When software is sold as one unit combining a taxable insurance-rating database and nontaxable custom software, is the whole price taxable?

Plain-English summary

Insurance Automation Systems, Inc. sold insurance agents a computer system (for the period June 1, 1988 through May 31, 1991) that underwrites, calculates, and quotes prices for commercial, homeowners, and auto insurance. The company visited each agent, analyzed the agent's hardware/software, and built the program around the agent's insurance-company contracts, then installed and further customized it on-site (custom proposal letters, quote profiles, default settings, rating factors). The program also drew on a database of the rating factors of insurance companies operating in New York. Insurance Automation asked whether it was selling nontaxable customized software or a taxable information service under Tax Law § 1105(c)(1).

The Department found the system had two parts with different tax treatment:

• The rating-factor database — taxable information service. The database of insurance-company rating factors, stored on discs, is an information service under § 1105(c)(1) (and § 527.3(a)(1), which reaches information on "tapes, discs, electronic readouts or displays"). It was not "personal or individual in nature" because it was available to any insurance agent willing to buy it — and it's immaterial that the client used it to generate a different quote for each of its own customers. So this part was taxable.
• The customized application software — exempt. The custom application software, which required analysis of the customer's equipment and modifications to fit it, qualified as exempt intangible/custom software under Technical Services Bulletin 1978-1(S) (paragraphs A and B) — consistent with Astrogamma, TSB-A-90(44)S and Answer Systems, TSB-A-91(9)S.
• Bundled = fully taxable. Because the taxable database and the nontaxable custom software were sold together as a single unit, sales tax was due on the total price, citing SOQ Broadcasting and Dynamic Telephone Answering Systems.

What this means for you

An information service doesn't become "personal" just because your customer personalizes the output

The § 1105(c)(1) exclusion for information "personal or individual in nature" turns on whether you furnish the same information to anyone who buys it — not on what the buyer does with it. A rating database sold to any agent is a taxable information service even though each agent uses it to produce individualized quotes.

Custom software analyzed and adapted for the buyer can be exempt

Software that requires the vendor to analyze the customer's specific requirements or adapt the program to the customer's environment can qualify as exempt custom/intangible software under the Department's software guidance — a separate track from taxable canned software and taxable information services.

Bundling a taxable and a nontaxable item can tax the whole thing

If you sell a taxable component (here, the database) together with a nontaxable component (custom software) as one unit for one price, New York taxes the entire charge. To preserve the exemption on the nontaxable part, price and sell the components separately with a reasonable, separately stated charge.

Common questions

Q: Was the insurance-rating database taxable?
A: Yes. It's a taxable information service under § 1105(c)(1) because it was available to any agent who bought it — not personal or individual in nature.

Q: Was the custom software taxable?
A: No. The customized application software that required analysis and adaptation to the customer's equipment qualified as exempt custom/intangible software.

Q: Then why was tax due on the whole price?
A: Because the taxable database and the nontaxable software were sold together as a single unit, tax applied to the total price.

Q: Does it matter that the client generated a unique quote for each of its customers?
A: No. The Department said that's immaterial; the database itself was information available to any agent, so it was a taxable information service.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1105(c)(1) (tax on furnishing information; exclusion for information personal or individual in nature not substantially incorporated in reports furnished to others)
• 20 NYCRR § 527.3(a)(1) (duplicating written/printed material includes tapes, discs, electronic readouts or displays)
• Technical Services Bulletin 1978-1(S) (Feb. 6, 1978) (software exempt where its selection requires analysis of the customer's requirements or adaptation to a specific environment)
• Astrogamma, Inc., TSB-A-90(44)S; Answer Systems, Inc., TSB-A-91(9)S (custom software as intangible personal property)
• Economic Information Systems, Inc., TSB-H-87(218)S (database on electronic media as an information service)
• SOQ Broadcasting Corp., TSB-H-85(154)S; Dynamic Telephone Answering Systems, Inc. (single-unit sale of taxable and nontaxable items taxed on the total price)

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_75s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (75)S
Sales Tax
November 26, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S910621A

