Is a hosted call-handling/voice-recognition product a taxable sale of prewritten software, and where is the sale taxed?

Plain-English summary

A company sells a call-handling product built on its own proprietary voice-recognition software, which lives on the company's servers in three states (none of them New York). When a customer's caller phones in, a circuit routes the call to the company's data center, where the software — helped by live "Intent Analysts" who listen to short call segments — determines the caller's intent and either resolves the issue or routes the call back to the customer. The company also charges separately for initial consultation, call-flow script design, software configuration, and sometimes a circuit. It asked whether it's selling prewritten computer software.

The Office of Counsel concluded yes:

• Prewritten software is taxable tangible personal property (Tax Law §§ 1105(a), 1101(b)(6)), "regardless of the medium" of delivery, and the location of the code is irrelevant (TSB-A-08(62)S).
• A "sale" includes a license to use, and a transfer of possession occurs when the customer gets the right to use, or control or direct the use of, the property (20 NYCRR 526.7(e)(4)). Here customers connect their phone systems to the software to route their calls, so they direct its use and obtain constructive possession — a taxable sale of software. The Intent Analysts only keep the software working; they don't talk to callers or turn it into a service.
• Situs: the sale is sourced to where the customer uses or directs the software — the customer's call center — and the proper rate is that jurisdiction's combined state and local rate.
• Circuit fees are an incidental part of the software sale; because a receipt is figured "without any deduction for expenses," any charge for providing a circuit is included in the taxable software receipt (Tax Law § 1101(b)(3)).
• Installation and configuration: where the charges for initial consultation, call-flow script design, and software configuration are reasonable and separately stated, those receipts are exempt as software installation services (§ 1115(o)) or excluded as modifications to prewritten software (§ 1101(b)(14)).

What this means for you

SaaS, cloud, and hosted-software vendors

Hosting the code on your servers — even out of state — doesn't make it a service. If the customer directs the software's use to do its own work (here, routing its calls), that's constructive possession and a taxable sale of prewritten software. Adding human help "to make the software run" doesn't change that.

Where to source the tax

Software is taxed at the customer's location where it directs the use of the software — for a call-routing tool, the call center — not where the servers or code sit.

Watch your invoice structure

Circuit/connectivity pass-throughs get pulled into the taxable software receipt as an expense. By contrast, reasonable, separately-stated install and configuration charges can be exempt or excluded — so separate-stating matters.

Common questions

Q: The software is on the vendor's own out-of-state servers — how is this a taxable software sale in New York?
A: Because the customer directs the software's use to route its calls, gaining constructive possession. The location of the code doesn't matter; the sale is sourced to the customer's call center.

Q: Live analysts handle the calls — doesn't that make it a service?
A: No. The analysts only ensure the software functions; they don't speak with callers or perform a separate service, so the offering stays a software sale.

Q: Are the separate 'circuit fees' taxable?
A: Yes — providing the circuit is an incidental expense included in the taxable software receipt.

Q: Can the setup charges avoid tax?
A: Yes, if reasonable and separately stated — installation is exempt under § 1115(o) and configuration is excluded as a software modification under § 1101(b)(14).

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 receipts from sales of tangible personal property, including prewritten software)
• Tax Law § 1101(b)(6) (tangible personal property includes prewritten computer software)
• Tax Law § 1101(b)(14) (definition of prewritten computer software; reasonable separately-stated modification charge)
• Tax Law § 1101(b)(5) (definition of sale, including license to use)
• Tax Law § 1101(b)(3) (definition of receipt; no deduction for expenses)
• Tax Law § 1115(o) (exemption for software installation services)
• 20 NYCRR 526.7(e)(1), (e)(4); 20 NYCRR 527.2(d)(4); Publication TB-ST-128; TSB-A-08(62)S; TSB-A-17(9)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/a20-65s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(65)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) requesting guidance on the implications of its product offering for sales tax
purposes. We conclude that Petitioner is making sales of prewritten computer software. Accordingly, sales tax
is imposed on Petitioner’s sales receipts. However, sales tax is not imposed on receipts for software installation
services and software modifications, if the corresponding charges are reasonable and separately-stated on
invoices.
Facts
Petitioner owns proprietary computer software that it markets to customers seeking to better handle
incoming phone calls to their customer service departments. The software resides solely on Petitioner’s servers
and, along with a historically diminishing level of human assistance, is used to determine the intent of callers.
Petitioner first consults with a customer to assess its call handling needs. In this phase, Petitioner
designs and develops technical specifications and call flow scripts based on information provided by the
customer with the objective of configuring its proprietary software to handle the customer’s calls. Petitioner
then configures its software to determine the intent of each caller. The customer is charged separately for these
installation services and software modifications.
Next, the appropriate technology must be procured to enable Petitioner’s services. In most cases, the
customer is responsible for supplying and implementing all required telephony and network connectivity
equipment, including a circuit to forward calls from the customer's call center to one of Petitioner’s data center
locations. However, in some instances, Petitioner procures the circuit on behalf of the customer. Petitioner
pays all applicable sales tax to its vendors at the time of purchasing these circuits. The charges for the circuit
then are generally passed through as separate "circuit fees" along with any additional administrative fee. In
certain circumstances, though, the customer is not billed separately.
When a customer 's caller (an unrelated third party) contacts a customer, a circuit located on the
customer's premises routes the call to one of Petitioner’s data centers. Petitioner has data centers located in
three states, which do not include New York. At the data center, the call is connected to software that has been
configured for that specific customer. The caller's intent is then determined by a combination of Petitioner’s
proprietary, voice-recognition software and "Intent Analysts" who listen to small segments of the calls (call
utterances) to determine the intent of the caller. Intent Analysts are live employees of the Petitioner who listen
to the calls to determine the intent of the caller. Gathering the intent of the caller is achieved by listening to call
utterances and entering the intent of the call into a desktop computer, which is hosted on Petitioner’s platform
and interfaces with Petitioner’s software. Intent Analysts do not speak with the caller. Their job function is

