Across six different electronic-forms-business transactions -- paper-to-digital conversion, resold software, a licensed forms-development system, maintenance contracts, management contracts, and consulting -- which charges does a business forms company owe New York sales tax on?

Subject

, is whether Petitioner will be liable for collecting sales tax on the receipts from the various transactions enumerated below: 1.

What this means for you

An electronic-forms company asked about six distinct product/service lines:

1. Conversion services -- scanning a customer's paper form (or designing a new one) into an electronic image on a disc. Following the same data-conversion-vs-information-service distinction as its companion opinion (TSB-A-95(5)S), the Department treated this as producing tangible personal property (not an information service), since the company merely converts the form's format without adding new intelligence. If the company supplies the disc, the whole charge is taxable as a tangible-property sale. If the customer supplies the disc, the same work instead becomes a taxable fabrication service (processing/imprinting tangible personal property the customer already owns) under a different Tax Law provision.

2. Resale of third-party software -- taxable as prewritten software, unless the buyer gives a proper resale or exemption certificate.

3. Documaster System licensing fees -- taxable as a sale of tangible personal property (prewritten software), even though it's structured as a license rather than an outright sale.

4. Maintenance contracts (user support + upgrades) -- taxable in full UNLESS the nontaxable elements (support, training) are reasonably estimated and separately stated/billed apart from the taxable elements (software upgrades).

5. Management service contracts (maintenance + new products/enhancements + ongoing consulting) -- same rule as maintenance contracts: taxed in full if billed as one lump sum, but if the nontaxable elements (user support, consulting) are reasonably and separately stated/billed, only the taxable elements (upgrades, new products, enhancements) are taxed.

6. Standalone consulting/systems-integration services -- pure consulting isn't an enumerated taxable service and is generally untaxed, UNLESS it's folded into a lump-sum management contract alongside taxable elements (per item 5) rather than separately billed.

Q&A

Q: We scan/convert customer forms to disc -- does it matter whether we or the customer supplies the blank disc?
A: Yes. If you supply the disc, you're selling tangible personal property (the finished disc), taxed under the general retail-sale provision. If the customer supplies the disc, the identical conversion work instead becomes a taxable fabrication/processing SERVICE under a different provision -- still taxable, just under a different statutory hook.

Q: How do we structure a maintenance or management contract to keep the nontaxable parts (training, support, consulting) tax-free?
A: You must reasonably estimate and SEPARATELY STATE the charge for nontaxable elements, and separately bill them on the invoice/sale document given to the customer. If everything is billed as one undivided lump sum, the WHOLE charge becomes taxable, even the parts that would otherwise be exempt standing alone.

Q: Is pure consulting (no software sale involved) ever taxable in New York?
A: Generally no -- consulting isn't one of the Tax Law's enumerated taxable services. But if that same consulting gets bundled into an undivided management-contract lump sum alongside taxable software elements, the consulting charge gets swept into the taxable total unless separately stated and billed.

Q: Does licensing (rather than selling) software change the tax result?
A: No -- licensing fees for prewritten software are still treated as a sale of tangible personal property and are fully taxable, regardless of the license structure.

Citations

• Tax Law § 1105(a) -- imposes sales tax on retail sales of tangible personal property, including prewritten software.
• Tax Law § 1105(c)(2) -- taxes producing, fabricating, processing, printing, or imprinting tangible personal property furnished by the customer.
• Tax Law § 1105(c) -- generally, taxes only enumerated services; consulting is not among them.
• Finserv Computer Corp. v. Tully, 463 N.Y.S.2d 924, affd 61 N.Y.2d 947 -- converting a customer's information from one medium to another without recasting it is a sale of tangible personal property (microfiche/microfilm), not an information service.
• Taxability of Major Data Entry Techniques, TSB-M-81(3)S, February 9, 1981 -- data conversion without new information created is a sale of tangible personal property.
• State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software, TSB-M-93(3)S, March 1, 1993 -- bundled software maintenance/management agreements are taxed in full unless nontaxable elements are reasonably estimated and separately stated/billed.

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_6s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (6)S
Sales Tax
February 15, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940811C

On August 11, 1994 a Petition for Advisory Opinion was received from Moore Business
Forms, Inc., 900 Buffalo Avenue, Niagara Falls, NY 14302.
The issue raised by Petitioner, Moore Business Forms, Inc., is whether Petitioner will be
liable for collecting sales tax on the receipts from the various transactions enumerated below:
1.

