NY TSB-A-20(70)S Sales Tax 2020-11-24

Are services to create, host, maintain and optimize a client's mobile website subject to New York sales tax?

Short answer: No. The company designs, builds, hosts, maintains, and optimizes mobile websites for retailers, all for a fixed monthly fee. Website development — design, creation, and the operation of a site the developer keeps exclusive control over — isn't an enumerated taxable service and transfers no prewritten software. Custom add-on features built to a client's specs are exempt when reasonable and separately stated; servicing and repairing the software is exempt under § 1115(o). Third-party hosting fees passed through to clients aren't taxable and aren't a rental of equipment. And the optimization/reporting service, though it's an information service, isn't taxable because the reports are unique to each client, drawn from the client's own analytics, and never shared with others — personal or individual in nature. (The company does owe tax on prewritten software it buys to perform the work.)

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. It reflects the law, regulations, and Department policy in effect when issued and may since have changed. Taxpayer-identifying details are redacted. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

A company builds, hosts, maintains, and optimizes mobile websites and apps for retail clients, all bundled into a fixed monthly fee (graduated by page-views). It keeps exclusive control of the website code (clients own the URL but can't modify the site), uses a third-party host outside New York, and provides clients reports based on each client's own Google Analytics data. It asked whether any of this is taxable.

The Office of Counsel concluded none of it is taxable:

Website creation/development — design, development, testing, and operating a site over which the developer keeps exclusive control — is not an enumerated taxable service, and it transfers no prewritten software (Tax Law § 1105(c); TSB-A-01(21)S; TSB-A-12(11)S).
Custom add-on features ("professional/enhancement services") built to a specific client's specifications are exempt as custom software when the charge is reasonable and separately stated (Tax Law § 1101(b)(14)). Servicing and repairing the software is exempt under § 1115(o).
Hosting fees the company pays a third party and passes through to clients are not among the enumerated taxable services and are not a rental of tangible personal property.
Optimization/reporting is an information service (analyzing analytics data and furnishing reports), but it's not taxable because each report is unique to that client, based on the client's own site data, and never shared with other clients — it's personal or individual in nature (Tax Law § 1105(c)(1); TSB-A-14(2)S; Westwood Pharmaceuticals v. Chu).
Caveat: any prewritten software the company itself buys to perform the work is taxable to the company as a retail purchase (TSB-A-01(21)S).

What this means for you

Web/app developers and digital agencies

Building and operating a website you keep control of isn't taxable, and passing through third-party hosting isn't either. The exemptions for § 1115(o) software maintenance and separately-stated custom modifications keep your enhancement work non-taxable — but separate-state those custom charges.

Watch the information-service line

Client-facing analytics reports are an information service, but stay non-taxable as long as they're each client's own data and never pooled or shared. Selling reports drawn from a common database across clients would flip to taxable.

Don't forget your own input purchases

Even when your service isn't taxable, prewritten software you buy to deliver it is taxable to you.

Common questions

Q: We bundle creation, hosting, maintenance, and reports into one monthly fee. Is that fee taxable?
A: No — each component here is non-taxable (development, pass-through hosting, software maintenance, and personal/individual reports), so the bundled fee isn't taxable.

Q: We pass our third-party host's charge straight to the client. Taxable?
A: No. Hosting fees aren't an enumerated taxable service and aren't a rental of equipment.

Q: The optimization reports analyze data — isn't that a taxable information service?
A: It's an information service, but it's excluded because each report is unique to the client, from the client's own data, and not shared with others.

Q: Are our custom feature add-ons taxable?
A: No, if they're custom modifications to a specific client's specs and the charge is reasonable and separately stated (and software servicing is exempt under § 1115(o)).

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 retail sales of tangible personal property)
Tax Law § 1105(c) (enumerated services subject to tax)
Tax Law § 1105(c)(1) (information services; exclusion for personal or individual information)
Tax Law § 1101(b)(14) (definition of prewritten software; custom modifications)
Tax Law § 1115(o) (exemption for software maintenance/installation services)
20 NYCRR 527.3(b)(2); TSB-A-01(21)S; TSB-A-12(11)S; TSB-A-14(2)S; Westwood Pharmaceuticals, Inc. v. Chu, 164 AD2d 462 (4th Dep't 1990)

Source

Original ruling text

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Sales taxNovember 24, 2020Office of Counsel

The Department of Taxation and Finance received a Petition for Advisory Opinion from Redacted ("Petitioner”). Petitioner asks whether its services of creating, operating and hosting websites and applications accessed on mobile devices are subject to State and local sales and use tax.

We conclude that Petitioner’s services are not subject to State and local sales and use tax because they are not enumerated services subject to tax pursuant to Tax Law § 1105(c).

Facts

Petitioner creates and hosts websites and applications accessed on mobile devices. Its clients are retail sellers of consumer goods. The mobile websites are accessed by Petitioner’s clients’ customers to view and purchase clients’ goods on mobile devices. Each mobile website is tailored to the unique specifications of Petitioner’s client. The specific services associated with the development and maintenance of the mobile websites include website creation, hosting, maintenance, optimization/reporting and professional services. These services are performed at Petitioner’s headquarters in Pennsylvania.

