware + software installation (one charge): Installing tangible personal property is taxable (Tax Law section 1105(c)(3)). Because the software-installation charge is not separately stated from the hardware-installation charge, the whole charge is taxable.
- Ongoing IT support: Maintaining/servicing/repairing tangible personal property is taxable (section 1105(c)(3)). Because hardware maintenance is combined with software maintenance in one fee, the entire charge is taxable.
- Marketing fees: These bundle taxable point-of-purchase materials (counter cards, decals) with nontaxable advertising services, for one unitemized price — so the entire fee is taxable.
- Shipping: Taxable when the item shipped is itself sold in a taxable transaction — a "receipt" includes shipping (Tax Law section 1101(b)(3); 20 NYCRR 526.5(g)(3)).

Not taxable
- Faxes (17¢/page): The franchisor does not provide the transmission; this is a reimbursement of its own expense, not taxable.
- Online-order / website-support charges: Treated as services to software (Tax Law section 1115(o)). Note the caveats: if a single fee covers both services and prewritten software, the whole fee is taxable; but software custom to the franchisor's restaurants is exempt.
- Loyalty-rewards hosting: Managing/maintaining the points system is broader than an information service, so it is an unenumerated (nontaxable) service — even though it includes an information element (TSB-M-10(7)S).
- Franchise fees and royalty fees: Cover mostly intangibles (trademark rights, training, manual updates); the tangible items (e.g., manuals) are only incidental, so these fees are not taxable.

The opinion also notes the franchisor can buy items for resale tax-free (with a resale certificate) where its purchases occur in New York, but its resale of taxable property/services to New York franchisees is itself a taxable sale.

What this means for you

Bundling pulls nontaxable items into the tax base

The recurring theme: when a taxable component (hardware, hardware maintenance, point-of-purchase materials) is lumped into one unitemized charge with nontaxable services, the entire charge becomes taxable. Separately stating the reasonable charge for the nontaxable piece is what preserves the exemption (see Tax Law section 1115(o) for services to software).

Reimbursements vs. sales

A pure pass-through reimbursement of the franchisor's own cost (the per-page fax charge) is not a taxable sale, because the franchisor is not actually providing the taxed service or property.

Franchise/royalty fees are mostly intangible

Fees for trademark rights and training are nontaxable intangibles even though a manual changes hands, because the property is incidental. But marketing fees flunked that test — the point-of-purchase materials were a real, non-incidental tangible component.

Resale still flows through to the franchisee

Buying for resale lets the franchisor avoid tax on its own purchase, but the resale to the New York franchisee is taxable on the items and services that are taxable.

Common questions

Q: Why is my combined IT-support fee fully taxable when software maintenance alone is exempt?
A: Because the hardware-maintenance (taxable) and software-maintenance (exempt) charges are not separated. Separately stating a reasonable charge for the software service is what makes that portion exempt.

Q: Are the franchise and royalty fees taxable because a manual is included?
A: No — those fees are mostly intangible rights and training, and the manual is incidental. Marketing fees were taxable because the counter cards/decals were not incidental and the fee was unitemized.

Q: Is shipping always taxable?
A: Shipping follows the item: taxable when the thing shipped is sold in a taxable transaction, because a receipt includes shipping charges.

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(a) (sales tax on retail sales of tangible personal property)
• Tax Law section 1105(c)(1) (information services)
• Tax Law section 1105(c)(3) (installing, maintaining, servicing, repairing tangible personal property)
• Tax Law section 1101(b)(3) (receipt includes shipping charges)
• Tax Law section 1101(b)(6),(14) (prewritten vs. custom software)
• Tax Law section 1115(o) (services to software exempt if reasonable and separately stated)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2016.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a16_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(21)S
Sales Tax
May 27, 2016

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

PETITION NO. S130529B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTED. Petitioner asks whether a
variety of charges to Petitioner’s franchisees located in the state of New York are subject to sales
and compensating use tax, including: (1) faxes per page; (2) online order charges; (3) shipping;
(4) loyalty hosting; (5) IT support for hardware and software; (6) IT set up for hardware and
software; (7) hardware; (8) hardware used to receive an internet connection; (9) franchise fees;
(10) marketing fees; and (11) royalty fees.
We conclude that charges associated with faxes, online order charges, initial software
installation and loyalty rewards hosting are not subject to sales tax. However, charges associated
with miscellaneous hardware, hardware to support an internet connection, initial hardware
installation and ongoing IT support are all subject to sales tax. Charges associated with shipping
are subject to sales tax if the item being shipped is being sold in a taxable transaction. Charges
associated with franchise fees and royalty fees are not subject to sales tax. Charges for
marketing fees are subject to sales tax because they include tangible personal property and
nontaxable services for a single charge.
Facts
Petitioner is a corporation located in another state that sells franchises of its restaurant
throughout the United States. Petitioner has franchised locations in the State of New York and
often charges its franchisees for a variety of costs associated with operating the restaurants.
Petitioner wants to know which of these charges are subject to sales and compensating use tax.
Petitioner provides hosting for the loyalty rewards program to franchisees, and each
franchisee is charged a set rate per restaurant to utilize this service. The loyalty rewards program
allows customers to obtain a rewards card and then collect points for purchases towards future
free meals. The rewards program also comes with additional perks, such as coupons and free
offers for a customer’s birthday. The hosting charge includes only the tracking of customer
purchases, information, and the maintenance of points; the actual loyalty cards and hardware are
sold separately to the franchisee.
Petitioner self-hosts a website that allows customers to find locations, view menus and
place orders. Petitioner purchases a service from a third-party vendor to process the orders
through the website, and each franchisee is charged a set rate per restaurant to utilize this service.
This service primarily covers the maintenance required to ensure the ordering system runs

