Is subscription access to an online secure board-document file-sharing portal taxable as software in New York?

Plain-English summary

A company sells subscription access to online secure file-sharing applications built for corporate boards of directors. Its three applications replace the printed board book and let directors store, annotate, bookmark, approve, collaborate on, e-sign, survey, and securely message about board documents; pricing is per authorized user. The company asked whether selling these applications is taxable.

The Office of Counsel concluded the applications are taxable prewritten software:

• Prewritten software is tangible personal property (Tax Law sections 1101(b)(6), 1101(b)(14)), and giving customers access to it is a taxable sale (section 1105(a); 20 NYCRR 526.7; TSB-A-08(62)S).
• The sale is taxable to the extent the customers users are in New York. The provider may accept a customer letter stating the New York proportion of authorized employees/board members and collect tax on that share of the subscription.
• All three applications are taxable on the same basis (the more feature-rich ones give more software-driven functionality).
• Internet-access carve-out: the bundled secure email is Internet access, which the Internet Tax Freedom Act (ITFA) bars states from taxing. Because email is bundled in a single charge, the provider may exclude the portion reasonably identifiable from its books and records (using an objective, verifiable standard reasonable in relation to the total charge) as attributable to email.

What this means for you

SaaS / document-portal providers

Access to prewritten software is a taxable sale in New York even if customers never download anything. If your software wasnt custom-built to one customers specs, it is prewritten and taxable.

Source by where users are

Tax is owed on the New York share of users. Get a customer letter documenting the in-state proportion of authorized users and tax that fraction of the subscription — keep it on file.

Bundled Internet access / email can be carved out

ITFA blocks tax on Internet access (including email). If you bundle it into one charge, you can exclude the email portion only if you can reasonably identify it from your books and records under an objective standard. Better still, separately state it.

Common questions

Q: Customers never download the software — why is it taxable? A: Giving customers access to prewritten software is a taxable sale of tangible personal property; the location of the code does not matter.

Q: How much of the subscription is taxed?
A: The portion attributable to authorized users located in New York. The provider may rely on a customer letter stating that proportion.

Q: Is the included secure email taxable?
A: No. Email is Internet access, which ITFA bars from tax. The provider may exclude the part of its charge reasonably identifiable as email from its books and records.

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)(6) (prewritten software is tangible personal property)
• Tax Law section 1101(b)(14) (definition of prewritten software)
• Tax Law section 1105(a) (tax on sales of tangible personal property)
• 20 NYCRR 526.7 (delivery/possession; situs)
• Internet Tax Freedom Act, 47 USC 151 note (Internet access, including email, cannot be taxed)
• TSB-A-08(62)S (access to prewritten software is taxable; allocate by NY users)

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_2s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel

TSB-A-17-(2)S
Sales Tax
February 27, 2017

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION PETITION NO. S140513A
The Department of Taxation and Finance received a Petition for Advisory Opinion from Petitioner REDACTED REDACTED Petitioner asks whether the sale of its online file-sharing applications for corporate boards of directors is subject to sales and use tax. We conclude that the application is taxable as a sale of prewritten software. Facts Petitioner provides on-line and on-premise applications that provide secure file sharing for corporate boards of directors. Petitioner inquires about the taxability of three of its on-line applications, described below. Petitioner sells all of these applications on a subscription basis, with the amount of the charge based solely on the number of the customer’s authorized users. Application 1 This application is a portal that provides secure access to boardroom documents to the directors on a company’s board of directors and other authorized parties. Application 1 replaces the traditional paper boardroom documents. Traditionally, boardroom documents have been delivered to board members in a large paper document called a “board book.” This document would be printed and physically delivered to each board member prior to a board of directors meeting. Any changes to the document would need to be printed and physically delivered to each board member. Application 1 uses digital technology to streamline the process for getting board books to board members, while also giving board members the benefit of other functionality, as discussed below. Generally, the customer interface with the application is on-line through a user’s standard web browser. More recently, data may also be accessed through an iPad application. Customers log in on-line to a unique URL, using a User Name, Password and other security features. Application 1 includes the following features:


Repository – the repository stores the documents for the paperless boardroom. Documents can be saved in folders or as individual files. The documents are created outside the Repository and uploaded into the portal.



Annotation – the application includes the ability to make notes on individual board member documents for the board member’s own review in a number of methods. Annotations are viewed only by the individual who made the notes – they are not reflected on all copies of the documents in the repository.



Current Meeting – access to documents for the current board meeting.

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TSB-A-17(2)S
Sales Tax
February 27, 2017



Approvals – a tool for board consents or approvals during or between meetings.



Team Spaces – documents can be segregated based upon the user of the data. For example, audit committee documents may be available only to those board members that are members of the audit committee.