Website creation includes the design, development, and testing of the site. Petitioner creates the mobile website by first using the client’s existing desktop website code and data and then tailoring the mobile website to each client’s specifications to ensure that the look and feel of the client’s mobile site is the client’s desired user experience. Petitioner retains ownership of the mobile website it creates, but the URL is owned by the client: the link or address to the website is owned by the client, but the client does not have access to modify the website for any purpose because the process by which the mobile website is created and maintained is proprietary to Petitioner. Petitioner usually does not charge its clients for mobile website creation. Instead, Petitioner recovers the costs incurred for these services as part of a fixed monthly service fee.

Hosting involves hosting the website in the cloud on behalf of the client. Petitioner does not own the servers on which the websites are hosted. Petitioner retains a third party hosting company to provide this service. Petitioner leases space on the servers and does not lease specific/identifiable servers. The third party servers are physically located outside of New York.

Once the mobile website is launched, Petitioner does not separately charge the hosting fees to the client. The hosting fees are included in the fixed monthly service fee. The fixed monthly service fee is a graduated fee based on the number of page-views the mobile site receives each month.

Website maintenance includes daily manual error testing, automated scripts error testing and monthly reporting detailing certain performance diagnostics, marketing updates such as banner charges, and fixing bugs or fundamental changes/modifications to the website. Fees for these services are also included in the fixed monthly service fee.

The optimization/reporting service includes weekly reports based on third party information from Google Analytics, including confirming the page-views on which the fixed monthly service fee is based, and monthly recommendations made by Petitioner for improvements and optimization to the client’s mobile site. The data in Google Analytics is private to each client. A client can see its own data but it will not see the data in another client’s profile.

Petitioner embeds code into each client’s mobile site code to enable Google Analytics. Clients may request and receive access to Google Analytics for the mobile site. Google Analytics does not charge Petitioner for this feature and Petitioner does not charge its clients. Petitioner will review the analytics provided by Google Analytics and create a report to recommend and market additional services to its clients. If the client would like to move forward with Petitioner’s recommendations, the charge for these additional services may be included in the monthly service fee or charged separately as professional services.

Professional services, also referred to as “enhancement services,” encompass add-on or out-of-scope services such as adding new features and functionality to the mobile website at the request of the client. As part of the initial contract, clients may pick and choose from numerous features and functionality options for their mobile site. After launch, Petitioner’s account managers continue to discuss additional add-ons or modifications to optimize the mobile site in various ways. Additionally, updates to the mobile websites need to be performed regularly. Any change to a client’s desktop website triggers an alert to Petitioner. Petitioner then makes the appropriate adjustment to the mobile site. Petitioner has developers who constantly ensure that adjustments are made and any “bugs” are immediately repaired. A fixed, minimal number of hours for these professional services are included in the fixed monthly service fee described above. If these hours are exceeded, Petitioner charges the client an agreed-upon hourly rate for the additional time.

Analysis

Tax Law § 1105(a) and (c) impose tax upon the receipts from every sale, except for resale, of tangible personal property and certain enumerated services. Website development services, including consulting, designing and website creation, are not enumerated services subject to New York State and local sales and compensating use taxes. See Tax Law § 1105(c); TSB-A-01(21)S. Moreover, where a developer maintains exclusive control over the website, the service of developing and operating the website also does not involve any transfer of prewritten computer software and thus is not subject to sales or use tax. See TSB-A-12(11)S.

Additionally, charges for a revision or upgrade of software is subject to tax as the sale of prewritten software. See Tax Law § 1101(b)(14); TSB-A-02(11)S. However, where the software upgrade is designed and developed to the specifications of a specific purchaser, its sale to that purchaser is exempt as custom software if the charge for such upgrade is reasonable and separately stated. See id.; TSB-A-02(11)S. Here, if the charge to add new features and functionality to the website through custom modifications to prewritten software for a specific client is reasonable and separately stated, it would be exempt from sales tax. See id.

Charges for servicing and repairing the software are also exempt from sales tax. See Tax Law § 1115(o); TSB-A-09(19)S; TSB-M-93(3)S. Petitioner’s mobile website development services and “professional services” involve updates to the mobile website and, thus, are not subject to sales or use tax. Notably, however, any purchase by Petitioner of prewritten software for use in performing its mobile website development service is subject to tax under Tax Law § 1105(a) as a purchase at retail of tangible personal property. See TSB-A-01(21)S.

Hosting fees charged by a third party that Petitioner pays and passes through to its clients also are not included in the enumerated services subject to sales or compensating use tax pursuant to Tax Law § 1105(c). See id.; TSB-A-09(19)S. Additionally, hosting fees are not fees for the rental of tangible personal property. See id.

Finally, Petitioner’s optimization and reporting service that includes weekly reports based on third-party analytics of Petitioner’s clients’ mobile websites and monthly recommendations for improving optimization also is not subject to tax. Tax Law § 1105(c)(1) imposes tax upon the receipts from every sale, except for resale, of the following:

The furnishing of information . . . by duplicating written or printed matter in any other manner, including the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons, but excluding the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons . . . .

Here, because Petitioner is analyzing the information provided by sites such as Google Analytics and preparing reports, including recommendations, based on that information, Petitioner’s optimization and reporting service is an information service. See TSB-A-14(2)S. However, because the information provided in the report is unique to each client, is not shared with other clients and pertains only to the features of that client’s mobile site, such information is individual in nature and will not be incorporated in reports to other clients; therefore, the information service is not subject to tax. See id.; Westwood Pharmaceuticals, Inc. v. Chu, 164 AD2d 462, 466-467 (4th Dep’t 1990).

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.