Are a firm's digital marketing services and the third-party software licenses it resells subject to New York sales tax?

Plain-English summary

A digital-marketing firm consults with clients (mostly advertising agencies), trains and supports them on third-party marketing tools, and reports on campaign effectiveness. In several of its offerings, it also resells a license to third-party software and supports the client's use of it; on its invoices, the software charge is separately stated. It asked whether its marketing services and the software are taxable.

The Office of Counsel drew a line. The firm's digital-marketing services, advising clients how to track and improve their own marketing, designing strategies, and reporting on results, are non-taxable advertising services (consultation and development of campaigns, per 20 NYCRR 527.3(b)(5)). But reselling the third-party software license to the client is a taxable sale of prewritten computer software. The packaging then controls: if the advertising service is bundled with the software for a single charge, the entire charge is taxable; if the software is separately stated at a reasonable amount, only the software charge is taxed.

What this means for you

Marketing agencies and consultants

Pure advertising/consulting, helping clients improve their own campaigns, is not taxable. But if you resell software (even third-party licenses), that piece is taxable prewritten software. How you invoice determines whether tax hits only the software or the whole bill.

Software resellers

Reselling a prewritten software license is a taxable sale, regardless of the support you wrap around it.

Accountants and tax professionals

The rule: separately state the taxable software at a reasonable charge to confine tax to it; bundling it with non-taxable advertising makes the entire receipt taxable. Compare TSB-A-04(23)S; advertising-service definition in 527.3(b)(5) and TB-ST-10.

Common questions

Q: Is digital marketing taxable in New York?
A: Advertising/consulting services to improve a client's own marketing are not taxable. Selling software is.

Q: How do I keep tax off the advertising portion?
A: Separately state the software charge at a reasonable amount; then only the software is taxed.

Q: What if everything is one price?
A: Then the entire charge is taxable because the taxable software is bundled with the non-taxable services.

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

Statutes and guidance:
- Tax Law §§ 1105(a), 1110(a); § 1105(c); § 1101(b)(6), (14)
- 20 NYCRR 527.3(b)(5); TB-ST-10; TSB-A-04(23)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales-ao-2020.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20-27s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(27)S
Sales Tax
June 30, 2020

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
The Department of Taxation and Finance (“the Department”) received a Petition for
Advisory Opinion from [ REDACTED ] (hereinafter “Petitioner”). Petitioner asks whether its
digital marketing services provided to customers are subject to sales tax. We conclude that
Petitioner’s digital marketing service, in which Petitioner provides clients with the ability to track
the effectiveness of a marketing strategy, is an advertising service not generally subject to tax. If
Petitioner bundles the advertising service with a third-party software license for a charge to its
client, then the entire charge is taxable. Where charges for third-party software licenses are
separately stated, only the separately stated charge is taxable.
Facts
Petitioner is a digital marketing services business. It provides consulting, managed
services and technical services, and acts as a reseller of advertising- and marketing-related
offerings. Petitioner’s services are built around certain third-party platform technologies and
tools. In providing its services, Petitioner consults with and provides support and training to its
clients about the use of those technologies and tools, and reports on the effectiveness of
campaigns using those technologies and tools.
Petitioner’s customers generally are advertising agencies that provide ad serving, web
search marketing, or email marketing services. Petitioner’s customers require access to certain
tools offered by third-party platforms, but they often need training, support and guidance to
properly use these tools to set up campaigns, measure performance and make appropriate
adjustments. Petitioner provides these functions.
Petitioner provided sample contracts representing the services it offers. The contracts
between Petitioner and its customers often include a license for third-party digital marketing
software (the Software), the charge for which is separately stated on Petitioner’s invoices to its
customers. Petitioner purchases licenses to the Software and resells the licenses to its customers.
It also provides support to its customers for the use of the software.
Petitioner engages in digital consulting projects, which range from 1-month special
projects to 12-month projects. Petitioner is retained on an hourly basis for its consulting services.
Petitioner offers the following services in connection with the sale of the Software:

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TSB-A-20(27)S
Sales Tax
June 30, 2020

1) Consulting and professional services. Petitioner makes suggestions to its customers on

how to track and improve the effectiveness of a customer’s marketing strategy. Petitioner
devises strategies for making its customer’s current marketing tools more effective.
2) Digital search marketing support. Petitioner assists its clients in optimizing a search

campaign by instructing a client how to use relevant key search words. To provide search
services, Petitioner sells the license to the Software to its client and provides support for the
Software. Petitioner tracks where its customer’s digital marketing is being sent and thereafter
targets where to send a customer’s marketing piece. Petitioner answers its customers’ questions
on how to use the Software.
3) Auction management services.

Petitioner manages auction buys, bid prices,
placements and media spend levels and bills the client for expenses related to programmatic
auction management. Petitioner sells the Software license to its customer and then supports the
customer’s use of the Software.
4) Campaign management support services. Petitioner sells the Software license to its

customer and then offers training, campaign set-up support, campaign strategy and tracking
strategy.
5) Email marketing services to clients. Petitioner sells the Software license to its customer

and then provides tactical and strategic email marketing strategies, data management and data
analysis.

Petitioner asks whether its receipts from the sale of its marketing services and the
Software are subject to sales tax.
Analysis
State and local sales tax is imposed on the receipts from the retail sale of tangible
personal property and specifically enumerated services, except as otherwise provided. See Tax
Law §§ 1105(a) and 1110(a)(A). Advertising services are not subject to sales tax. See Tax Law §
1105(c); TB-ST-10. Advertising services consist of consultation and development of advertising
campaigns and the placement of advertisements with the media, 20NYCRR 527.3(b)(5).
Petitioner’s digital marketing services include consulting and technical services regarding a
customer’s own marketing tools. Petitioner consults, designs, provides access to, implements,
and reports on the effectiveness of customer’s existing campaigns. Petitioner’s customers
subscribe to Petitioner’s service for the purpose of obtaining guidance, advice, input and
direction with reference to the customer’s own marketing tools. Petitioner does not promote

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TSB-A-20(27)S
Sales Tax
June 30, 2020

other tools or software as part of this service. Petitioner’s customers are purchasing an
advertising service. Thus, the sale of this service is not subject to sales tax.
Petitioner also provides marketing services to its customers who request digital search
marketing support in conjunction with the sale of the Software. These services generally include
training the customer to use the Software, including ad placement and email deployment
strategies. For example, Petitioner can use the Software to track where its customer’s digital
marketing is being sent and thereafter help its customer target where to send a marketing piece.
Petitioner also answers its customers’ questions on how to use the Software. To provide search
services, Petitioner purchases the third-party Software at a discounted price, and then resells the
license to the Software to its client. Petitioner also provides support for the Software.
Tax Law §§ 1105(a) and 1110(a)(A) impose State sales and use tax on retail sales of
tangible personal property. Section 1101(b)(6) defines “tangible personal property” to include
pre-written 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 the
purchaser. Tax Law § 1101(b)(14) defines “pre-written computer software” as software
(including pre-written upgrades thereof) that is not software designed and developed by the
author or other creator to the specifications of a specific purchaser. The resale by the Petitioner
of the license to the third-party software to Petitioner’s customer’s is the sale of pre-written
computer software and is subject to sales tax.
Where Petitioner’s advertising service is bundled with the sale of the Software for a
single charge, the entire charge is subject to tax. If Petitioner’s charge for the Software is
separately stated on an invoice and such charge is reasonable in relation to the overall charge,
only the separately stated charge for the Software is subject to tax. See, e.g., TSB-A-04(23)S.
DATED: June 30, 2020

/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.