Doc Collaboration – an ability to collaborate with others on documents within the repository. While documents are edited in their native programs, the application can track versions and notify authorized users that there is a document update.



Secure Email – an email exchange within the application to exchange confidential messages only between authorized users of the application associated with the same subscriber’s account (e.g., only directors of the same corporate subscriber could communicate with each other through Petitioner’s email functionality).



Bookmarks – board members may make digital bookmarks in the distributed documents to make it easier to navigate through documents.



Secure Briefcase – encrypted folder on device (laptop or iPad) for offline viewing of materials.



Remote Purge – if the device is lost/stolen, the data that has been downloaded to the Secure Briefcase will be purged.



Directory – contact information for board members.

Application 2
Petitioner’s Application 2 includes all the features of Application 1, along with additional features to allow for document sharing and collaboration outside the typical board meeting process, as detailed below.


Document Sharing at Meetings - allows for the sharing of documents within the portal only to the authorized viewers, or attendees, of a particular meeting, which can be other than the regularly scheduled board meeting.



Document Presentation at Meetings - as the meeting occurs, documents can be placed in Presenter mode. This mode allows for the presenter of the material to control the view of the document so that all meeting participants (in the same location or remote) are viewing the same content.



Signing Feature - allows directors to electronically sign documents, using a signature saved within the application and implemented with appropriate controls.



Survey Feature - allows for the creation and response to highly confidential surveys of the board of directors.

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TSB-A-17(2)S
Sales Tax
February 27, 2017

Application 3
This Application is similar to Application 2, with some reduced features. Application 3 is for sharing confidential documents within an organization, excluding some of the features needed for an organization’s board of directors. The above described features that are not included in Application 3 are the following:


Approvals



Signing Feature



Document Sharing at Meetings



Document Presentation at Meetings



Survey Feature

Applications 1 and 2 are also available as on-premise solutions, meaning the software for the application is downloaded on the customer’s server. Some customers want their own internal personnel to control the highly confidential environment and choose to host their data in-house. Petitioner did not request a ruling about the on-premise solutions. Analysis The Tax Law imposes sales and use tax on retail sales of tangible personal property. See Tax Law §§ 1101(b)(6); 1105(a). The definition of tangible personal property includes prewritten computer software, whether sold as part of a package, as a separate component, or otherwise, and regardless of the medium by means of which the software is conveyed to a purchaser. Tax Law § 1101(b)(6). Here, Application 1 gives its corporate customers access to prewritten software on its portal. The customers use this software to upload board of director materials to the portal, with the ability to reserve access to specified materials to identified directors or other persons. Using Petitioner’s software, the board members then can annotate, bookmark, approve, and share the materials with other members. Additionally, the board members can download the materials to an encrypted file on their laptops or tablet computers. By giving its customers access to prewritten software for their use, Petitioner is making taxable sales of tangible personal property in New York to the extent that the customer’s employees or board members are using the prewritten software in New York. See Tax Law §§ 1105(a); 1101(b)(6); 20 NYCRR § 526.7; TSB-A-08(62)S. Petitioner may accept a letter from the customer as to the proportion of its employees and board members authorized to use the software who are in New York, and collect tax based on that proportion of its subscription charge for the software. See TSB-A-08(62)S. Because Applications 2 and 3 give the customer more software-driven functionality, sales of these services also are subject to tax as prewritten software.

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TSB-A-17(2)S
Sales Tax
February 27, 2017

The Internet Tax Freedom Act and amendments thereto (ITFA) preclude States from taxing Internet access. See 47 USC §151 (note § 1101 et. seq.). E-mail is included in the definition of Internet access. See 47 USC § 151 (note § 1105); TSB-M-08(2)S. Here, Petitioner is not selling e-mail as a separate service, but rather includes it as part of its service, for which it makes a single charge. Under ITFA, “[i]f charges for Internet access are aggregated with and not separately stated from charges for telecommunications or other charges that are subject to taxation, then the charges for Internet access may be subject to taxation unless the Internet access provider can reasonably identify the charges for Internet access from its books and records kept in the regular course of business.” 47 USC § 151 n. 151, at § 1106. For charges to be “reasonably identifiable” as Internet access, the provider must be able to show that it used an objective and verifiable standard in determining those charges and the charges must be reasonable in relation to the total charge. See NYT-G-07(3)S. Accordingly, Petitioner may exclude from tax a portion of its charge for its applications that, based on its books and records, reasonably can be identified as attributable to its email service.

DATED: February 27, 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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TSB-A-17(2)S
Sales Tax
February 27, 2017

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TSB-A-17(2)S
Sales Tax
February 27, 2017