Are hosted email, fax, online meeting, and file-management services taxable in New York?

Plain-English summary

A provider sells four separate hosted services — email, fax, online meeting, and file management — and asked which are taxable.

The Office of Counsel split them four ways:

• Email — not taxable. Email is telephony/telegraphy, but the Internet Tax Freedom Act (ITFA) bars taxing Internet access, which includes email and instant messaging (even when sold independently). So email service is not taxable.
• Fax — taxable telegraphy. The fax services purpose is exchanging documents with non-subscribers still using fax machines; accepting and delivering the data is telegraphy (Tax Law section 1105(b)(1)(B); Easylink). It does not count as email for ITFA, and the single charge is fully taxable even though transmissions may be intra- or inter-state.
• Online meeting services — not taxable services.
• File management/storage — not taxable. Sales tax reaches only storage of tangible property, not digital products (Tax Law section 1105(c)(4)).
• Software trap (the key wrinkle). The specified email software and conferencing software are taxable prewritten software (sold to some subscribers for one price with the service; the software also works for unrelated functions and can be bought from third parties, so it is a discrete transaction — Galileo). When the provider sells that software together with the otherwise-nontaxable email or meeting service for one price, the entire charge is taxable — unless the provider can reasonably identify (from books and records), or separately state a reasonable charge for, the nontaxable service.

What this means for you

Communications / SaaS providers

Email and digital storage ride exemptions (ITFA Internet access; digital-storage not taxed), and online meetings are non-taxable services — but fax is taxable telegraphy. Map each service to its own rule; dont assume an all-digital suite is uniformly non-taxable.

Bundling taxable software taxes the whole charge

The repeated trap: if you bundle taxable prewritten software with a nontaxable service for one price, the entire price becomes taxable. Protect the exemption by separately stating a reasonable charge for the nontaxable service (or being able to reasonably identify it from your books and records).

Fax ≠ email for ITFA

A service whose point is reaching fax machines is telegraphy, not Internet-access email — so ITFA doesnt shield it.

Common questions

Q: Is our hosted email taxable?
A: No. Although email is telephony/telegraphy, ITFA bars taxing Internet access, which includes email and instant messaging.

Q: Why is fax taxable when email isnt?
A: Fax service is telegraphy whose purpose is exchanging documents with non-subscribers using fax machines; it isnt email for ITFA, and the single charge is fully taxable.

Q: We include email/conferencing software with the service for one price. Does that matter?
A: Yes. The software is taxable prewritten software, so the whole single charge is taxable unless you can reasonably identify, or separately state a reasonable charge for, the nontaxable service.

Q: Is digital file storage taxable?
A: No. Only storage of tangible personal property is taxable; digital storage is not.

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(b)(1)(B) (tax on telephony and telegraphy)
• Tax Law section 1101(b)(6) (prewritten software is tangible personal property)
• Tax Law section 1105(c)(4) (storage of tangible property; not digital)
• Internet Tax Freedom Act, 47 USC 151 note (Internet access, including email/instant messaging, cannot be taxed)
• Easylink Services Intl v. Tax Appeals Tribunal, 101 AD3d 1180 (3d Dept 2012) (fax/data delivery is taxable telegraphy)

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_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(30)S
Sales Tax
November 18, 2016

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

PETITION NO. S130506B

The Department of Taxation and Finance received a Petition for Advisory Opinion
from REDACTED REDACTED REDACTED REDACTED REDACTED RE
(“Petitioner”). Petitioner asks whether any of four services that it sells (e-mail, fax,
meeting, and file management) are subject to New York sales tax. We conclude that (1)
the receipts from Petitioner’s fax service are taxable as telephony or telegraphy; and that
(2) Petitioner’s remaining services are not taxable, except that Petitioner’s e-mail service
and meeting service are taxable when Petitioner sells those services along with certain
taxable prewritten software for one price.
Facts
Petitioner is headquartered in California, and has an office in New York.
Petitioner provides separate e-mail, fax, Internet meeting, and file management services,
which are hosted on Petitioner’s website. The subscribers to the four services must
provide their own telecommunication connections to Petitioner’s website.
Each e-mail subscriber is assigned an online mailbox. Petitioner houses its online
mailboxes on a server located outside New York. All e-mail messages sent to a subscriber
are routed to and stored in the subscriber’s mailbox. Petitioner requires that its e-mail
subscribers have specified e-mail software. The e-mail software can be purchased either
from a third party or Petitioner. If Petitioner provides the software, the subscriber
downloads the software directly to the subscriber’s server. An appendix to Petitioner’s
standard contract grants the subscriber the right to use the specified e-mail software in
connection with the services provided by Petitioner. The specified e-mail software
functions identically, whether purchased from Petitioner or from a third party. Although
used mainly as an e-mail application, the specified e-mail software also includes a
calendar, note taking, journal, and web browsing functionality, along with task manager
and contact manager features. The specified e-mail software can be used with instantmessaging and VoIP calling capability. A subscriber can use the specified e-mail software
to adjust the appearance of its mailbox. When the subscriber obtains the software from
Petitioner, Petitioner bills the subscriber a single charge for e-mail service and the
specified e-mail software (per user/per month), which allows unlimited usage. This
monthly charge is higher than the charge imposed by Petitioner for e-mail service without
the provision of the software.