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Sales Tax
May 27, 2016

smoothly and to process payments, but it may include the updating of the website itself.
However, any programming done to update the website would be personalized to Petitioner’s
restaurant. In addition to online orders, Petitioner offers the ability for customers to fax in an
order, which is generally used for larger catering orders. According to Petitioner’s website,
customers have the ability to print out an order form, fill it in, and then fax the order form to the
location of their choice. These faxes are transmitted via the Internet by a third party vendor. The
fax company charges Petitioner 17 cents per page for all faxes, and Petitioner then sends a bill to
each franchisee for the faxes used by the franchisee’s individual restaurant(s).
In addition to these services, Petitioner bills franchisees for a variety of hardware and
software maintenance, as well as for the hardware itself. Upon establishing a new restaurant
location, Petitioner charges franchisees a one-time fee for a hardware device that allows the
restaurant to receive and maintain an Internet connection. Petitioner also charges franchisees for
miscellaneous hardware needed to repair any of a franchisee’s restaurant’s existing hardware.
These items are purchased directly from the vendor by Petitioner in bulk, who pays sales tax on
the initial transaction, and these items are then shipped to Petitioner’s warehouse outside of the
state of New York. When these items are needed by a franchisee, Petitioner subsequently passes
on to the franchisee the cost of the item, shipping and sales tax paid by the Petitioner.
Petitioner charges each franchisee a one-time fee for hardware and software installation
for each restaurant. The software installation and hardware installation are not charged
separately. Following this initial charge, Petitioner charges each franchisee a set rate per period
for any hardware and software maintenance that might be needed. This fee is a flat rate
regardless of use and is not itemized by the type of support provided.
Petitioner also charges each franchisee a franchise fee, marketing fee and royalty fee.
Franchise fees cover a variety of items including training, access to Petitioner’s manuals and
recipes, and use of Petitioner’s trademarks. Royalty fees provide franchisees with similar items
such as continued training and manual updates. Marketing fees cover the cost of advertising and
promotions to build the brand, research and development for menu innovation, food photography
and point-of-purchase materials, such as counter cards and decals.
Finally, whenever Petitioner ships an item to a franchisee or restaurant via common
carrier, Petitioner charges the franchisee to cover the cost of the shipping. The items shipped
vary, but could include, for example, miscellaneous hardware needed for repairs.
Analysis
Petitioner has not provided us with sufficient information to conclude whether it is
required to collect New York sales tax. However, to the extent that it is so required, sales tax
would apply to Petitioner’s charges to its franchisees as discussed below.
Petitioner charges its franchisees a set rate per period for the cost of hosting its loyalty
rewards program. This charge covers the collection and tracking of information, which is a

