Is a license to use prepackaged, off-the-shelf software — and its technical support — subject to New York sales tax?

Plain-English summary

Cognos Corporation sells a 99-year license (keeping ownership) to prepackaged software shipped on diskettes for use on an IBM PC AT or compatible. It's ordered by mail or phone (not sold in retail stores), isn't written for any one user, and needs no analysis or adaptation — its selling point is compatibility with Cognos's mid-range software so users can move data between systems. Cognos asked whether the license and its technical support are subject to New York sales tax.

The Department said both are taxable.

• A software license is a "sale." Under Tax Law § 1101(b)(5), a "sale" includes any license to use tangible personal property. So calling it a license (not a sale) doesn't avoid the tax.
• Prepackaged software = taxable tangible property. Under Technical Services Bulletin 1978-1(S), software is treated as exempt intangible property only if either (A) its preparation/selection required the vendor's analysis of the customer's requirements, or (B) it required the vendor's adaptation to a specific environment. Cognos's software meets neither — it's a canned program usable on any IBM PC AT without modification — so it's taxable tangible personal property under § 1105(a), like pre-packaged programs sold for home/personal computers.
• The technical support is taxable too. The support (software modification and helpful hints on using the product after installation) is rendered in connection with tangible personal property, so it's also taxable.

What this means for you

Off-the-shelf software is taxable in New York; calling it a "license" doesn't change that. The 1978 software rule (still the framework these 1980s opinions apply) turns on whether the vendor had to analyze the buyer's needs or adapt the program. Canned software that any buyer can install and run as-is is tangible personal property and taxable — and § 1101(b)(5) makes a license to use it a taxable sale.

Contrast custom/adapted software. Where the vendor must analyze the customer's specific data-processing requirements, or adapt the program to a particular make/model/environment, the software can be exempt intangible property. The distinction is analysis or adaptation — not the media or the "license vs. sale" label.

Support tied to taxable software is generally taxable. Technical support that involves modifying the program or helping the customer use it after installation is a service connected to tangible personal property, so it follows the taxable treatment of the software.

Common questions

Q: We license prepackaged software on diskette. Is it taxable even though we keep ownership?
A: Yes. A license to use tangible personal property is a taxable "sale" (§ 1101(b)(5)), and prepackaged software that needs no analysis or adaptation is taxable tangible property (§ 1105(a)).

Q: When would software be exempt instead?
A: When the vendor's preparation required an analysis of the customer's requirements, or the program required adaptation to a specific environment (TSB 1978-1(S), test A or B). Cognos's canned product met neither.

Q: Is the technical-support contract taxable?
A: Yes. Support involving software modification and use-help after installation is rendered in connection with tangible personal property, so it's taxable.

Citations and references

Statute and guidance:

• Tax Law § 1105(a) — imposes sales tax on receipts from retail sales of tangible personal property
• Tax Law § 1101(b)(5) — "sale" includes any rental, lease, or license to use tangible personal property
• Technical Services Bulletin 1978-1(S) (Feb. 6, 1978) — software is exempt intangible property only if (A) preparation/selection required the vendor's analysis of the customer's requirements or (B) it required the vendor's adaptation to a specific environment; prepackaged programs usable without modification are taxable tangible personal property

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_54s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (54)S
Sales Tax
October 21, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880826A

On August 26, 1988, a Petition for Advisory Opinion was received from Cognos
Corporation, 2 Corporate Place I-95, Peabody, MA 01960.
The issue raised is whether the sale of a license to use prepackaged software shipped to
customers on magnetic diskettes for use on personal computers and technical support for the above
product is subject to New York State and local sales taxes.
Petitioner is selling a license to use prepackaged software for a 99 year period. Petitioner
retains ownership of the product. It is prepackaged software which must be used on an IBM PC AT
or compatible equipment. Petitioner does not sell it through retail stores. It must be ordered through
the mail or by telephone from a special sales unit at Petitioner's corporate headquarters. It is not
easily transferable from one machine to another since it must be used on a specific system
configuration. The main advantage to the user of the product is its compatibility with Petitioner's
mid-range computer software and the ability to transfer data between the systems.
When purchased, a thirty day warranty is included in the original cost. The customer has the
option to purchase a support contract which entitles him to an electronic bulletin board service
providing helpful hints on how to use the product, technical newsletters, notification of new releases
of the program and the right to acquire the new version at material cost. For an additional amount
the customer may purchase extended support which includes all of the above plus telephone advice.
Section 1105(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property. Sale, as defined in Section 1101(b)(5), includes any rental, lease or
license to use tangible personal property. For sales tax application, computers and peripheral devices
commonly described as "hardware" are considered tangible personal property.
The tax status of receipts from computer program ("software") sales and services is explained
in Department of Taxation and Finance Technical Services Bulletin 1978-1(S), issued February 6,
1978:
Software [means] instructions and routines which, after analysis of
the customer's specific data processing requirements, are determined
necessary to program the customer's electronic data processing
equipment to enable the customer to accomplish specific functions
with his EDP system. To be considered exempt 'software' for
purposes of this bulletin, one of the following elements must be
present:
TP-9 (9/88)

2
TSB-A-88 (54)S
Sales Tax
October 21, 1988
A.

Preparation or selection of the program for the customer's use requires
an analysis of the customer's requirements by the vendor.
or

B.

The program requires adaptation, by the vendor, to be used in a
specific environment i.e, a particular make and model of computer
utilizing a specified output device. For example, a software vendor
offers for sale a pre-written sort program which can be used in several
computer models. Prior to operation, instructions must be added by
the vendor which specify the particular computer model in which the
program will be utilized.

The software may be in the form of:
a.

System programs (except for those instruction codes which
are considered tangible personal property in paragraph 1
above) - programs that control the hardware itself and allow
it to compile, assemble and process application programs.

b.

Application programs - programs that are created to perform
business functions or control or monitor processes.

c.

Pre-written programs (canned) - programs that are either
systems programs or application programs and are not written
specifically for one user.

d.

Custom programs - programs created specifically for one user.

Software meeting the above criteria, whether placed on cards, tape disc pack or other
machine readable media or entered into a computer directly, is deemed to be intangible
personal property for sales tax purposes, and as such its sale is exempt from New York State
and local sales and use taxes. Software or programs which do not meet the criteria are
subject to tax.
[Example] E. A software supplier manufactures pre-packaged
programs for use with home television games or other personal
computer equipment. The programs are marketed through retail
stores and the programs are fully usable by customers without
modifications. In selecting or preparing the program, the supplier
does not perform a detailed analysis of the customer's requirements.
The program is viewed as tangible personal property for sales tax
purposes.

3
TSB-A-88 (54)S
Sales Tax
October 21, 1988
Petitioner is selling a license to use prepackaged software. This software is not specifically
written for one user and does not require analysis or adaptation. Rather, the software is designed for
any IBM PC AT or compatible equipment. Accordingly, the software is regarded as tangible
personal property, and thus, is subject to sales tax pursuant to Section 1105(a) of the Tax Law.
The technical support services offered by Petitioner involving software modification and
helpful hints on how to use the product after its installation, accordingly, are subject to tax because
they are rendered in connection with tangible personal property.

DATED: October 21, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.