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November 17, 2020

purely to listen to call utterances and to enter the caller’s intent into Petitioner’s software. Historically, Intent
Analysts listened to small segments of every call and were necessary to determine a caller’s intent. However, as
Petitioner’s software has developed and improved, the software is now capable of handling more and more calls
start to finish without the intervention of Intent Analysts. Mostly, the caller's issue is resolved and the call is
terminated at one of Petitioner’s data centers. However, occasionally, Petitioner’s system is unable to resolve
the caller's issue and the call is routed back to the customer. Alternatively, the caller's intent is successfully
determined and the call is routed back to the customer as predetermined by the call flow script. Petitioner
generally bills its customers based on successful transactions, per completed call or necessary utterance second.
Additionally, the Company offers a web-based portal whereby a customer can view reports regarding
the handling of its phone calls. Petitioner’s software reports on call result information such as routing
destinations, containment data, and terminations. Neither the software nor the data generated by the software
can be manipulated or modified through this web-based portal.
Analysis
Sales tax is imposed on receipts from the sale of tangible personal property, including prewritten
software, “regardless of the medium by means of which such software is conveyed to a purchaser.” See Tax
Law §§ 1105(a); 1101(b)(6); but see Tax Law § 1115(o). Prewritten computer software is any computer
software that is not designed and developed by the author or other creator to the specifications of a specific
purchaser. See Tax Law § 1101(b)(14). Prewritten software remains prewritten software, even if modified or
enhanced to the specifications of a specific purchaser, except to the extent that there is a reasonable, separatelystated charge for such modification or enhancement. Id.
“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)(4) provides that, with respect to
a “license to use,” a transfer of possession has occurred if there is a transfer of 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.” 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. See 20 NYCRR 526.7(e)(1). The
location of the code embodying the software is not relevant, because software can be used by a customer
without transfer of the code on a tangible medium or by download. See TSB-A-08(62)S.
The essence of Petitioner’s offering to customers is prewritten computer software designed to facilitate
efficiency in the handling of phone calls. See generally TSB-A-17(9)S. This software either identifies and
resolves the caller’s issue, or directs the caller back to a customer to handle the call directly. Petitioner is
making a sale of this software because its customers contract with Petitioner to connect their telephone systems
with Petitioner’s software to better route incoming calls. Thus, the customer is directing the use of Petitioner’s
software and thereby obtains constructive possession of the software. Despite Petitioner’s suggestion that use
of Intent Analysts makes this offering more of a service than software, the analysts only work to ensure the

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proper functioning of the software. The analysts do not interface with the caller or otherwise perform any
function that makes this sale more akin to a service. Accordingly, we conclude that Petitioner’s sales are sales
of prewritten computer software, the receipts of which are subject to sales tax.
The situs of the sale of software for determining the proper tax rate and jurisdiction is the location from
which a purchaser uses or directs the use of the software. See generally TB-ST-128. The location of the code
embodying the software is not relevant. Because the customer directs the use of the software from a customer’s
call center, the proper tax rate is the combined state and local rate in effect in the local jurisdiction in which the
customer’s call center is located.
Additionally, sales tax is imposed on any separate charges for circuit fees or corresponding
administrative fees. The transfer of circuits is an incidental element of the sale of software by Petitioner. See
generally 20 NYCRR 527.2(d)(4). Accordingly, any charge for providing a circuit is an expense and must be
included in the receipt for the sale of software because the amount of a receipt is determined “without any
deduction for expenses.” See Tax Law § 1101(b)(3).
However, Petitioner provides that its customers are billed separately for initial consultations, call-flow
script design and development, and necessary software configurations. Where the corresponding charges are
reasonable and separately stated on a customer’s invoice, those receipts are either exempted from sales tax by
Tax Law § 1115(o) as software installation services or excluded from sales tax by Tax Law § 1101(b)(14) as
modifications to pre-written software. See generally TB-ST-128.

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.