Is an online service that turns users photos and clips into videos taxable as prewritten software in New York?

Plain-English summary

A California company (with a NYC office) sells an online product that turns customers photos and video clips into finished videos. Customers use a web interface to upload media and choose the content, order, music, logos, text, and style; then proprietary video-generating software on the companys servers — which customers never download or directly touch — builds the video. It is sold via several personal and business account tiers; videos are streamed or downloaded (DVDs discontinued). The company asked whether its charges are taxable.

The Office of Counsel concluded the product is taxable prewritten software:

• Nothing was designed or developed to a specific customers specifications, so it is prewritten software — taxable tangible personal property (Tax Law sections 1101(b)(6), 1101(b)(14), 1105(a)).
• A sale includes a license to use (section 1101(b)(5)). Although customers dont directly interact with the server-side video-generating software, the interface gives them the right to use, control, and direct it — so they obtain constructive possession (20 NYCRR 526.7(e)(4)). The location of the code is irrelevant, and the fact that each video is unique because of the algorithms does not matter.
• Situs: the sale is sourced to the location associated with the right to use — the customer or its users. If a customer has users in and out of New York, the company collects tax on the New York portion of receipts.

What this means for you

Online creative / generative tools and SaaS

A tool where the heavy software runs on your servers and the user just drives it through a web interface is still a taxable sale of prewritten software in New York. Constructive possession — the customers right to use, control, or direct the software — is what triggers tax, not whether they download code.

Unique output doesnt make it custom

That every result (here, every video) is one-of-a-kind does not make the software custom or non-taxable. What matters is whether the software was built to one customers specs — generic software used by everyone is prewritten.

Source to the users

Collect tax based on where the customer/its users are. For mixed in/out-of-state users, tax the New York share.

Common questions

Q: Customers only use a web interface and never touch the real software — why is it taxable?
A: The interface gives them the right to use, control, and direct the server-side software, which is constructive possession. The location of the code is irrelevant.

Q: Every video is unique — isnt that custom software?
A: No. The software is the same for all customers and was not built to one customers specifications, so it is prewritten and taxable; unique output does not change that.

Q: How is the tax sourced?
A: To the location of the customer or its users; for users both in and out of New York, tax the New York portion of the receipts.

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 1101(b)(5) (definition of sale, including license to use)
• Tax Law section 1105(a) (tax on sales of tangible personal property)
• 20 NYCRR 526.7(e)(4) (constructive possession: right to use, control, or direct use)

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_4s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-17(4)S
Sales Tax
March 1, 2017

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

PETITION NO. S141223B

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTED REDACTED REDACTED REDACTED REDACTED R. Petitioner asks whether
charges for its “video generating services” are subject to sales tax. We conclude that Petitioner’s
product is prewritten computer software and is subject to New York State and local sales taxes
when sold to customers located in New York.
Facts
Petitioner is a California-based corporation with an office in New York City. Petitioner
offers an on-line product that allows customers to “turn [their] photos and video clips into
professional videos.” To create these videos, customers must create an on-line account with
Petitioner that may, at the user’s option, be linked to other social media accounts. Thereafter,
customers use a web-based interface (either on Petitioner’s website or through the use of an
application downloaded from a third-party site) to upload photographs and videos from their
computer or mobile devices, or from other cloud services or social media sites, to Petitioner’s
server. This interface allows customers to select from a library of music to be used in a video,
and to specify various “customization options,” such as text and logos. Customers are also able
to choose the order in which images or text appears and a “style” for the video, and they may
select multiple songs to be used within the same video.
When customers have finished using the interface to make their selections, proprietary
software (“video-generating software”) that is hosted on Petitioner’s server, and that customers
do not download or directly interact with, creates a video that incorporates all of the customer’s
chosen selections. The video, in most cases, is then hosted on Petitioner’s servers and may be
viewed online. However, depending on the type of account a user has (see below), videos may
also be downloaded electronically to a computer or device. While Petitioner at one point sold
copies of videos on DVD to customers, that option has since been discontinued, and videos are
no longer sold by Petitioner on any tangible media. Due to the nature of the customer-selected
media content and algorithms used in Petitioner’s video-generating software, each video created
is unique in some way.
Petitioner identifies five types of accounts that it offers to customers, including three
personal accounts (one of which is free of charge) and two business accounts. These accounts
are described as follows:

-2-

TSB-A-17(4)S
Sales Tax
March 1, 2017



Free Personal Account: A free personal account allows for the creation
of “web quality videos” that are up to 30 seconds long. This account provides
users with a limited number of style choices, and offers access to over 300 audio
tracks. Videos created with a free personal account are not downloadable; rather,
they are hosted on Petitioner’s servers, where they can be accessed via a number
of social networking websites.



Personal Plus Account: A personal plus account costs $5 per month or
$30 per year. Like a free account, a Personal Plus account allows for the creation
of “web quality” videos, but these videos may be up to 10 minutes long. In
addition, a personal plus account provides users with a choice of 53 video styles
and the right to download videos and burn them to DVD.



