Is a firm's automotive marketing product a taxable sale of prewritten computer software, or a non-taxable advertising service?

Plain-English summary

A firm provides marketing and customer-relationship consulting exclusively to car dealerships. It uses its own staff and proprietary software to gather dealership sales data, analyze it, build marketing models, and then design and launch targeted advertising campaigns (email, text, phone, and direct mail). Customers can log into a secure website to view their account settings and reports on their own campaigns — but they can't access the software, can't launch or modify campaigns, and can't see other customers' data. The firm charges a monthly fee and asked whether that fee is a taxable sale of prewritten computer software.

The Office of Counsel said no — it's a non-taxable advertising service:

• Advertising services are expressly excluded from the tax on information services (Tax Law § 1105(c)(1); 20 NYCRR 527.3(b)(5)), and consulting isn't an enumerated taxable service either.
• The primary function of the firm's service is advertising — customers buy its expertise in automotive consumer behavior and its ability to develop and launch effective campaigns. That customers can view a few reports about their own campaigns doesn't change the answer.
• It is not a sale of prewritten software. Although customers reach the firm through a secure website, they cannot independently launch or modify any advertisement; only the firm can do that through software the customer never accesses. Communicating through a website and viewing information doesn't make it a software sale.

What this means for you

Marketing agencies, ad-tech, and campaign platforms

If the primary function is advertising — you design and run the campaigns — the receipts aren't taxable, even when sophisticated software powers the work behind the scenes. The key facts: the customer doesn't access or control the software and can't run the campaign itself.

The line you don't want to cross into "software"

Letting customers log in and operate the tool — launch, configure, or modify campaigns themselves — pushes the offering toward a taxable sale of prewritten software (constructive possession). View-only reporting on their own results is fine.

Accountants

This is a primary-function analysis. A view-only portal and incidental reports don't convert an advertising service into a taxable information service or software sale.

Common questions

Q: Software clearly runs the whole thing — why isn't this a software sale?
A: Because the customer never accesses or controls the software and can't launch or change campaigns. Only the firm operates it, so the customer doesn't get possession of software.

Q: Customers see reports on their campaigns. Isn't that a taxable information service?
A: No. Advertising services are expressly excluded from the information-services tax, and viewing reports on one's own campaigns doesn't change the primary function.

Q: What if the firm let customers run campaigns themselves through the portal?
A: That would point toward a taxable sale of prewritten software, because the customer would be directing the software's use.

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(c) (services subject to sales tax; consulting not enumerated)
• Tax Law § 1105(c)(1) (information services; exclusion for advertising services)
• Tax Law § 1105(a) (tax on receipts from sales of prewritten computer software)
• Tax Law § 1101(b)(6) (definition of tangible personal property, including prewritten software)
• 20 NYCRR 527.3(b); 20 NYCRR 527.3(b)(5) (advertising services); TSB-A-16(22)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/a20-63s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(63)S
Sales Tax
November 17, 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), asking whether the sale of its product constitutes the sale of pre-written
computer software. We conclude that Petitioner’s product is most appropriately characterized as
an advertising service and, accordingly, is not subject to sales tax.
Facts
Petitioner provides marketing and customer relationship consulting services exclusively to
businesses in the automotive industry, primarily car dealerships. Petitioner has particular expertise with
consumer habits in the automotive industry, which it uses to design and launch effective targeted
marketing campaigns for its customers. Petitioner uses its staff and proprietary software to gather sales
data from dealerships, analyze the collected data to develop marketing models and study the
effectiveness of marketing campaign strategies. Petitioner’s employees compile the data collected from
various dealerships to create usage reports. These reports are used by Petitioner’s employees to identify
success rates and trends and create analytic models that are used to develop new advertising campaigns
based on identified trends. Petitioner’s customers can access some reports of data and results of their
own campaigns, but cannot access data or analysis related to another customer.
Petitioner consults and guides customers in the creation of effective advertising and promotional
campaigns and ultimately launches a finalized advertising campaign using email, text messages,
telephone calls and direct mailings. A customer is not able to independently launch an advertising
campaign or to modify an existing advertising campaign. Customers are not able to directly access
Petitioner’s proprietary software.
Petitioner uses a secure website to communicate with its customers. Customers can view their
account settings, their current advertisements and reports on past campaigns through this website, but
cannot change them. A customer is not able to access data or analyses related to any other customer.
Petitioner charges a monthly fee for this service and has limited its inquiry specifically in this
Advisory Opinion to whether this fee is subject to sales tax. Petitioner indicated that it passes through
some third-party charges, such as for the printing of promotional items, but is not seeking an opinion
about whether those charges are taxable. Petitioner separately states these pass-through charges and
conducts a separate analysis to determine whether they are taxable.

-2-

Analysis

TSB-A-20(63)S
Sales Tax
November 17, 2020

Tax Law § 1105(c) imposes sales tax on receipts from sales of certain services, which do not
include consulting services. In addition, advertising services are expressly excluded from the tax
imposed on information services. See Tax Law § 1105(c)(1); 20 NYCRR 527.3(b)(5).
We conclude that the primary function of Petitioner’s service is an advertising service.
Petitioner’s customers purchase its service in order to obtain Petitioner’s expertise regarding consumer
habits in the automotive industry and to have Petitioner develop and launch effective advertising
campaigns. Petitioner’s service is not among the services subject to sales tax. See 20 NYCRR 527.3(b);
TSB-A-16(22)S. The fact that customers can view some reports that reflect the data and analysis about
their own advertising campaigns does not alter this conclusion.
In addition, we conclude that Petitioner’s service does not constitute the sale of prewritten
computer software. Tax Law § 1105(a) imposes sales tax on the receipts from sales of pre-written
computer software. See generally Tax Law § 1101(b)(6). Here, Petitioner communicates with its
customers through a secure website, where customers can view information on their advertising
campaigns. Although customers communicate with Petitioner through a secure website and can view
information regarding past campaigns, they are not able to independently launch or modify any
advertisement or promotion. Only Petitioner can create and launch such advertisements through its
proprietary software, which Petitioner maintains is never accessed by customers. The use of a secure
website by which the customer can communicate with Petitioner and view certain information does not
change the nature of this service.
DATED: November 17, 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.