Is customized retail-training software (with embedded videos) and its subscription fees taxable, and how is the tax sourced?

Plain-English summary

A vendor sells employee-training software to retail chains in and outside New York. The product is prewritten code "skinned" (customized with each retailer's logo, name, and operating system) and may include videos the vendor films and embeds in the software (the video plays only through the software; the vendor keeps the video). Retailers access it through an app on corporate devices, and managers pull reports on employees' quiz scores. Charges include the software (with skinning), media/video creation, and a subscription fee based on the number of users (managers and employees). It asked how these are taxed and sourced.

The Office of Counsel concluded:

• The training software is taxable prewritten software. Selling access and the right to use/consume prewritten software is a taxable sale of tangible personal property (Tax Law §§ 1101(b)(6), 1105(a)). Prewritten software stays prewritten even when modified for a specific buyer — unless the custom-modification charge is reasonable and separately stated. Here the "skinning" charge is not separately stated from the prewritten-software charge, so the entire charge is taxable (TSB-M-93(3)S).
• Subscription fees are taxable. Charges giving employees/managers access to and the right to use prewritten software are taxable transfers of that software.
• Standalone electronic videos are not taxable. Videos delivered electronically aren't tangible personal property, so a separate charge to create them isn't taxable (TSB-A-08(41)S; TSB-A-12(10)S). But if the software and videos are sold for one lump-sum price, the entire charge is taxable (20 NYCRR 527.1(b) — taxable + exempt items sold as a single unit are taxed on the total).
• Situs — destination tax. The sale is sourced to where the license is used (20 NYCRR 526.7(e), 525.2(a)(3)). When a retailer's employees use the software both in and outside New York, the vendor collects tax only on the New York share of users, relying on written location information from the retailer (retained at least three years).

What this means for you

SaaS, training-software, and content vendors

Customized ("skinned") prewritten software is taxable — and the custom-modification carve-out only works if you separately state a reasonable charge for it. Bundle the customization into the software price and the whole thing is taxable. Access subscriptions to prewritten software are taxable too.

Bundling kills the video exemption

Electronically delivered video alone isn't taxable, but lump-summed with taxable software it becomes fully taxable. Separate-state the video to preserve its non-taxable status.

Source by where users are

This is a destination tax for software: tax the New York portion of users. Get written user-location data from the customer and keep it three+ years to support your apportionment.

Common questions

Q: Our software is customized for each retailer — isn't customization exempt?
A: Only if the custom-modification charge is reasonable and separately stated. If skinning isn't broken out from the prewritten-software charge, the whole charge is taxable.

Q: Are the subscription fees taxable?
A: Yes — they give employees and managers the right to use prewritten software, which is a taxable transfer.

Q: Is the charge for creating the embedded videos taxable?
A: Not on its own — electronically delivered video isn't tangible personal property. But if sold in one lump sum with the taxable software, the entire charge is taxable.

Q: How do I tax a retailer with stores in and outside New York?
A: Apportion: collect tax only on the New York share of users, using written location info from the retailer (kept at least three years).

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 § 1101(b)(6); Tax Law § 1105(a) (tax on prewritten software as tangible personal property)
• Tax Law § 1101(b)(5) (definition of sale, including license to use)
• Tax Law § 1101(b)(14) (prewritten software; separately stated custom modifications)
• 20 NYCRR 527.1(b) (taxable and exempt items sold as a single unit); 20 NYCRR 526.7(e); 20 NYCRR 525.2(a)(3)
• TSB-M-93(3)S; TSB-A-08(62)S; TSB-A-15(51)S; TSB-A-08(41)S; TSB-A-12(10)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2017.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a17_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-17(15)S
Sales Tax
August 1, 2017

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

PETITION NO. S140320A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTED REDACTED REDACTED REDACTED REDACTED RE (hereinafter “Petitioner”).
Petitioner asks whether New York State and local sales tax apply to charges to customer-retailers
(hereinafter “Retailers”) located both in and outside New York for: (i) training software that is
customized to each Retailer and distributed electronically; (ii) license fees related to the creation of
videos that are embedded in the software; (iii) software and video license fees when they are charged
in a lump sum; and (iv) monthly or annual subscription fees.
We conclude that Petitioner’s sale of software, software and videos for one lump sum, and its
subscription fees will be subject to New York State and local sales tax when they are used by
Retailers’ employees in New York State, but they will not be subject to tax when sold for use by
Retailer’s employees outside New York State.
Facts
Petitioner’s primary product, REDACTE (“the Product”), is software that delivers interactive
training programs to Retailers located both in and outside of New York State. The Product helps
Retailers train their employees to become knowledgeable about their goods and culture to drive
better performance.
The Product consists of basic code that is “skinned” for Retailers. “Skinning” involves
customizing Petitioner’s core code to reflect a retailer’s logo, name or other individual attributes.
The code is also modified to work with each Retailer’s operating system.
Where a Retailer wants videos included in the Product, the videos are filmed by Petitioner
after Petitioner learns about a Retailer’s culture and brand attributes. Petitioner does this in four
phases: creation, production, post-production and testing and release.
Retailers and their employees access Petitioner’s Product through its software application
(hereinafter “app”). The Product is not available for personal devices. Retailers download the
training content from the app to their corporate devices, including desktop computers, laptops,
tablets or cash registers. The training content in the Product incorporates interactive quizzes,

