Is the sale or license of a specialized software program that the vendor analyzes and adapts for each customer subject to New York sales tax?

Plain-English summary

Astrogamma Inc. licenses a program called Fenics that helps traders of foreign-currency options calculate the theoretical fair price of an option — its pricing formula became an industry standard. Fenics is sold directly (not in stores). Before shipping, Astrogamma sets each user's time zone and base currency in the program so it can do its job, and embeds the customer's name and address in the code to prevent piracy. Astrogamma asked whether its Fenics licenses are subject to sales tax under § 1105(a).

The Department held the licenses are exempt.

• Technical Services Bulletin 1978-1(S) treats a program as exempt "software" — intangible personal property — if either (A) preparing or selecting the program for the customer requires the vendor to analyze the customer's requirements, or (B) the program requires adaptation by the vendor to a specific environment.
• Fenics requires an analysis of the customer's requirements and modification of the actual program (setting the time zone and base currency, embedding the user's identity) before the customer can use it.
• Because it meets the Bulletin's test, Fenics is intangible personal property, so its sale — including licenses to use and renewals of licenses to use — is not subject to New York State and local sales and use tax. The Department cited its earlier opinion in Computer Language Research, Inc., TSB-A-89(13)S.

Two limits the Department flagged: the vendor of exempt software must pay sales or use tax on any tangible personal property (like a diskette) it transfers to the customer with the exempt service, and the hardware, utility services, and supplies used to develop the exempt software are not eligible for any sales tax exemption.

What this means for you

Under the rule that applied then, "analyzed or adapted" software was exempt

At the time of this opinion, New York treated a program as tax-free intangible property if the vendor analyzed the customer's needs or adapted the program for the customer's environment — even a widely sold program like Fenics qualified because each copy was configured for the individual user. Prewritten programs a vendor sold off the shelf, unchanged, did not qualify.

The software rules have since changed — check current law

This is the biggest caveat. New York changed its treatment of prewritten (canned) software in 1991: the sale or license of prewritten software is now generally taxable as tangible personal property, whether delivered on media or electronically. Do not rely on this 1990 opinion to conclude that a modern software license is exempt — analyze it under current law.

Exempt software doesn't make everything around it exempt

Even when the software itself was exempt, the developer still owed tax on the physical media handed to the customer and got no exemption on the hardware, utilities, and supplies used to create the software. A software business had taxable inputs even while its product was tax-free.

Common questions

Q: Why was the Fenics software exempt when it was sold worldwide as an industry standard?
A: Because the vendor analyzed each customer's requirements and modified the actual program for that customer (time zone, base currency, embedded identity), it met the 1978 Bulletin's test for exempt intangible software.

Q: Were the licenses and renewals taxable?
A: No. As intangible personal property, the sale, the licenses to use, and license renewals were all outside sales and use tax under § 1105(a) as the law then stood.

Q: Does this mean my software license is exempt today?
A: Not necessarily. New York changed the rule in 1991 — prewritten software is now generally taxable. Check current law for your product.

Q: Did the developer owe any tax at all?
A: Yes — on any tangible property (such as diskettes) transferred with the software, and on the hardware, utilities, and supplies used to develop it.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Technical Services Bulletin 1978-1(S) — tax status of receipts from computer software sales and services

Cited authority:

• Computer Language Research, Inc., Adv Op, Comm T & F, June 7, 1989, TSB-A-89(13)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(44)S
Sales Tax
August 29, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900725C

On July 25, 1990 a Petition for Advisory Opinion was received from Astrogamma Inc., c/o
Healy & Baillie, Esqs., 29 Broadway, New York, New York 10006.
The issue raised by Petitioner, Astrogamma Inc., is whether its sales of its Fenics software
licenses are subject to sales tax under Section 1105(a) of the Tax Law.
Petitioner is a corporation duly organized and existing under the laws of the State of New
York with its principal place of business at 3 Hanover Square, Apt. 3, New York, New York 10004.
Petitioner licenses a software system called Fenics. Fenics is a specialized program that assists
traders of options in foreign currencies to determine the theoretical fair price of an option. The most
valuable feature of the program is its unique formula for the calculation of the theoretical fair price
of the option. The Fenics program is sold throughout the world. The Fenics formula has become the
worldwide industry standard for pricing of options.
Fenics is sold directly by Petitioner. It is not advertised and is not available in retail stores.
To determine the appropriateness of the Fenics program and its various modules to a prospective
customer's operations, Petitioner provides individualized consultation together with a fully functional
demonstration copy of Fenics for use up to 3 months.
The Fenics program runs on DOS based micro-computers and is made available on 5.25" or
3.5" high or low density floppy diskettes, depending upon the customer's requirements. In order for
the program to perform its specialized function (determining the theoretical fair price of an option),
each user's time zone and the user's base currency must be set in the program. These programming
adjustments are performed by Petitioner prior to shipment to the customer. Further, the name and
address of the institutional user is imbedded in the program code prior to shipment. This
identification process is necessary in order to maintain confidentiality and to prevent piracy of a
customer's licensed program, as well as to assist in policing compliance by the customer's employees
with the terms of the license agreement with Petitioner.
Petitioner does not seek to control the number of copies of the program at any single location.
In fact, upon request by the customer, Petitioner provides multiple copies of the program (each with
the required time zone, base currency and customer name and address imbedded in the program) at
no additional charge.
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:
TP-9 (9/88)

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TSB-A-90(44)S
Sales Tax
August 29, 1990
Instructions and routines (programs) which, after an 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:
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. Systems 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. The person
selling exempt software is required to pay the applicable sales or use tax on any tangible personal
property transferred to the customer in connection with the exempt service. In addition, the hardware,
utility services and supplies used to develop the exempt software are not eligible for any sales tax
exemptions.
Accordingly, as the Fenics computer program developed by Petitioner requires an analysis
of the customer's requirements and modification of the actual program for use by such customer,
such program is considered to be intangible personal property and therefore is not subject to New

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TSB-A-90(44)S
Sales Tax
August 29, 1990
York State and local sales and use taxes under Section 1105(a) of the Tax Law. Moreover, as
intangible personal property, its sale, including licenses to use and renewals of licenses to use, is not
subject to New York State and local sales and use taxes. Computer Language Research, Inc., Adv
Op, Comm T & F, June 7, 1989, TSB-A-89(13)S.

DATED: August 29, 1990

NOTE:

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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