Is a graphic-arts firm's charge for a custom 'multi media' computer disk (a client-specific graphical presentation) an exempt sale of custom software, or a taxable sale of tangible personal property?

Subject

, is whether Petitioner's receipts from sales of "Multi Media" are not subject to sales tax since the receipts qualify as receipts from nontaxable sales of intangibles in the form of custom software.

What this means for you

A graphic-arts company was expanding into "multi media" -- building custom presentation software for individual clients (college-recruitment presentations, interactive annual-report viewers, marketing libraries, and combinations that also included label, sleeve, and mailing-envelope design and, sometimes, printing). It argued these were sales of custom software (which New York's tax law treats as an exempt, non-taxable service/intangible, unlike prewritten "canned" software).

The Department disagreed with the framing. Even though the software itself was written to each client's specs, the company wasn't actually selling software as such -- in every scenario described, what it delivered and charged for was a physical disk containing data (plus, where applicable, the disk labels, sleeves/covers, and mailing envelopes it designed, and their printing). New York taxes the receipts from selling tangible personal property, and a disk is tangible personal property regardless of what the underlying software on it does. Because the client wasn't going to resell the annual report or presentation, no resale exclusion applied either.

The lesson for software/media businesses: custom-software status can matter for other tax questions, but if what you're actually invoicing the client for is a physical deliverable -- a disk, a printed label, an envelope -- New York taxes that as a sale of tangible personal property. Separately itemizing "software development" on the invoice doesn't change the result if the end product handed over is still physical media.

Q&A

Q: We write custom software to a client's exact specifications -- isn't custom software exempt from NY sales tax?
A: Custom software itself can be treated differently from "prewritten" (canned) software under New York law, but that distinction didn't help this petitioner because it wasn't selling software as an intangible -- it was selling the physical disk containing the finished program and data. The sale of that disk is a taxable sale of tangible personal property.

Q: What about the disk label, sleeve, or envelope designs we create?
A: Those are also treated as sales of tangible personal property and are taxable, along with any printing of those labels, sleeves, or envelopes that the company also performs or arranges.

Q: Does it matter that the client won't resell the finished report or presentation?
A: Yes -- it confirms there's no resale exclusion available. The client is the end user of the finished product, so the full charge (design, printing, and the disk itself) is subject to sales tax.

Citations

• Tax Law § 1101(b)(6) -- defines tangible personal property, including that prewritten computer software counts as tangible personal property regardless of the medium.
• Tax Law § 1101(b)(14) -- defines prewritten computer software and when custom software is deemed "prewritten" (e.g., if resold to someone other than the original purchaser).
• Tax Law § 1105(a) -- imposes sales tax on receipts from every retail sale of tangible personal property.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (28)S
Sales Tax
July 13, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S941118B

On November 18, 1994, a Petition for Advisory Opinion was received from Steve Burnett,
Inc., 39 East 20th Street, New York, New York 10003.
The issue raised by Petitioner, Steve Burnett, Inc., is whether Petitioner's receipts from sales
of "Multi Media" are not subject to sales tax since the receipts qualify as receipts from nontaxable
sales of intangibles in the form of custom software.
Petitioner is in the graphic arts business and is presently expanding into the multi media
business. The following paragraphs contain petitioner's statement as to the nature of its activities.
Multi media is the creation of a customized software package for use in internal or external
marketing purposes. Petitioner develops multi media software exclusively for its individual clients.
Petitioner creates the software to the specifications of the client and does not reproduce or use the
software in work for other clients.
The following items represent examples of Petitioner's multi media projects:
(a)

Petitioner will develop software for use in creating a graphical
presentation on a computer. Such presentations might be college
recruitment presentations showing the various divisions of a
company, the company's future goals, etc.

(b)

Petitioner will develop software for creating a graphical presentation
of particular printed matter, such as a company's annual financial
statement. The software may allow the user to access specific
information in the report without going through the whole report and
to have the capability to export financial information from the report.

(c)

Some projects will possess a combination of items. For example, a
project for the development of a graphical presentation of an annual
report may include the development of the software, the design of the
label to be placed on the disk, the design of a sleeve or cover for
storing the disk and the design of an envelope for use in mailing the
disk. In these instances Petitioner may do just the development of the
software and design work, or also may be involved in the printing of
the labels, the disk sleeve or cover, and the envelopes and the
duplication of the computer disks.

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TSB-A-95 (28)S
Sales Tax
July 13, 1995
(d)

Petitioner will develop software for use in creating a marketing
library. This software will allow Petitioner to update the marketing
data or information at the client's request. The software will allow the
client to retrieve and customize any of the stored data for
reproduction in any medium (i.e., paper copies, slides, overhead
projections, computer presentations, etc.).

Section 1101(b)(6) of the Tax Law defines tangible personal property as "[c]orporeal
personal property of any nature . . . . Such term shall also include pre-written computer software,
whether sold as part of a package, as a separate component, or otherwise, and regardless of the
medium by means of which such software is conveyed to a purchaser."
Section 1101(b)(14) of the Tax Law defines prewritten computer software as:

[c]omputer 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.
Section 1105(a) of the Tax Law imposes sales tax on "[t]he receipts from every retail sale
of tangible personal property . . . ."
In items (a), (b), (c) and (d) enumerated above, Petitioner is not selling prewritten nor custom
software, but is selling tangible personal property in the form of disks containing data. Petitioner's
receipts from the sale of the disks in items(a), (b), (c) and (d) and the sale of duplicated disks in item
(c) will be subject to the sales tax imposed on the receipts from the sale of tangible personal property
under section 1105(a) of the Tax Law.

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TSB-A-95 (28)S
Sales Tax
July 13, 1995
In item (c) Petitioner's receipts from the sale of the designs for the disk labels, designs for
the sleeves or covers for disks and designs for the outside envelopes for use in mailing the disks will
be receipts from sales of tangible personal property and will be subject to the sales tax imposed on
receipts from sales of tangible personal property under section 1105(a) of the Tax Law.
When Petitioner also arranges for or performs the actual printing of the labels, sleeves or
covers and the mailing envelopes, the total receipts from the charges to the customer applicable to
the design, printing and sale of the labels, sleeves or covers and the mailing envelopes will be subject
to the sales tax imposed on receipts from sales of tangible personal property under section 1105(a)
of the Tax Law. Since the customer will not be selling the annual reports, the customer is not
making purchases for resale purposes.

DATED: July 13, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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