Is the fee a New York firm pays for remote 'managed IT services' on servers located outside New York subject to sales tax?

Plain-English summary

An investment-advisory firm (with some New York customers) hired a New York-based company to provide remote "managed IT services" for the firm's IT assets — servers and data that are all located outside New York. It asked whether the monthly fee is taxable.

The Office of Counsel said no, breaking the bundled service into its components:

• Hardware and software support (diagnosing problems and relaying manufacturer/developer fixes, without actually repairing anything) — falls short of taxable maintaining/servicing/repairing of tangible personal property, and software servicing is in any event exempt under § 1115(o). Not taxable.
• Data backup management — managing a non-taxable data storage/backup service is itself not taxable.
• IT security management — standing alone, this is a protective service under § 1105(c)(3)/(c)(8). But a protective service is sourced to where the protected property is located, and here the assets and data are outside New York, so even this component is not taxable in New York.

Normally you'd determine the taxability of an integrated service by its primary function (SSOV '81). But the Department didn't need to here: because the only potentially taxable component (security/protective) is delivered outside New York, the entire managed-IT fee escapes New York sales and use tax — regardless of the overall service's primary function.

What this means for you

Buyers of managed IT / MSP services

Much of a typical managed-IT bundle (help-desk support, backup management) isn't taxable in the first place. The taxable risk is the security/protective piece — and that's sourced to where your protected servers and data physically sit. If they're outside New York, the protective component isn't New York-taxable.

Managed service providers (MSPs)

Location of the protected assets, not your own location, drives the protective-service tax. An MSP sitting in New York can still deliver a non-taxable protective service if the customer's protected property is elsewhere.

Accountants and tax professionals

Decompose the bundle: § 1115(o) software-servicing exemption, non-taxable backup/storage and supervisory support (TSB-A-15(13)S; TSB-A-16(19)S), and the § 1105(c)(8) protective service sourced to the protected property's location (TSB-A-16(20)S; N-90-20). If the only taxable component is delivered out of state, the whole fee is non-taxable without reaching the SSOV '81 primary-function test.

Common questions

Q: Why isn't our managed IT fee taxable?
A: Most of it (support, backup) isn't a taxable service, and the only taxable piece — IT security (a protective service) — protects servers and data located outside New York, so it isn't New York-taxable.

Q: The provider is in New York — doesn't that make it taxable here?
A: No. A protective service is sourced to where the protected property is located, not where the provider sits.

Q: What if our servers were in New York?
A: Then the security/protective component would be a taxable protective service in New York, and you'd analyze the bundle's primary function.

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 § 1105(a) (tax on tangible personal property, including prewritten software)
• Tax Law § 1105(c)(3) (maintaining/servicing/repairing tangible personal property)
• Tax Law § 1115(o) (exemption for maintaining/servicing prewritten software)
• Tax Law § 1105(c)(8) (protective and detective services)
• Matter of SSOV '81 Ltd., Tax Appeals Tribunal (Jan. 19, 1995) (primary-function test)
• TSB-A-16(20)S; N-90-20 (protective services sourced to where protected property is located); TSB-A-15(13)S; TSB-A-16(19)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/a20-49s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(49)S
Sales Tax
October 27, 2020

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
The Department of Taxation and Finance received a Petition for Advisory Opinion from
[ REDACTED ] (“Petitioner”). Petitioner asks whether the fee it pays for an information
technology (IT) support service, as described below, is subject to tax. We conclude that
Petitioner does not owe State and local sales and use tax on that fee because the only taxable
component of the IT support service is delivered to Petitioner outside the State of New York.
Facts
Petitioner provides investment advice to its customers. Some of Petitioner’s customers
are located in New York. As part of its service, Petitioner conveys significant data to its
customers. Petitioner conveys the data to its customers mostly by means of its website, although
some information is also conveyed by emails and via telephone calls. To prepare its investment
advice and to house its website, Petitioner uses IT assets, including servers, all of which are
located outside New York.
To maintain those IT assets, Petitioner has hired a New York-based company, Company
X, to provide it with “managed IT services.” All of Company X’s work is done remotely, i.e.,
over the Internet. All of Company X’s employees are located in New York. Company X’s
managed IT services require it to manage Petitioner’s IT assets and the data on them in order to
keep them secure and operational. This includes the following main tasks:
1. Support hardware covered by the manufacturer’s warranty, which involves
communicating with Petitioner’s employees to identify the problem, communicating that
information to the manufacturer of the hardware, following up with the manufacturer as
necessary, and then communicating the manufacturer’s suggested resolution of the
problem to Petitioner. Company X does not fix the hardware itself.
2. Support Petitioner’s standard business software, which involves communicating with
Petitioner to identify the problem, sharing that information with the developer of the
software, following up with the developer as necessary, and then communicating the
developer’s suggested resolution of the problem to Petitioner. Company X does not fix
the software problem itself.
3. Manage the backing up of Petitioner’s data, including reporting on success or failure of
any attempted backups, and scheduling test restores.

