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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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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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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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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