Does a New York business owe sales tax on a hosted business e-mail / Microsoft Exchange subscription it buys from an out-of-state provider?

Plain-English summary

A New York business bought a secure hosted Exchange e-mail service (essentially a managed Microsoft Exchange / Outlook mailbox, with storage, security, anti-virus, mobile sync, and phone support) from an out-of-state provider, and asked whether it owed New York sales tax on the subscription. The Department of Taxation and Finance said no — the service is not taxable.

The wrinkle is that New York does tax some communication services: "telephony and telegraphy" are taxable under Tax Law § 1105(b)(1)(B), and the Department treats e-mail as telephony/telegraphy for that purpose. So on its face, an e-mail service could be a taxable service.

What saves it is federal law. The Internet Tax Freedom Act (ITFA) bars states from taxing "Internet access," and ITFA defines Internet access to include electronic mail service — whether sold on its own or bundled with Internet access. Because of that federal preemption, New York has treated separately-sold e-mail as exempt since November 1, 2007. The Department therefore concluded the provider's charge for the hosted e-mail service is not subject to New York State or local sales tax.

The Department declined to opine on a side question — whether the provider could go back and bill the business for sales tax on prior periods — because that turns on the private contract. But it pointedly noted that e-mail has been exempt since November 1, 2007, which strongly implies there was no New York sales tax for the provider to collect for those periods.

What this means for you

Businesses buying hosted e-mail or cloud mailboxes

If you subscribe to a hosted e-mail platform (managed Exchange, Microsoft 365 / Google Workspace-style mailboxes, etc.), New York sales tax generally should not apply to the e-mail portion, because the Internet Tax Freedom Act treats e-mail as exempt Internet access. If a vendor is charging you New York sales tax on a standalone e-mail service, that is worth questioning.

SaaS and cloud vendors selling into New York

The exemption here rests specifically on the ITFA "Internet access" definition covering e-mail. It does not mean every cloud or SaaS product is exempt. New York separately taxes prewritten software (including SaaS, as the licensing/right-to-use of software) and various enumerated services. The label "e-mail/Internet access" is doing the work — bundling other taxable software or services into the charge can change the result.

Accountants and tax professionals

The analysis is a two-step: (1) the service first qualifies as taxable telephony/telegraphy under Tax Law § 1105(b)(1)(B), then (2) ITFA preemption removes it because e-mail is within "Internet access." The relevant Department guidance is TSB-M-08(4)C, (2)S, and the operative date for separately-sold e-mail is November 1, 2007. Watch for charges that bundle e-mail with clearly taxable items (e.g., separately licensed prewritten software beyond what is incidental to the e-mail service).

Common questions

Q: Is hosted business e-mail taxable in New York?
A: Per this opinion, no. A standalone hosted Exchange / e-mail subscription is exempt from New York State and local sales tax because the Internet Tax Freedom Act treats e-mail service as Internet access, which states cannot tax.

Q: Does it matter that the provider was located in another state?
A: The result here did not depend on where the provider sat; it depended on the service being e-mail/Internet access that ITFA shields from state tax. (Where the buyer uses the service still matters for sourcing taxable services generally.)

Q: My vendor charged me NY sales tax on email for past years — can they do that?
A: The Department declined to interpret your contract, but it emphasized that separately-sold e-mail has been exempt from New York sales tax since November 1, 2007 — so for those periods there generally was no New York sales tax due on the e-mail service itself.

Q: Does this mean all my cloud software is tax-free?
A: No. The exemption is specific to e-mail/Internet access. New York taxes prewritten software (including software accessed as SaaS) and many other services; this opinion does not exempt those.

Q: Can my business rely on this opinion?
A: Not as binding. A TSB-A advisory opinion binds the Department only as to the petitioner who requested it and the exact facts described. It shows the Department's reasoning, but your facts may differ — confirm before relying on it.