Personal Pro Account:
A personal pro account is $39 per month
or $249 per year. This account allows for the creation of “high definition quality”
videos that are up to 20 minutes long and can be downloaded. In addition, a
Personal Pro account offers users 77 video styles and 2000 commercially-licensed
audio tracks. Unlike any of Petitioner’s other personal accounts, and as an added
benefit, users of a personal pro account are given a choice of logos that can be
used in a video.



Business Pro Account: This account, which like a personal pro account
is $39 per month or $249 per year, allows users to receive an unlimited number of
20-minute high definition videos that may be downloaded. In addition, this
account allows for the creation of “white-label” videos, which are videos that do
not contain any logos.



Pro Premium Account (Business): This account, which is $399 per year,
offers everything the above business account offers, plus it allows users to use
their own logos on videos. In addition, this account provides users with access to
3000 music tracks, phone support, and the option to host videos on a third-party
site.

When creating any of the above accounts, customers are required to accept and agree to
Terms of Service. These terms describe Petitioner’s product as one that provides customers with
“the ability to have a video . . . automatically created by [Petitioner] using uploaded photographs,
graphics, or video clips (‘Image Content’) set to a selected or uploaded music track (‘Musical
Content’).” In addition, these terms provide that Petitioner’s “services,” which are defined to
include its website and applications, are owned and operated by Petitioner, and that Petitioner
retains all proprietary rights to its site. However, the terms also permit customers to use
Petitioner’s “site and its content” as specifically authorized by it and, among other things, grants
customers a “limited right to use” the “software and services” that are available on Petitioner’s
site. Petitioner contends that this language refers only to the web interface that customers use,
and not to its video-generating software.

-3-

TSB-A-17(4)S
Sales Tax
March 1, 2017

Analysis
Petitioner offers an on-line product that allows customers to have a video automatically
created using uploaded Image Content that is set to music. These videos are created via the use
of a web-based interface. While this interface does not itself create any videos, it gives
customers the ability to control the video-generating software by selecting the content of a video,
the order in which this content appears, and various other aspects of a video, including what
music and logos are used, and the video’s “style.” In addition, this interface allows customers to
create text that can be incorporated into a video. For the reasons discussed below, therefore, we
conclude that Petitioner is selling access to prewritten computer software, which is included
within the definition of “tangible personal property” subject to New York State and local sales
tax. See Tax Law §§ 1101(b)(6); 1105(a).
A “sale” is defined as “[a]ny transfer of title or possession or both, exchange or barter,
rental, lease or license to use or consume (including, with respect to computer software, merely
the right to reproduce), conditional or otherwise, in any manner or by any means whatsoever for
a consideration, or any agreement therefor.” See Tax Law § 1101(b)(5). Sales and Use Tax
Regulation § 526.7(e)(1) provides generally that “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.” The regulations further provide that, with respect to a
“license to use,” a transfer of possession has occurred if there is 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). The location of the code embodying
the software is irrelevant, because the software can be used just as effectively by the customer
even though the customer never receives the code on a tangible medium or by download.
Initially, there is no indication that any aspect of Petitioner’s product, including the web
interface that customers use, was designed or developed to the specifications of a specific
customer. Rather, it appears that regardless of who uses Petitioner’s product, the same software
is used to produce videos for all customers. All of this software, therefore, is properly
considered pre-written computer software, the sale of which is subject to sales tax. See Tax Law
§§ 1105(a); 1101(b)(6) (pre-written computer software included within the definition of
“tangible personal property”); 1101(b)(14) (defining “pre-written computer software”).
Further, while Petitioner’s customers may not directly interact with the video generating
software located on Petitioner’s server, they have access to an online interface that gives them
control over that software and what it does. Specifically, and as noted above, customers use
Petitioner’s interface to dictate the content of videos, to create text for videos, and to control
other significant aspects of a video that gets automatically created, including the order in which
content and text appear, the music and logos that are used, and the video’s “style.” This interface
software, in other words, gives Petitioner’s customers the ability to make the videos that they
want. As such, Petitioner’s customers are given constructive possession of Petitioner’s video
generating software in that they have the “right to use, or control or direct the use” of it. See 20

TSB-A-17(4)S
Sales Tax
March 1, 2017

-4-

NYCRR § 526.7(e)(4)(iii); see also TSB-A-10(60)S; TSB-A-09(15)S. That all videos will be
unique in some way due to the software’s algorithms is irrelevant. Charges for Petitioner’s
product, therefore, are for the use of software, and are subject to State and local sales tax.
Finally, the situs of the sale for purposes of determining the proper local tax rate and
jurisdiction is the location associated with the right to use Petitioner’s software, i.e., the location
of the customer or its employees (if applicable). See, e.g., TSB-A-13(22)S; TSB-A-09(15)S. If
a customer has employees located both in and out of New York State who use Petitioner’s
software, Petitioner should collect tax based on the portion of the receipts attributable to the
customer’s users located in New York State. See id.

DATED: March 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.

-5-

TSB-A-17(4)S
Sales Tax
March 1, 2017