Are Internet-based large-file transfer subscription plans subject to New York sales tax?

Plain-English summary

A company sells Internet-based subscription plans for sending, receiving and tracking large digital files. A customer uploads a file to the company's server and enters a recipient's email; the recipient gets an email with a link to download the file from the server. The company encrypts and virus-scans files, stores them for a set number of days, and offers optional, free plug-ins, desktop/mobile apps and a "digital drop box." Paid tiers (Pro, ProPlus, Corporate) add storage, tracking, access controls and enterprise administration. It asked whether the plans are taxable.

The Office of Counsel concluded the plans are a nontaxable service:

• Sales tax reaches prewritten software (tangible personal property, Tax Law section 1101(b)(6)) and enumerated services, but not unenumerated services.
• The plans' primary function is letting a customer transfer large files to recipients over the Internet. The company gives the customer access to prewritten software only for the limited purpose of uploading a file and entering the recipient's address — but accomplishes the rest of the job by other means: providing the server that acts as the bridge, running anti-virus scanning, and giving the recipient the download link.
• That makes the offering a nontaxable bridging service (citing TSB-A-15(28)S), not a sale of prewritten software.
• The added functionality — access levels, the digital drop box, and the Corporate Plan's administrator controls — is ancillary to the file-transfer bridging and does not change the nontaxable result. The plug-ins and apps are free and optional.

What this means for you

File-transfer / "bridging" platforms are generally nontaxable

A service whose core is connecting two parties to move data — you provide the server bridge, security and the access link, while the customer just uploads and addresses the file — is a nontaxable bridging service in New York, even though some prewritten software is involved at the edges.

Limited, incidental software use does not make it a software sale

Giving customers software for the narrow step of uploading/addressing a file does not convert the service into a taxable sale of software, where the provider performs the substance of the service by other means. Keeping client apps free and optional reinforces that.

Ancillary admin/storage features ride along

Access controls, drop boxes and enterprise-administration features that are ancillary to the main bridging function do not make the plan taxable.

Common questions

Q: Customers download plug-ins and apps — isn't that taxable software?
A: No. The apps are free and optional, and customers use software only for the limited upload/address step. The provider performs the rest of the bridging service itself, so it is a nontaxable service, not a software sale.

Q: Does the Corporate Plan's admin console make it taxable?
A: No — those enterprise controls are ancillary to the core file-transfer bridging service.

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) (enumerated taxable services)
• Tax Law section 1101(b)(5) (definition of sale)
• Tax Law section 1101(b)(6) (prewritten software is tangible personal property)

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_6s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-16(6)S
Sales Tax
February 25, 2016

Office of Counsel

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S131004A

The Department of Taxation and Finance received a petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED
(“Petitioner”). Petitioner asks whether the sale of its Internet-based document transfer
subscription plans described below are subject to sales and use tax. We conclude that the plans
constitute nontaxable services.
Facts
Overview of Petitioner’s Services
Petitioner provides solutions (“plans”) for sending, receiving and tracking large digital
files via the Internet, including free and paid plans. Customers purchase the paid plans for a
monthly or annual subscription, for which the sales price varies according to the features
included in the plan package. Some features of the paid plans may be purchased on a pay-peruse basis.
To use any of Petitioner’s plans, the Customer wanting to send the file accesses
Petitioner’s website and inputs the e-mail address of a designated recipient. The Customer then
selects the file he or she wants to transfer from his or her computer hard drive and clicks a button
on the webpage to initiate the file upload/send process. The plan sends an e-mail notification to
the recipient from the e-mail address of the Customer, with a subject message reflecting that a
file has been sent from the e-mail address of the Customer. The recipient follows links within
the body of the notification e-mail that take the recipient to Petitioner’s webpage, where the
recipient then clicks a button to download the file to his or her computer. The uploading and
downloading of the file is through Petitioner’s servers located in California.
Petitioner stores the subscriber’s uploaded and sent files for a certain number of days
after which time the files automatically expire and are deleted from Petitioner’s server.
Petitioner performs encryption and virus scanning at the Server to ensure the safe transfer of the
file. Recipients do not pay for downloading the file.
As part of its free and paid plans, Petitioner makes available "plug-ins" and applications
at no charge as described below, which the Customer can download to his or her device. The
plug-ins and applications are optional and available to all Customers, including customers using
the free “Lite” plan. The applications and plug-ins are subject to the terms of a "click-through"
software license that customers are required to accept by clicking on an "accept" button before
downloading to his or her device. Only 2% of Pro-plan and ProPlus Plan paid users download
these applications.