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TSB-A-16(30)S
Sales Tax
November 18, 2016

Petitioner’s fax service allows subscribers to send and receive faxes. Each
subscriber receives a telephone number that can be associated with the subscriber’s
specified e-mail program mailbox or with a fax device. Incoming faxes received by a
subscriber can be routed directly to the subscriber’s specified e-mail program mail box
and appear as an attachment to an e-mail. For outgoing faxes, the service allows
subscribers to send a fax directly from the subscriber’s specified e-mail program mail box
as an attachment to an e-mail. The “fax e-mail” goes to Petitioner’s server, which faxes it
to the recipient’s traditional fax machine or routes it to the recipient’s electronic mailbox
(if the recipient also has a similar fax service subscription). Faxes addressed to a
subscriber of Petitioner’s fax service are stored in the subscriber’s online mailbox as a file
attachment to an e-mail. The fax service uses a server located in Petitioner’s New York
office. The subscriber is able to access the attachment by opening the e-mail. The
subscriber accesses the on-line mailbox through its own telecommunication connections.
Petitioner charges its subscribers a monthly subscription amount (per user/per month) for
a specified level of usage, with additional charges for overages. The fax service is most
useful in exchanging faxes with persons who want to send and receive information via the
traditional fax machine, thereby allowing subscribers to virtually access faxes from
anywhere they are sent, while enabling them to send faxes to those recipients that still
prefer receipt of messages by fax.
Petitioner’s meeting services require the subscriber to have a specified prewritten
conferencing software. Subscribers can buy the specified conferencing software from
Petitioner or a third-party vendor. Petitioner does not sell the specified conferencing
software except in connection with its meeting services. Petitioner offers two types of
meeting services: same-time instant messaging and video conferencing. These services
allow multiple users to participate in the same messaging or call conversation from
different locations. The specified conferencing software allows a subscriber to add up to
250 people to online meetings, gives the subscriber enterprise-grade security for its
conferences, allows the subscriber to manage employee accounts, and is integrated into
certain of the subscriber’s desktop applications, such as a spreadsheet application. Thus,
for example, when using the desktop spreadsheet program, the subscriber has the ability to
send the spreadsheet to another subscriber using the prewritten conferencing software.
Subscribers can use the meeting service to communicate with persons who are not
subscribers to Petitioner’s service, although the non-subscriber must have a license to use
the specified e-mail software, which includes instant-messaging and VoIP calling
capability. To communicate with a non-subscriber, the subscriber sends a link to the nonsubscriber, that, when opened, connects the non-subscriber’s specified e-mail software
program to Petitioner’s server. The non-subscriber then will be able to participate in a
web conference hosted by the subscriber or send the subscriber instant messages. This
connection is made on Petitioner’s server and is not a direct connection between users’
computers (i.e., peer to peer).
Petitioner charges its meeting service subscribers a monthly subscription amount
(per user/per month) for a specified level of usage, with additional charges for overages.

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TSB-A-16(30)S
Sales Tax
November 18, 2016

Where the subscriber purchases the specified conferencing software from Petitioner in
addition to the service, Petitioner imposes a single monthly charge to the subscriber,
which charge is higher than when Petitioner provides only the service.
Petitioner’s file management services include file backup, and data storage and
sharing. Subscribers transfer data files to Petitioner’s servers, where the files are stored.
Subscribers can retrieve the documents by accessing Petitioner’s portal on the Internet,
which is password protected. Subscribers can also use the data sharing function to extend
access to a subset of their files to an external party (users outside of their organization) for
the purpose of collaborating. Petitioner does not manipulate the stored data or otherwise
process it in any way. For these services, Petitioner charges a monthly subscription
amount (per user/per month) for a specified level of data transfers, with an additional
charge once that data limit is exceeded.
Analysis
Sales tax is imposed on all retail sales of tangible personal property and sales,
except for resale, of certain enumerated services. See Tax Law § 1105(a), (b), and (c).
Among the taxable services are telephony or telegraphy. See Tax Law § 1105(b)(1)(B).
E-mail service qualifies as telephony or telegraphy service for purposes of Tax
Law § 1105(b)(1). See Easylink Services International, Inc., v. Tax Appeals Tribunal, 101
AD3d 1180 (3d Dep’t., 2012). However, the Internet Tax Freedom Act and amendments
thereto (ITFA) preclude States from taxing Internet access. See 47 USC § 151 (note 1101
et. seq., made permanent by Public Law 114-125). Electronic mail and instant messaging
services are included in the definition of Internet access, even if such e-mail and
messaging services are provided independently of any service that allows a subscriber to
connect to the Internet. See 47 USC § 151 (note 1105); TSB-M-08(2)S. Thus, under
ITFA, Petitioner’s charge for its e-mail service is not subject to New York sales and use
tax.
Petitioner requires that subscribers have specified e-mail software. With regard to
some subscribers, Petitioner provides the specified e-mail software with its e-mail service
for one price. Other subscribers purchase the specified e-mail software from a third-party.
The specified e-mail software qualifies as pre-written computer software. See Tax Law §
1101(b)(14). The definition of “tangible personal property” includes prewritten computer
software “whether sold as a part of a package, as a separate component, or otherwise.” Tax
Law § 1101(b)(6). When Petitioner transfers the right to use the specified e-mail software
in conjunction with the sale of its service for one price, Petitioner is selling prewritten
software. See Tax Law § 1105(a). The sale of the software is a discrete transaction for
purposes of sales tax because the subscriber has the option of purchasing the software
from a third party and because the subscriber can use the software for functions unrelated
to Petitioner’s e-mail service. See Galileo International Partnership et al. v. Tax Appeals
Tribunal, 31 AD3d 1072 (3d Dep’t, 2006); TSB-A-10(32)S.