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exercises, assessments and videos. Trainings that include videos have a video link embedded in the
software and can be played only by the software. The video link is triggered automatically once the
employee gets to a particular section. Petitioner does not provide the videos or any other tangible
items to Retailers and maintains ownership of the video.
Retailers’ managers also can use the Product to review reports of their employees’ quiz
scores and determine whether employees have completed the required training. This data is stored
online and managers access it through a link in the app.
Each Retailer is charged as follows: (i) for the prewritten software and to have Petitioner’s
prewritten software “skinned” to that Retailer, (ii) to have media programs created, and (iii) a
subscription fee. Sometimes the software and media programming is billed as one charge. The
frequency of the subscription fee varies by Retailer and may be on a monthly, quarterly or annual
basis. The fee is based on the number of users who log into the software. Both managers and
employees are users and the charge is the same for both.
Analysis
The Tax Law imposes sales tax on retail sales of tangible personal property, including
prewritten software, and enumerated services. See Tax Law §§ 1101(b)(6); 1105. “Sale” is defined
as “[a]ny transfer of title or possession or both, exchange or barter, rental, lease or license to use or
consume or otherwise, in any manner or by any means whatsoever for a consideration, or any
agreement therefor.” Tax Law § 1101(b)(5).
Prewritten computer software is computer software that is not designed and developed by the
creator to the specifications of a specific purchaser. Tax Law § 1101(b)(14). “Prewritten computer
software is included within the definition of tangible personal property, ‘regardless of the medium
by means of which such software is conveyed to the purchaser.’” TSB-A-08(62)S; Tax Law §
1101(b)(6). Selling a client access and the right to use or consume prewritten software constitutes the
sale of prewritten software, which is taxable under Tax Law § 1105(a). See TSB-A-15(25)S; TSB-A15(1)S; TSB-A-08(62)S.
“Prewritten software, even though modified or enhanced to the specifications of a specific
purchaser, remains prewritten software subject to tax.” TSB-M-93(3)S. Additionally, software that is
created by combining multiple prewritten programs is still prewritten software subject to tax. See
TSB-A-07(16)S. However, if the charge for the custom modification is reasonable and separately
stated on the invoice, the separately stated charge is not subject to tax. TSB-M-93(3)S.

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Here, Retailers use Petitioner’s app to access and download Petitioner’s training software for
use in training their employees. Petitioner’s charge for its training software constitutes receipts from
the lease or license to use or consume prewritten computer software. See TSB-M-93(3)S. The charge
for Petitioner’s software includes the charge for the prewritten software used for all Retailers before
it is “skinned” to a specific Retailer plus the charges for skinning. Therefore, here, where the charge
for the custom modification is not separately stated from the charge for the prewritten software, the
entire charge is subject to sales tax. See TSB-A-15(51)S; TSB-M-93(3)S.
Additionally, Petitioner’s monthly, quarterly or annual subscription fee allows employees
and managers to use and/or access the software for training purposes. Charges for providing
employees and management access to and the right to use or consume prewritten software
constitutes the transfer of prewritten software and, therefore, is subject to New York State and local
sales tax. See id.
The charge for Petitioner’s service of creating videos and other media can be billed either as
a separate charge or in a lump sum with the charge for the software. Tax Law § 1105(a) imposes tax
upon the receipts from every retail sale of tangible personal property unless otherwise exempt.
Videos delivered electronically or online are not tangible personal property. See TSB-A-08(41)S;
TSB-A-12(10)S. Therefore, the charge for creating the videos and other media content that is
delivered electronically is not subject to New York State and local sales tax.
However, “when tangible personal property, composed of taxable and exempt items is sold
as a single unit, the tax shall be collected on the total price.” 20 NYCRR 527.1(b). Accordingly,
when Petitioner charges a Retailer one price for both its sale of prewritten software and creation of
its videos, the entire charge will be subject to New York State and local sales tax.
The location of the sale for purposes of determining the proper tax due is the location where
the license is being used. See TSB-A-08(62)S; TSB-A-15(51)S. Sales tax is a “destination tax” and
the point of delivery controls the tax incident and rate. See 20 NYCRR 525.2(a)(3); TSB-A-10(43)S.
“[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.” 20 NYCRR
526.7. Additionally, with a “license to use,” a transfer of possession occurs if there is an 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.” 20 NYCRR 526.7(e)(4).
Here, if the Retailer’s employees and managers use the software at the Retailer’s offices both
inside and outside New York, Petitioner should determine the total number of Retailer employees
and management using the software, and collect tax for only the portion of users that are in New
York. See TSB-A-15(51)S; TSB-A-03(5)S. To determine the sales tax due, Petitioner may rely on

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written information received from Retailers about the locations where the Retailer uses the software.
See id. “Petitioner should retain this information for at least three years after the date of the last sale
to which the information relates.” Id.

DATED: August 1, 2017

/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.

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