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Web Plug-ins and Desktop Plug-ins
The web plug-ins are not stand-alone application software, but rather software that
works in conjunction with other third party software that already exists on the Customer's
computer, i.e., the Customer's webbrowser software. The webmail-based plug-ins do not alter
client-side software for the webmail program; rather, the plug-ins enhance the Customer's web
browser. The features of the webmail plug-in allow the Customer to upload documents to
Petitioner’s servers from webmail sites, or directly from the Customer's web browser toolbar.
The webmail plug-ins only become available when the Customer logs into his or her webbased e-mail account.
Petitioner also offers desktop e-mail plug-ins, which are downloaded to the Customer's
device and are a software code that attaches to the Customer's installed e-mail client software.
The desktop e-mail plug-ins allow Customers to upload a document to Petitioner’s servers
directly from the Customer's desktop e-mail software rather than visiting Petitioner’s website
directly.
Desktop Portal Application
Petitioner’s desktop portal is a standalone software application that allows a computer
to continually synchronize with Petitioner’s cloud-based servers. The Customer saves the
current version of a digital file to a designated folder on his or her computer's hard-drive. The
desktop portal then synchronizes the designated folders to Petitioner’s servers periodically so
that the most recent version of the file can be accessed from multiple devices. The Desktop
Portal is offered free of charge to all Customers.
Mobile Applications
The mobile applications are available for download onto any Customer's smartphone
o r t a b l et at no charge. Because of the nature of mobile platforms, the mobile application is
required in order for the Customer to access Petitioner’s California server from his or her mobile
device, and must be specifically launched before the Customer can access the Service. The
mobile application allows the Customer to send, receive, track, and store digital files directly
from his or her smartphone or tablet, but it does not add any features to the Service that are not
also available from the Customer's computer.
Plan Descriptions

Petitioner’s free Lite plan allows customers to transfer files of up to a maximum size of
50 MB at no charge. Lite customers receive up to 2GB of data storage. Petitioner maintains
that the Lite plan requires no download of software to the customer's device in order to use the
Service from a laptop or computer.
Petitioner has three paid plans. Customers of the first paid plan, the Pro-plan, receive
three additional gigabytes (GBs) of storage, and the ability to send larger files of up to two GBs.
Additionally, Pro-plan Customers receive a digital drop box. The digital drop box is a hosted
data storage solution that allows the Pro-plan Customers to send files from and receive files at

