Is a separately priced software maintenance agreement taxable in New York, and how did the 9/1/1991 law change the answer?

Plain-English summary

Arthur Andersen and Co. asked, for a client, whether the client's charge for an optional software maintenance agreement is taxable. The client designs and sells a software product (an application-development tool that generates RPG/COBOL code). It analyzes each customer's requirements and adapts the program to the customer's CPU. The canned and modified portions are not separately stated. The software is sold under a perpetual license with an optional, separately priced, cancel-anytime maintenance agreement covering both the canned and modified portions. The maintenance fee is not broken out between canned/modified portions or among its four service features: (1) telephone support, (2) user-group conference attendance, (3) software upgrades, and (4) Program Temporary Fix (PTF / bug-fix) service.

The Department split the answer by date:

• Before September 1, 1991 — not taxable. Software that required analysis of the customer's requirements and modification of the program was intangible personal property (Computer Language Research, TSB-A-89(13)S). Maintaining or servicing an intangible is not an enumerated service under § 1105(c), so the maintenance agreements sold before 9/1/1991 were not subject to tax.
• On or after September 1, 1991 — taxable here. New § 1101(b)(14) makes prewritten software (and prewritten software modified to any degree for a specific purchaser) tangible personal property — unless the prewritten and modification charges are reasonably separately stated. New § 1115(o) exempts services performed on software, but where those services accompany a TPP sale, the charge is exempt only if it is reasonable and separately stated.
• No itemization = fully taxable. Because the client does not separately state the canned vs. modified portions, and does not break out the four maintenance services, the entire post-9/1/1991 maintenance charge is subject to sales tax under §§ 1101(b)(14) and 1115(o).

What this means for you

Software's tax status changed on September 1, 1991

Before that date, custom/modified software was treated as an intangible, and servicing it wasn't taxable. After it, prewritten software — including prewritten software modified for a buyer — is tangible personal property unless the modification is reasonably separately stated. Date-of-sale matters when analyzing older software transactions.

Separately state your charges or the whole bill is taxable

The exemptions here are itemization-dependent. If you don't separately state (a) the prewritten vs. custom-modification portions and (b) the taxable vs. exempt components of a maintenance agreement, New York taxes the entire charge. A reasonable, separately stated breakout is what preserves the exempt portions.

Bundled maintenance features rise and fall together

A maintenance agreement mixing exempt and taxable features (support, conferences, upgrades, bug fixes) that is billed as one lump sum is fully taxable. To keep the exempt features exempt, break the fee out by component on the invoice.

Common questions

Q: Is a software maintenance agreement taxable in New York?
A: Before 9/1/1991, not when it serviced intangible custom software. On/after 9/1/1991, it's taxable unless the taxable and exempt portions are reasonably separately stated — here the unitemized charge was fully taxable.

Q: What changed on September 1, 1991?
A: Tax Law § 1101(b)(14) defined prewritten software (including modified prewritten software) as tangible personal property, and § 1115(o) made services on software exempt only when reasonably separately stated in a bundled sale.

Q: Why was the whole maintenance fee taxed after 9/1/1991?
A: Because the client didn't separately state the canned vs. modified software or break out the four maintenance services — so no portion qualified as separately stated exempt.

Q: How could the vendor have preserved an exemption?
A: By reasonably and separately stating the prewritten vs. custom-modification charges and itemizing the maintenance agreement's components on the invoice.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1101(b)(14) (added eff. 9/1/1991) (prewritten software, including modified prewritten software, is tangible personal property unless the modification is reasonably separately stated)
• Tax Law § 1115(o) (added eff. 9/1/1991) (services performed on software are exempt, but a charge bundled with a TPP sale is exempt only when reasonable and separately stated)
• Tax Law § 1105(c)(3) (tax on installing/maintaining/servicing/repairing tangible personal property)
• Technical Services Bureau Bulletin 1978-1(S) (software exempt where its selection requires analysis of the customer's requirements or adaptation to a specific environment)
• Computer Language Research, Inc., TSB-A-89(13)S (analyzed/modified software is intangible personal property, not taxable)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_70s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (70)S
Sales Tax
November 8, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S910808B

On August 8, 1991, a Petition for Advisory Opinion was received from Arthur Andersen and
Co., Spear Street Tower, Suite 3500, One Market Plaza, San Francisco, CA 94105.
The issue raised by Petitioner, Arthur Andersen and Co., is whether its client's charge for an
optional maintenance agreement on computer software is subject to New York State and local sales
and use tax.
Petitioner's client designs, publishes, and retails computer software application development
tools ("the Software Product"). The Software Product provides a complete range of interactive
facilities to design, generate, document and maintain application software. It generates the source
code in RPG or COBOL needed to perform a wide range of interactive, batch and report functions.
It also contains a set of administrative and support tools which enable development of menus,
manipulation of objects and automatic documentation of existing systems. The Software Product has
made the process of developing custom software on midrange computers more efficient than
conventional programming methods.
Petitioner's client analyzes the customer's requirements and makes the necessary program
adaptations to facilitate the customer's use of the program on their specific CPU. In addition, the
software license is evidenced by a written agreement which restricts the customer's duplication,
licensing, sublicensing or transferring of the Software Product to a third party. Charges for the
canned portion of the program are not separately stated from the charges for the modified portion
of the program. Petitioner's client will provide another copy at minimal charge if the customer loses
or damages the software and the Software Product is destroyed or returned upon termination of the
license period.
Petitioner's client sells the Software Product to customers under a perpetual licensing
agreement. This licensing agreement provides for an optional maintenance agreement which may
be cancelled at any time. The maintenance agreement covers the canned portion as well as the
modified portions of the program. The cost for the maintenance agreement is stated separately within
the licensing agreement and is dependent upon the particular computer hardware to which the
Software Product is adapted. The fee is assessed on an annual basis. Charges for the maintenance
agreement are not separately stated between the canned portion or the modified portion of the
program, nor are they broken down between the four services provided under the agreement.
The four service features provided under the maintenance agreement are:
(1)
(2)
(3)
(4)