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Sales Tax
May 27, 2016

service. Under Tax Law § 1105(c)(1), the service of “collecting, compiling or analyzing
information of any kind or nature and furnishing reports thereof” is a taxable service, unless the
information is “personal or individual in nature” and “may not be substantially incorporated in
reports furnished to other persons.” However, the fact that one element of a service is an
information service does not mean that the service as a whole is taxable as an information
service. See TSB-M-10(7)S. The hosting of the loyalty rewards program includes managing and
maintaining the points system, accruing and debiting points based on coupons, and other perks;
this is broader than the compiling and provision of information described in Tax Law §
1105(c)(1). Therefore, the charges associated with the loyalty rewards points are for an
unenumerated service and would be exempt from sales tax.
Petitioner hosts a website that allows customers to place online orders. Petitioner pays a
third-party vendor to maintain the order portion of the website, and then seeks reimbursement
from each franchisee. The charge collected from each franchisee does not include the website or
the hosting of the website, but only technical support for the website. Tax Law § 1115(o)
exempts from sales tax services otherwise taxable under Tax Law § 1105(c) or § 1110 (e.g.,
installation, maintenance, etc.) where performed on computer software of any nature. However,
where services to software are provided to a customer in conjunction with the sale of tangible
personal property, the charge for these services is exempt only when it is reasonable and
separately stated on an invoice or other statement of the price given to the customer. Tax Law §
1115(o). Petitioner charges the franchisees for the third-party vendor’s maintenance of its
website, which includes software upgrades. These upgrades by themselves may qualify as
prewritten software. See TSB-M-93(3)(S). If the fee charged by the Petitioner covers both
services and prewritten software provided by the third-party vendor, the entire fee is subject to
sales tax. See TSB-A-96(27)S. However, these upgrades would be considered custom software
if they are specific to Petitioner’s restaurants and are created solely for this use, and, if so, would
also be exempt from sales tax. See Tax Law § 1101(b)(6),(14).
Petitioner charges their franchisees a fee of 17 cents per page for faxes received from
customers for orders. Petitioner does not provide the means of transmitting the faxes. These are
charges that are a reimbursement for expenses incurred by Petitioner that are not subject to sales
tax.
Petitioner charges a set price to each store for a hardware device used to receive an
Internet connection. Furthermore, Petitioner charges its franchisees miscellaneous hardware
charges as needed to replace or repair existing hardware. All of these charges constitute sales of
tangible personal property and are therefore subject to sales tax. See Tax Law § 1105(a). The
entire charge to a franchisee would be included in the “receipt” under Tax Law § 1101(b)(3),
including any markup to cover shipping charges or sales tax paid by Petitioner, if these costs
were also passed on to a franchisee.
Petitioner charges a franchisee a flat rate for hardware and software installation whenever
a franchisee opens a new restaurant. Tax Law § 1105(c)(3) imposes sales tax on the service of
installing tangible personal property. Hardware is tangible personal property; therefore, the fee

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for hardware installation is a taxable service. Because Petitioner’s software installation charge
is not stated separately from the hardware installation charge, the entire charge is taxable as one
receipt.
After the initial installation, Petitioner charges its franchisees a set rate per period to
cover IT support. This charge includes the maintenance of software and hardware for fax
machines, printers, terminals, back office computers and related software. Tax Law § 1105(c)(3)
imposes a tax on “maintaining, servicing, or repairing tangible personal property.” Therefore,
any charges associated with the maintenance of hardware are subject to sales tax. Because
Petitioner combines the charges for software maintenance with the charges for hardware
maintenance, the entire charge is taxable.
The application of sales tax to franchise fees, royalty fees and marketing fees depends on
what items and services are covered by these fees. Here, the franchise and royalty fees cover
primarily non-taxable intangibles, such as the right to use Petitioner’s trademarks and training
programs. Although these fees include limited tangible personal property, such as operations
manuals, these tangible objects are only incidental to the intangible rights conveyed. Therefore,
under the circumstances, the franchise and royalty fees are not subject to sales tax.
On the other hand, the marketing fees include both non-taxable services, such as
advertising services, and point-of-purchase materials, such as counter cards and decals, which
are tangible personal property subject to sales tax under Tax Law § 1105(a). Unlike the tangible
personal property included in the franchise and royalty fees, the point-of-purchase materials
included in the marketing fees provide a tangible visual element to the marketing of Petitioner’s
restaurants and brand, and are not an insignificant element of the marketing fees. Because the
marketing fees are not itemized and include taxable tangible personal property, the entire fee is
subject to sales tax as one receipt.
To the extent that Petitioner’s purchases occur in New York, purchases of tangible
personal property and services intended exclusively for resale would be exempt from sales tax as
long as the Petitioner is registered for sales tax purposes and timely furnishes the vendor with a
properly completed resale certificate. This would allow Petitioner to avoid paying sales tax on
its original purchase of tangible personal property and taxable services. However, regardless of
the Petitioner’s payment of sales tax on the original transaction, the resale of taxable personal
property and taxable services to a franchisee located in New York is a taxable transaction under
Tax Law § 1105(a) as a retail sale of tangible personal property and taxable services. To the
extent that Petitioner’s purchases for resale to its franchisees occur outside of New York, it
should consult the state in which the purchase occurred for information with respect to a resale
exemption.
Petitioner charges its franchisees the cost of shipping a variety of items via common
carrier to franchisees or restaurants. The applicability of sales tax to shipping charges depends
on the item(s) being shipped. Tax Law § 1105(a) imposes sales tax on “receipts” from sales of
tangible personal property. Tax Law § 1101(b)(3) defines “receipt” to include any shipping

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charges. Therefore, if a taxable item is shipped, the entire price, including shipping, would be
taxable. For example, if Petitioner were to sell a replacement piece of computer hardware to its
franchisee, and then ship the hardware to the franchisee in New York, the entire charge for the
product, including the shipping fees, would be a taxable receipt under Tax Law §1101(b)(3). See
20 NYCRR § 526.5(g)(3).

DATED: May 27, 2016
_/S/_____
DEBORAH R. LIEBMAN
Deputy Counsel
NOTE:

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 of 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.