On June 21, 1991 a Petition for Advisory Opinion was received from Insurance Automation
Systems, Inc., 4400 E. Emery Industrial Parkway, Warrensville, Ohio 44128.
The issue raised, by Petitioner, Insurance Automation Systems, Inc., is whether during the
period from June 1, 1988 through May 31, 1991 it was selling customized insurance computer
software which was not subject to sales tax, or an information service which was subject to sales tax
under Section 1105(c)(1) of the Tax Law.
Petitioner has created a specialized computer software program, designed on a case by case
basis for insurance agents, that underwrites, calculates, and ultimately quotes prices for commercial,
homeowners and automobile insurance. In order for the program to perform its various functions,
each user's insurance company contracts, computer hardware requirements, and existing computer
software requirements have to be set in the program to design the software sold by Petitioner.
When Petitioner made a sale to a customer, who was typically a licensed insurance agent,
Petitioner made a field visit and analyzed the customer's computer requirements (i.e., model,
hardware and software capabilities, etc.) and noted the individual companies the agent wrote for.
Each individual insurance company used by an agent has a unique rating structure that took into
account different territories of potential customers of the agent and other demographic data based
on those territories. Prior to delivery to the customer, the program was created and customized to
reflect structures and requirements of the Buyer's need.
Upon delivery to the customer, Petitioner installed on-site the software, further customized
it to fit the agent's specific computer needs, and trained appropriate personnel as to operation of the
software. During this on-site installation, software modifications were made which included: (i)
Creation of customized proposal letters, unique to the agency, (ii) Creation of unique quote profiles
matching the particular risk quoting requirements of the customer, (iii) Changes to the default
settings of virtually all variables, based on projected quoting needs of the customer; and, (iv)
Creation of commercial rating factors which vary not only by company represented, but which also
can vary by agency. At this point, the program was able to calculate insurance rates from individual
companies, based on the prior data gathered from the agents combined with each insurance
company's unique rating structure, and generate proposals for the agent's prospective customers.

TP-9 (9/88)

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TSB-A-91 (75)S
Sales Tax
November 26, 1991

Each report generated by the program was based on the prospective customer's individual
needs, demographics, and territory, and therefore the proposal was unique and useful only to that
customer. For example, if a potential customer desired to have automobile insurance, the agent
would input into the computer such data as the customer's age, family status, type of car, traffic
violations points, etc. The program combined this information with the data unique to the individual
agent (based on the insurance companies they work with) that is already incorporated into the
program by Petitioner in his initial set-up and adaption, and it produced a report and proposal unique
to that customer.
The program also incorporated those proposals into a letter addressed to the prospective
customer. The letter included an insurance price quote. If a customer decided to buy an insurance
policy from the agent based on the program, the program also produced the individual applications
that were forwarded to the insurance company.
Petitioner created a data base of the rating factors of individual insurance companies which
operate in New York State. When a customer of Petitioner's client wanted a quote, Petitioner's client
was able to give that customer a quote for each insurance company it represented.
The tax status of receipts from computer program ("software") sales and services during the
period in issue is explained in Department of Taxation and Finance Technical Services Bulletin
1978-1(S), issued February 6, 1978 which states that:
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.
Presentation 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.

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TSB-A-91 (75)S
Sales Tax
November 26, 1991

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.

Section 1105(c)(1) of the Tax Law imposes a tax upon:
(1) The furnishing of information by printed, mimeographed or multigraphed
matter or 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, and excluding the
services of advertising or other agents, or other persons acting in a representative
capacity, and information services used by newspapers, radio broadcasters and
television broadcasters in the collection and dissemination of news. (Emphasis
supplied)
Section 527.3(a)(1) of the Sales Tax Regulations provides that duplicating written or
printed material includes such things as ". . .tapes, discs, electronic readouts or displays."
The system sold by Petitioner contained two parts. The first part consisted of a data base
containing the rating factors of individual insurance companies which operated in New York State.
This portion of the system was an information service which was stored on electronic discs. (See:
Economic Information Systems, Inc., Dec St Tx Comm, May 26, 1987, TSB-H-87(218)S.). This data
base information was not personal or individual in nature since it was available to any insurance
agent willing to purchase it from Petitioner. It is immaterial that Petitioner's client might use the
information to produce a different quote for each of its customers. Therefore during the period from
3une 1, 1988 through May 31, 1991 this portion of the system sold by Petitioner was an information
service that was not personal or individual in nature in accordance with the meaning and intent of
Section 1105(c)(1) of the Tax Law and Section 527.3(a)(1) of the Sales and Use Tax Regulations
and therefore was subject to the tax imposed by Section 1105(c) of the Tax Law.

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TSB-A-91 (75)S
Sales Tax
November 26, 1991

The second part of the system sold by Petitioner consisted of customized application
computer software. Petitioner's software required analysis of its customer's computer equipment and
certain modifications were necessary to make the software compatible to such equipment and to the
customer's individual needs. Therefore this portion of the system sold by Petitioner qualified for the
exemption as the type of prewritten application program outlined in paragraphs A and B of
Department of Taxation and Finance Technical Services Bulletin 1978-1(S) since it was considered
to be intangible personal property; Astrogamma Inc., Adv Op Comm T&F, August 29, 1990, TSBA-90(44)S; Answer Systems, Inc., Adv Op Comm T&F, January 15, 1991, TSB-A-91(9)S.
In the instant case to the extent that the system sold by Petitioner was sold as a single unit
consisting of both the taxable information service and the nontaxable customized computer program,
sales tax was due on the total price; SOQ Broadcasting Corp., Dec St Tax Comm, May 23, 1985,
TSB-H-85(154)S; Dynamic Telephone Answering Systems, Inc., Dec St Tx Comm, May 28, 1986.

DATED: November 26, 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.