Telephone support service;
User group conference attendance;
Software upgrades, and;
Program Temporary Fix (PTF) service.

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Software upgrades represent the advancement and improvement in products which are
available upon request. The releases must be individually coded to facilitate each customer's use on
their specific CPU. The PTF service represents Petitioner's support and assistance to clients in
instances where the Software Product experiences difficulties, i.e., "bug" removal.
Technical Services Bureau Bulletin 1978-1 defines software as:
"Instructions and routines (programs) which, after an analysis of the customers 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.

In Computer Language Research, Inc., Adv Op Comm T & F, June 7, 1989, TSB-A-89(13)S,
the Commissioner advised that computer programs (software) developed by Petitioner which
required an analysis of the customer's requirements and modification of the actual program for use
by such customer was considered intangible personal property and therefore not subject to New York
State and local sales and use taxes.
Section 1105(c) of the Tax Law imposes tax upon the receipts from every sale, except for
resale, of certain enumerated services. The maintaining and servicing of an intangible is not a service
enumerated under Section 1105(c) of the Tax Law and, therefore, the fee paid for such service is not
subject to sales or use tax.
Effective September 1, 1991, Section 1101(b) of the Tax Law was amended to add the
following:
(14) Pre-written computer software. Computer software (including pre­
written upgrades thereof) which is not software designed and developed by the author
or other creator to the specifications of a specific purchaser. The combining of two
or more pre-written computer software programs or pre-written portions thereof does
not cause the combination to be other than pre-written computer software. Pre­
written software also includes software designed and developed by the author or
other creator to the specifications of a specific purchaser when it is sold to a person

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other than such purchaser. Where a person modifies or enhances computer software
of which such person is not the author or creator, such person shall be deemed to be
the author or creator only of such person's modifications or enhancements. Pre­
written software or a pre-written portion thereof that is modified or enhanced to any
degree, where such modification or enhancement is designed and developed to the
specifications of a specific purchaser, remains pre-written software; provided,
however, that where there is a reasonable, separately stated charge or an invoice or
other statement of the price given to the purchaser for such modification or
enhancement, such modification or enhancement shall not constitute pre-written
computer software.
Moreover, Section 1115 of the Tax Law was amended effective September 1, 1991, to add
the following:
(o) Services otherwise taxable under subdivision (c) of section eleven
hundred five or under section eleven hundred ten shall be exempt from tax under this
article where performed on computer software of any nature; provided, however, that
where such services are provided to a customer in conjunction with the sale of
tangible personal property any charge for such services shall be exempt only when
such charge is reasonable and separately stated on an invoice or other statement of
the price given to the purchaser.
In addition, Section 1105(c)(3) of the Tax Law imposes sales tax on the following:
(3) Installing tangible personal property, excluding a mobile home, or
maintaining, servicing or repairing tangible personal property, including a mobile
home, not held for sale in the regular course of business, whether or not the services
are performed directly or by means of coin-operated equipment or by any other
means, and whether or not any tangible personal property is transferred in
conjunction therewith. . .
Pursuant to Computer Language Research, Inc., supra., the sale of computer programs
developed by Petitioner's client and modified to meet the customer's requirement prior to September
1, 1991, is considered the sale of an intangible and, therefore, the sale of such program is not subject
to sales and use tax. Accordingly, Petitioner's clients sales of maintenance agreements prior to
September 1, 1991, are not subject to sales and use tax since the fees paid are for the maintaining
and servicing of an intangible, a service not enumerated under Section 1105(c) of the Tax Law as
subject to sales and use tax.
As for Petitioner's clients sale of maintenance agreements on or after September 1, 1991,
pursuant to Section 1101(b)(14) of the Tax Law the sale of pre-written software or a pre-written
portion thereof that is modified or enhanced to any degree to meet the specifications of a specific
purchaser constitutes the sale of tangible personal property unless charges for the pre-written portion
and the modifications are separately stated on an invoice or other statement given to the purchaser.
Moreover, pursuant to Section 1115(o) of the Tax Law the entire charge for services performed

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under the maintenance agreement is subject to sales tax unless the charge is separately stated
between the taxable and exempt services provided under the agreement. Accordingly, since
Petitioner's client does not separately state the charges for the pre-written portion and the modified
portion and does not separately state the charges for the four services it provides under the
maintenance agreement as mandated pursuant to Sections 1115(o) of the Tax Law, the entire charge
received from the sale of the maintenance agreement is subject to sales and use tax pursuant to
Sections 1101(b)(14) and 1115(o) of the Tax Law.

DATED: November 8, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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