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TSB-A-16(30)S
Sales Tax
November 18, 2016

While the State cannot subject the sales of Petitioner’s e-mail service by itself to
sales tax, ITFA allows sales tax to be imposed if charges for Internet access are aggregated
with other charges subject to taxation. Thus, if Petitioner bills a single charge for a bundle
that includes both a nontaxable service and taxable tangible personal property, i.e., e-mail
service and the specified e-mail software, the entire charge is subject to taxation unless
Petitioner can reasonably identify the charges for e-mail service and the specified e-mail
software from its books and records kept in the regular course of business. See ITFA, 47
USC § 151 n. 151, at § 1106. If Petitioner cannot make that showing, it must collect sales
tax on the full amount of its charges for the e-mail service and the specified e-mail
software.
Petitioner’s fax service allows a subscriber to both receive and send faxes to or
from other subscribers of Petitioner’s service or non-subscribers. Subscribers do not need
Petitioner’s fax service to send documents to other subscribers, as they already can do so
using Petitioner’s e-mail service. Thus, the primary function of Petitioner’s service is to
be able to exchange documents with non-subscribers still using fax machines to send and
receive documents. To send documents to a non-subscriber, the subscriber essentially
emails the document to Petitioner, who then faxes it to the subscriber’s intended recipient,
using its own telecommunication connections. This faxing service constitutes a
telegraphy service under Tax Law § 1105(b)(1)(B). See Matter of EasyLink Services
International, Inc. Tax Appeals Tribunal, July 27, 2009 (“The acceptance and delivery of
data resembles the role of a traditional telephone or telegraph company and, thus, such
services are taxable as telephony or telegraphy”), conf’d Matter of Easylink Intl., Inc. v.
New York State Tax Appeals Trib., 101 AD3d 1180, supra; 20 NYCRR § 527.1(b).
Although the service can be used for either intra-state or inter-state transmissions, the
entire charge is subject to tax because Petitioner imposes only a single charge for the
service. See Tax Law § 1132(c); 20 NYCRR § 527.1(b); TSB-A-88(8)S. Finally, the fax
service does not qualify as email service for purposes of ITFA because its purpose is to
allow a subscriber to communicate with a party that lacks an email service, such that at
least part of every communication using the service goes by fax, rather than email. See j2
Glob. Commc'ns, Inc. v. City of Los Angeles, 218 Cal. App. 4th 328, 335 (Court of
Appeal, Second District, Division 4 2013).
Petitioner’s meeting services are not taxable services. See NYT-G-06(1)C, (3)S;
TSB-A-99(35)S, (20)C. In some instances, Petitioner transfers the specified conferencing
software, with its meeting services, to subscribers for one price. This conferencing
software constitutes prewritten computer software taxable as tangible personal property.
See Tax Law §§ 1101(b)(6), 1101(b)(14); 1105(a). When taxable tangible personal
property is sold in conjunction with a nontaxable service for one price, the entire charge is
taxable. See Tax Law § 1132(c); 20 NYCRR § 527.1(b). Thus, in those instances where
Petitioner provides both the conferencing software and meeting services for one price, the
entire charge is taxable. However, if Petitioner breaks out a separate price for the meeting
services, which is reasonable as a proportion of the total charges, the separate charge for
the services will not be subject to tax. See, e.g., TSB-A-04(23)S.

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TSB-A-16(30)S
Sales Tax
November 18, 2016

Petitioner’s file management service is in the nature of a data storage service. The
sales tax applies only to storage of tangible personal property, not storage of digital
products. See Tax Law § 1105(c)(4); TSB-A-16(6)S; TSB-A-05(40)S. Accordingly,
Petitioner’s file management service is not subject to tax.

DATED: November 18, 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 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.