Are receipts from selling custom industrial-control software, and from ongoing modification/updating services on that software, subject to New York sales and use tax?

Subject

Whether the receipts from the sale of custom software and from updating and modification services are subject to sales and use taxes.

What this means for you

A software developer installs and continually modifies custom firmware/software for industrial and commercial customers, managing energy use and process controls under environmental rules that keep changing. Customers either pay per modification as needed, or contract annually for ongoing updates and modifications.

Effective September 1, 1991, New York broadened its computer-software tax to reach "prewritten" software (software not designed to a specific purchaser's own specifications), but software genuinely designed and developed to the specifications of a specific purchaser -- true "custom" software -- remains exempt, and modifications or enhancements to that customer's own custom software (even significant ones) also stay exempt as long as they're designed to that same purchaser's specifications, whether charged per occurrence or under an annual contract. Because this developer's software and its ongoing modifications are built to each customer's own specifications, its receipts from selling that custom software and from modifying/updating it are exempt from sales and use tax. But there's an important catch built into the same 1991 law change: custom software loses its exempt status the moment it's sold to someone OTHER than the specific purchaser it was designed for -- at that point it's treated as taxable "prewritten" software, even though it started out as a one-customer custom build.

Q&A

Q: We develop software designed and built to each customer's own specifications -- is our sale of that software taxable?
A: No, per this opinion -- custom software designed and developed to a specific purchaser's specifications remains exempt from New York sales and use tax under Tax Law § 1101(b)(14) as clarified by TSB-M-93(3)S.

Q: We also charge ongoing fees (per occurrence or under an annual contract) to modify and update that same customer's custom software -- is that taxable?
A: No, per this opinion, as long as the modifications/updates are designed to that same purchaser's specifications.

Q: We built custom software for one customer, but now want to sell essentially the same software to a different customer -- is that taxable?
A: Yes, per this opinion -- once custom software is sold to someone other than the specific purchaser it was originally designed for, it is deemed prewritten software and the receipts are subject to sales and use tax.

Q: Can another software developer rely on this opinion for its own custom-software sales?
A: No. This advisory opinion binds the Department only as to the petitioner and the facts described here; another taxpayer cannot rely on it.

Citations

• Tax Law § 1101(b)(14) -- defines "prewritten computer software" (taxable) as software not designed and developed to a specific purchaser's specifications, and provides that custom software sold to someone other than the purchaser it was designed for is deemed prewritten software.
• TSB-M-93(3)S, March 1, 1993 -- Technical Services Bureau Memorandum explaining that, effective September 1, 1991, only software designed and developed to a specific purchaser's specifications remains exempt, and that custom software sold to a different person becomes taxable prewritten software.
• New York State Department of Taxation and Finance Sales Tax Newsletter, Vol. 19 No. 1, March 1992 -- confirms that charges for custom software and for modifying prewritten computer software remain exempt from sales and use taxes.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a93_51s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (51)S
Sales Tax
October 4, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930526A

On May 26, 1993, a Petition for Advisory Opinion was received from Control Systems
Assoc. of CNY, Inc., 6 South Street, Cazenovia, New York 13035.
The issue raised by Petitioner, Control Systems Assoc. of CNY, Inc., is whether the receipts
from the sale of custom software and from updating and modification services are subject to sales
and use taxes.
Petitioner installs and modifies custom software in industrial and commercial applications.
These systems are a combination of custom firmware and custom software whose function is to
manage energy and control processes while operating under certain environmental rules and/or
conditions. The rules and/or conditions are subject to change based on a number of variables caused
by both the user and the environment.
The software needs to be continually modified when conditions requiring modification are
discovered or requested by the user. Petitioner's customers chose to either employ Petitioner on an
occurrence basis or contract on annual basis for the modification/updating of their custom software.
Effective September 1, 1991, Section 1101(b) of the Tax Law was amended imposing sales
tax on computer software as follows:
(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
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. (emphasis added)

-2­
TSB-A-93 (51)S
Sales Tax
October 4, 1993
Technical Services Bureau Memorandum, TSB-M-93(3)S, March 1, 1993, pertaining to the
taxability of computer software and certain related services provides, in part, as follows:
Effective September 1, 1991, State and local sales and compensating
use taxes are imposed on the sale or use of prewritten computer
software and certain related services.
The effect of this change in the Tax Law is to broaden the types of
computer software that are subject to sales and use taxes. Prior to
September 1, 1993, "custom" software was exempt from tax as
described in Technical Services Bulletin 1978-1(S). However, certain
software previously considered "custom" may now be considered
prewritten computer software and subject to such taxes. References
in the 1978 bulletin to exempt software are largely obsolete and
should be disregarded. The only software that is exempt from sales
and use taxes under the new law is software designed and developed
to the specifications of a specific purchaser.
*

*

*

Software that was originally designed and developed to the
specifications of a specific purchaser (i.e., "custom" software) loses
its identity as such and becomes prewritten software, subject to tax,
if and when it is sold to someone other that the person for whom it
was specifically designed and developed. (emphasis added)
Moreover, New York State Department of Taxation and Finance Sales Tax Newsletter, Vol.
19 No. 1, March, 1992, pertaining to recent legislative changes, provides, in pertinent part, that
"[c]harges for custom software and charges for modifying prewritten computer software remain
exempt from sales and use taxes."
In the instant case, Petitioner installs and modifies custom software. In accordance with
Section 1101(b)(14) of the Tax Law, TSB-M-93(3)S, supra, and Sales Tax Newsletter, Vol. 19 No.
1, supra, the receipt from the sale of software designed and developed to the specifications of a
specific purchaser and subsequent modifications to such custom software are exempt from sales and
use taxes. Therefore, Petitioner's receipts from the sale of it's custom software and any charges to
modify such custom software whether charged on an occurrence or annual basis are not subject to
sales and use taxes.

-3­
TSB-A-93 (51)S
Sales Tax
October 4, 1993
It is noted, however, that if Petitioner sells software that was originally designed and
developed to the specifications of a specific purchaser to someone other that person for whom it was
specifically designed and developed that such software is deemed prewritten software and the
receipts therefrom are subject to sales and use taxes.

DATED: October 4, 1993

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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