Citations and references

New York Tax Law:
- Tax Law § 1105(a), (b), (c) — sales tax imposed on certain services
- Tax Law § 1105(b)(1)(B) — telephony and telegraphy services are taxable (e-mail treated as telephony/telegraphy)

Federal law:
- Internet Tax Freedom Act § 1101(a) — prohibits state taxes on Internet access
- Internet Tax Freedom Act § 1105 — "Internet access" includes electronic mail service

Department guidance:
- TSB-M-08(4)C, (2)S — separately-sold e-mail treated as exempt Internet access (effective November 1, 2007)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao.htm
• Opinion: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales/24-4s.htm
• Printer-friendly PDF: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a24-4s.pdf

Original ruling text

Sales Tax
June 26, 2024
Office of Counsel

The Department of Taxation and Finance (“Department”) received a Petition for Advisory Opinion from [ redacted ] (“Petitioner”). Petitioner asks whether the secure hosted exchange service to which it subscribes is subject to sales tax.

We conclude that the secure hosted exchange service to which Petitioner subscribes is not subject to sales tax.

Facts

Petitioner is a business located in New York State that subscribes to a secure hosted exchange service (the “service”) for its business e-mail from a provider located in Florida. The service, as described by Petitioner, is an option for businesses that need e-mail service, but do not want to pay for equipment or information technology staff. The service allows businesses to enjoy worry-free e-mail, mobile device synchronization and the other benefits of Microsoft Exchange. Microsoft Exchange is an e-mail server that allows Petitioner access to e-mail, calendars, contacts, and scheduling.

Petitioner purchases the secure hosted exchange service from the provider on a yearly basis and renews the contract every June. Petitioner started the contract with the provider in 2015. Under the contract, Petitioner purchases email service that includes: (1) unlimited mailbox storage; (2) premium email security protection; (3) anti-virus protection; and (4) live phone support. The service that Petitioner purchases also includes ActiveSync and a Messaging Application Programming Interface (“MAPI”). ActiveSync keeps all the exchange data synchronized between devices and MAPI allows multiple applications to interact with multiple messaging systems across a variety of hardware platforms.

Petitioner is solely responsible for its connection to the Internet and must maintain a valid Internet Protocol address to use the service. The service includes the licensing for Microsoft Outlook software for each of Petitioner’s employees. Upon terminating the service, Petitioner is responsible for uninstalling any Microsoft Outlook or other client software that is licensed as part of the service. Petitioner is also subject to the service provider’s license with Microsoft and possibly one or more suppliers. Petitioner is a party to the Microsoft End User License, which must be acknowledged by Petitioner during its Microsoft Outlook software installation on its computers and devices. The service provider also provides online support for configuration of Microsoft Outlook or other select e-mail programs, as well as connectivity to the service.

Analysis

Sales tax is imposed on sales, except for resale, of certain services. See Tax Law § 1105(a), (b), and (c). Among the taxable services are telephony and telegraphy. See Tax Law § 1105(b)(1)(B). E-mail service qualifies as telephony or telegraphy service for purposes of Tax Law § 1105(b)(1).

The Internet Tax Freedom Act (“ITFA”) prohibits states from imposing taxes on Internet access and multiple or discriminatory taxes on electronic commerce. See ITFA § 1101(a). The term “Internet access service” means a service that enables users to access content, information, electronic mail, or other services offered over the Internet.

Electronic mail services are included in the ITFA definition of Internet access, regardless of whether such services are provided independently or packaged with Internet access. See ITFA § 1105; TSB-M-08 (4)C, (2)S. Therefore, the provider’s charge for its e-mail service is not subject to New York sales tax.

Petitioner also asked whether its provider has the authority to collect sales tax from Petitioner for prior periods for which tax had not been collected, but did not specify the prior periods at issue. The Department is not in a position to opine on the terms of Petitioner’s contract with its provider. However, we note that the inclusion of separately-sold email services in the definition of Internet Access for purposes of the Internet Tax Freedom Act took effect on November 1, 2007, and those services have been exempt from New York State and local sales taxes since that date. 

DATED: June 26, 2024

Mary Ellen Ladouceur
Principal Attorney

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.