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Sales Tax
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the hosted drop box, rather than having to upload files from and download files to the Customer's
device(s). The digital drop box allows Pro-plan Customers to switch between devices, without
having to reload the file to the next device. The Pro-plan Customer can grant different
authorization access levels to the senders and recipients who transfer files in and out of the
Customer's digital drop box and the customer also can set file transfer expiration dates via the
digital drop box.
Petitioner’s second paid plan is its ProPlus Plan. In addition to receiving all the features
of Lite and Pro, ProPlus Customers receive unlimited data storage. ProPlus Customers receive
a notification e-mail that tracks when recipients have been notified of a file transfer and
another notification e-mail that tracks when a recipient has downloaded the file. In addition,
ProPlus Customers also have access to telephone support.
Petitioner’s third paid plan is the Corporate Plan. This plan provides a hosted file sharing
platform designed specifically for enterprises and large organizations. The Corporate Plan
provides Customers with an online work space where they can store an unlimited amount of files
in cloud folders, and share content with other authorized Customers. The Corporate Plan has all
the features of Pro-plan, and ProPlus, and adds Enterprise-level controls. Additional features of
the Corporate Plan include the following:
• Send, Receive & Track: Provides desktop and web plug-ins that allow the
Administrator to identify, with regard to all the enterprise’s users, in which folder the user has
stored a particular file.
• Custom branding of emails and file share and storage environments.
• The enterprise management service function provides an administrator console from
which the Customer's designated administrator can centrally provision new users, manage
branding, and define security policies for the entire corporate environment across the desktop,
web and mobile devices. The Administrator has access to reporting and analytics, including files
sent, the sender, the recipient, and download information.
• Technical Support, including access to customer representatives by telephone, email,
and "live chat," a form of web-based instant messaging.
The Corporate Plan operates by way of plug-ins, which must be downloaded to the
Customer's desktop document-sharing or e-mail software programs and do not become available
until the Customer launches the desktop sharing or e-mail programs. The plug-ins allow for the
transfer of the file to the Corporate Plan Enterprise Management software, a hosted application
by which the Corporate Plan administrator can supervise enterprise users and manage the
organization's secure passwords and apply the organization's policy controls, specifically for
mobile device users. For instance, the administrator can choose to enforce application passcodes
on mobile devices or clear local data from devices after an established number of failed login
attempts. The integration between the Corporate Plan and the customer’s desktop e-mail and
document sharing software allows Customer to share files directly from those programs without
having to switch from the document-sharing or e-mail programs to transfer the files.
Analysis
Sales tax applies to the receipts from every retail sale of tangible personal property,
except as otherwise provided for in the Tax Law, and the receipts from every sale, except sales

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for resale, of certain enumerated services. See Tax Law §§ 1105(a),(c). “Sale” is defined, in
pertinent part, as “[a]ny transfer of title or possession or both, exchange or barter, rental, lease or
license to use or consume…for a consideration, or any agreement therefor.” See Tax Law §
1101(b)(5). “Tangible personal property” is defined to include pre-written software, regardless
of the medium by means of which such software is conveyed to a purchaser. See Tax Law §
1101(b)(6).
Petitioner’s paid plans permit customers to send large files to recipients and then provide
different levels of access for different recipients. The primary function of these plans appears to
be the customer’s ability to send files over the Internet to specified recipients. Petitioner
accomplishes this by allowing the customer to upload the file to its server and then providing the
customer’s recipient with the means to access that file on Petitioner’s server. As part of the
service, Petitioner ensures that the transferred files are virus-free. By providing its customers
with the means by which to transfer files to a recipient through its web portal, without providing
the customers with the telecommunication connections to the Internet site, Petitioner is providing
a bridging service, which the Department has held is not one of the taxable services. See TSBA-15(28)S. Petitioner accomplishes a part of this bridging service by giving its customers access
to prewritten software, either via download, or over the Internet, which the customers use for the
limited purpose of uploading a document to Petitioner’s website and providing an e-mail address
for the recipient. But Petitioner accomplishes the rest of the bridging service by other means,
including providing the server that functions as the bridge where the connection takes place,
running an anti-virus program on the server that assures the recipient that the file will be safe to
download, and giving the recipient the link necessary to access the document. Under these
circumstances, through its paid plans, Petitioner is not selling its customers prewritten software,
but rather is providing a nontaxable service.
Petitioner’s paid plans also provide the customer with the ability to specify levels of
access for each recipient, as well as access to a digital dropbox. Moreover, the Corporate Plan
product, in addition to providing an enterprise customer the file-transfer functionality discussed
above, allows the customer’s administrator to control certain aspects of the authorized
employees’ use of Petitioner’s file-sharing service. All of this functionality appears to be
ancillary to the main function of those plans, which is providing a bridging service that allows a
customer to transfer large files to recipients over the Internet. Accordingly, this additional
functionality does not change the nontaxable nature of Petitioner’s paid plans.

DATED: February 25, 2016

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,

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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.