Is a monthly fee paid for an out-of-state computer disaster recovery/backup facility subject to New York sales or use tax, when the backup equipment never comes to New York and no repair work is performed here?

Subject

Whether a monthly service fee paid by Petitioner for a computer disaster recovery service is subject to New York State and local sales and use taxes.

What this means for you

A utility company contracted with a disaster-recovery vendor for immediate access to a fully operational backup computer system, configured to the utility's specifications, at a facility in Philadelphia -- available for at least six weeks if the utility's own data processing equipment becomes unusable. If a disaster strikes, the utility's own personnel travel to the Philadelphia site to run the backup system using their own software; no vendor-owned equipment is ever shipped to New York, and the utility never receives title to a substitute computer. The vendor keeps the backup environment in a state of technical readiness and charges a flat monthly fee (around $8,300) for this standing access, but takes no responsibility for repairing the utility's own original equipment.

New York's sales tax is a "destination tax" -- what matters is where delivery happens or where possession of the property or service is actually transferred, not where the contract is signed or where the customer's headquarters sits. Since the backup facility, all its equipment, and the disaster-recovery services themselves are located entirely in Pennsylvania -- nothing is delivered to, or possessed in, New York -- the monthly fee escapes New York sales and use tax, even for the portion of the arrangement that would have been taxable had the backup facility instead been located in New York.

Q&A

Q: We pay a New York company for a backup/disaster-recovery service, but the actual backup facility and equipment are located entirely out of state -- is our fee subject to New York sales tax? A: Per this opinion, no -- New York's sales tax follows the destination rule (where delivery/possession occurs), so if the service and equipment are located and delivered entirely outside New York, the fee escapes New York sales and use tax regardless of where your company or the vendor is headquartered.

Q: Would the answer change if some of the vendor's backup equipment were shipped to or installed at our own New York facility? A: This opinion doesn't address that scenario, but its holding rests specifically on the fact that no equipment is delivered to the customer's New York facility and no services are performed there -- a hybrid arrangement with some in-state delivery could be analyzed differently.

Q: The vendor also throws in free technical assistance and network diagnostics support -- does that change the tax treatment? A: This opinion doesn't separately analyze the free technical-assistance component; its conclusion covers the disaster-recovery service fee as a whole, on the basis that delivery and possession of everything happens outside New York.

Citations

• 20 NYCRR § 525.2(a)(3) -- establishes that New York sales tax is a "destination tax," with the point of delivery or transfer of possession controlling both the tax incident and rate.
• 20 NYCRR § 526.7(e)(1) -- provides that a sale is taxable at the place where the tangible personal property or service is delivered, or where possession transfers to the purchaser or designee.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_15s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (15)S
Sales Tax
April 6, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S930504B

On May 4, 1993, a Petition for Advisory Opinion was received from Long Island Lighting Company, 175 East Old Country Road, Hicksville, New York 11801. The issue raised by Petitioner, Long Island Lighting Company, is whether a monthly service fee paid by Petitioner for a computer disaster recovery service is subject to New York State and local sales and use taxes. In the event any unplanned condition renders Petitioner unable to use its data processing equipment, Petitioner has contracted with Sungard Services Company (hereinafter "Sungard") to have immediate use of a backup computer facility provided by Sungard for a period of at least six weeks. The backup computer site, located in Philadelphia, consists of an installed, fully operational computer system equipped to Petitioner's specifications and technical requirements. In the event of a disaster, Petitioner's personnel will relocate to Sungard's facility. No equipment owned by Sungard will be delivered to Petitioner's facility in New York, nor will Petitioner received title to or ownership of a substitute computer. Petitioner will provide all software and personnel to operate the substitute system. However, the assistance of Sungard's Operations Staff is available for technical assistance without charge if needed. Petitioner will have use of the equipment configuration for testing their systems and applications. In addition, network diagnostics and installation assistance will be available to facilitate the testing and installation of Petitioner's backup network at the site. Sungard is required to maintain an IBM-specified proper operating environment for the equipment configuration and will adhere to IBM recommended policies and procedures for proper maintenance of said equipment, in order to maintain the facility in a state of readiness at all times. Petitioner is required to pay Sungard a monthly service fee of $8,315 for providing access to the backup computer site in the event of a computer disaster. Sungard assumes no responsibility for repairing Petitioner's original computer equipment. Section 525.2 of the Sales and Use Tax Regulations provides, in part, as follows: Reg. Sec. 525.2. Nature of tax.--(a)(1) The sales tax is imposed on the receipts, unless specifically exempt, from every retail sale of tangible personal property, from every retail sale of specifically enumerated utility services, from every retail sale of other specifically enumerated services and from the sale of prepared or ready to be eaten food, for consumption on or off premises, drinks, restaurant and catered meals,

-2­
TSB-A-94 (15)S
Sales Tax
April 6, 1994
and from charges for hotel occupancy, admissions and dues. Each of the various types of transactions has statutory exemptions, exceptions and limitations.
*

*

*

(3) The sales tax is a "destination tax", that is, the point of delivery or point at which possession is transferred by the vendor to the purchaser or designee controls both the tax incident and the tax rate. Section 526.7(e)(1) of the Sales and Use Tax Regulations provides, in part, as follows: (e) Transfer of possession. (1) Except as otherwise provided in paragraph (3) of this subdivision, a sale is taxable at the place where the tangible personal property or service is delivered, or the point at which possession is transferred by the vendor to the purchaser or his designee. Example 1: A person purchases tangible personal property in New York State, and takes delivery at the time of purchase. As delivery occurred in New York State, the receipts from the sale is taxable. (emphasis added) In the instant case, in the event of a computer disaster, Petitioner has contracted with Sungard for use of a backup computer facility located in Philadelphia, Pennsylvania. No equipment owned by Sungard will be delivered to Petitioner's facility in New York and Sungard assumes no responsibility for repairing Petitioner's original computer equipment in New York. Accordingly, since delivery and possession of all services provided by Sungard to Petitioner will take place outside of New York State, pursuant to Sections 525.2 and 526.7(e) of the Sales and Use Tax Regulations any portion of the fee paid by Petitioner to Sungard for computer disaster recovery services that would have been subject to sales tax if Sungard's facility were located in New York State, are not subject to New York State and local sales and use taxes.

DATED: April 6, 1994

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

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