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TSB-A-20(49)S
Sales Tax
October 27, 2020

4. Manage the security of Petitioner’s IT system, including implementing best practices,
   reporting on any attempted breaches of the Petitioner’s firewall, scheduling security
   audits, providing and deploying anti-virus and anti-malware software on location, routing
   all inbound email through an anti-spam platform, managing Petitioner’s domain name
   system (DNS) to render the system less vulnerable to malware, and working with
   Petitioner to physically secure the network and connected devices.
   Company X charges Petitioner a single monthly charge for its managed IT services,
   which is based on the number of Petitioner’s devices (i.e., IT assets such as servers) covered by
   the service.
   Analysis
   The Tax Law imposes sales and use tax on retail sales of tangible personal property. See
   Tax Law § 1105(a). “Prewritten computer software” is included in the definition of tangible
   personal property. See Tax Law § 1101(b)(6). Among the services made taxable by the Tax
   Law is the service of repairing, maintaining, and servicing tangible personal property not held for
   sale in the regular course of business. See Tax Law § 1105(c)(3). The Tax Law exempts the
   service of repairing, maintaining, or servicing prewritten software. See Tax Law § 1115(o). Also
   subject to tax are “[p]rotective and detective services, including, but not limited to, all services
   provided by or through alarm or protective systems of every nature, including, but not limited to,
   protection against burglary, theft, fire, water damage or any malfunction of industrial processes
   or any other malfunction of or damage to property or injury to persons.” Tax Law § 1105(c)(8).
   The service Company X is selling to Petitioner has a number of components. The
   services of supporting Petitioner’s hardware and software (i.e., items 1 and 2, above) fall short of
   being services to maintain, service or repair tangible personal property, or even to supervise such
   a service, and are thus not subject to tax. See TSB-A-15(13)S (service of supervising a taxable
   service performed by a third-party is not subject to tax). Similarly, Company X’s back-up
   service (Item 3 above) also does not appear to be taxable. Because the service of providing
   backup and storage of data is not a taxable one (see TSB-A-16[19]S), management of that
   service also would not be taxable. Thus, those components, if analyzed on a standalone basis,
   would not be taxable. In contrast, the service described in Item 4 above, which Petitioner refers
   to as the service of managing the security of Petitioner’s IT assets and data, standing alone,
   would constitute a protective service. See TSB-A-16(20)S; N-90-20. Here, because the
   computer assets and data being protected are located outside the State, this component of
   Petitioner’s service also is not taxable. See TSB-A-16(20)S, supra (protective services are
   provided in New York if the property being protected is located in New York). Generally,
   taxability of an integrated service, such as the managed IT services being provided by Company
   X, is determined based on the service’s primary function. See Matter of SSOV '81 Ltd., Tax

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TSB-A-20(49)S
Sales Tax
October 27, 2020

Appeals Tribunal, January 19, 1995. However, it is not necessary to determine the primary
function of Company X’s managed IT services in this matter because the only taxable
component of the managed IT Services is being delivered to Petitioner outside of New York.
Under that circumstance, whether or not Company X’s managed IT services as a whole would
constitute a taxable imposition, the fee Petitioner pays for those services is not subject to sales
and use tax.
DATED: October 27, 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.