Conversion Services

This process entails the conversion of a paper form to an electronic image. Petitioner will
take a customer's existing business form, such as a tax return, and convert it to an electronic image
encoded on a disc through use of scanning equipment and software. Petitioner will also design a
form for a customer through application of a software program specifically intended for forms
development. The end product delivered to the customer, regardless of whether scanned or designed,
will be an electronic file containing the form image. While the disc may be shipped to a customer
within New York State, Petitioner's conversion service may be performed either within or outside
New York State.
Answer
Where Petitioner converts a customer's existing form from paper to an electronic image on
a disc through the use of scanning equipment and software, Petitioner is producing tangible personal
property for sale. It is not performing an information service since Petitioner is not "integrating or
recasting the information received from the customer so that the customer is given back some new
information, or some new significant intelligence, concerning the data furnished" but is "converting
the information received from the customer from one form or medium to another, without
interpreting or recasting it, so that the form of the information changes but not the intelligence
contained therein". (Finserv Computer Corp. v. Tully, 463 N.Y.S.2d 924, affd 61 N.Y.2d 947). In
Finserv Computer Corp. v. Tully, supra, the court concluded that "petitioner's sales of microfiche
or microfilm to its customers are thus sales of tangible personal property subject to tax under
subdivision (a) of section 1105 of the Tax Law...."
In the instant matter, Petitioner is selling tangible personal property in the form of a disc
containing data, and the total receipts from the sale will be subject to the sales tax imposed on the
receipts from sales of tangible personal property under section 1105(a) of the Tax Law.

-2­
TSB-A-95 (6)S
Sales Tax
February 15, 1995
Where Petitioner designs a form for a customer through application of a software program
specifically intended for forms development, and furnishes the disc on which the data is recorded,
Petitioner is also selling tangible personal property and the receipts therefrom will also be subject
to the sales tax imposed under section 1105(a) of the Tax Law.
However, in any instance where the customer supplies the disc upon which the data is
encoded, Petitioner will be selling a fabrication service, the receipts from which will be subject to
the sales tax imposed on receipts from the services of producing, fabricating, processing, printing
or imprinting tangible personal property under section 1105(c)(2) of the Tax Law. (Taxability of
Major Data Entry Techniques, TSB-M-81(3) S, Feb. 9, 1981).
2.

Resale Products

Petitioner will purchase software from a third party and resell the software to customers. The
software will be for use in designing forms and for use in scanning forms.
Answer
Petitioner's sales of software, which Petitioner has purchased from a third party supplier for
the purpose of reselling to customers, will be considered to be sales of prewritten software.
Accordingly, the receipts from the sales of this software will be subject to the tax imposed under
section 1105(a) of the Tax Law, unless the customer presents Petitioner with a tax exemption form
substantiating that the customer is purchasing the software for resale purposes or for use in an
exempt manner such as equipment predominantly used in the production of forms for sale.
3.

Documaster System

This system consists of software which will allow the customer to have an inhouse network
for development of electronic forms. The software will allow network users to retrieve and edit any
electronic forms saved on the system. Petitioner will charge customers a license fee for the
Documaster System Software.
Answer
Petitioner's licensing fees charged to customers to use the Documaster System software will
be considered as sales of tangible personal property in the form of prewritten software and the
receipts from the licensing fees will be subject to the tax imposed under section 1105(a) of the Tax
Law.

4. Maintenance Charge
   Petitioner will offer customers who license a Documaster System an annual maintenance
   contract. Under the contract, customers will be entitled to user support and any upgrades made
   during the contract period. Petitioner will charge the customer an annual maintenance fee. The
   maintenance fee will be billed separately and will be renewable on an annual basis.

-3­
TSB-A-95 (6)S
Sales Tax
February 15, 1995
Answer
If the software maintenance agreement offered by Petitioner provides for the sale of both
taxable elements (e.g., prewritten software upgrades) and nontaxable elements (e.g., training,
consulting, diagnostic and troubleshooting support, etc.), the receipts from the charge for the entire
maintenance agreement are subject to tax unless the charge for the nontaxable elements is reasonable
and separately stated in the maintenance agreement and separately billed on the invoice or other
document of sale given to the customer. (State and Local Sales and Compensating Use Taxes
Imposed on Certain Sales of Computer Software, TSB-M-93 (3) S, Sales Tax, March 1, 1993)

5. Management Fee
   Petitioner will also offer customers a management service contract which will include
   everything offered under the maintenance contract plus any new products or enhancements which
   are developed by Petitioner. In addition, the customers may receive consulting services in regard
   to the setting up and use of the Documaster System software. The consulting may continue on an
   on-going basis and involves the integration of the design and systems software. In summary, the
   management fee includes user support, upgrades, new products, enhancements and consulting.
   Answer
   The total receipts Petitioner receives from the sale of a management service contract which
   includes both taxable and non-taxable elements will be subject to the tax imposed under section
   1105(a) of the Tax Law when the fees charged for the management service contract are billed to the
   customer as a lump sum. However, if the management service contract reasonably and separately
   states the charges for the nontaxable elements and if the charges for the nontaxable elements are
   separately billed on the invoice or other document of sale given to the customer the receipts from
   the charges for the nontaxable elements will not be subject to the tax imposed under section 1105(a)
   of the Tax Law. The nontaxable elements will include the charges for user support for software and
   consulting. The receipts from charges for upgrades, new products and enhancements are considered
   to be receipts from charges for taxable elements and are subject to the tax imposed under section
   1105(a) of the Tax Law. (State and Local Sales and Compensating Use Taxes Imposed on Certain
   Sales of Computer Software, TSB-M-93(3)S, Sales Tax, March 1, 1993)
6. Consulting
   Petitioner may also offer a consulting service to users of the Documaster System. This will
   include how to set up the system and how to retrieve and use electronic forms on file. The charge
   for the consulting service can be part of the management fee discussed in item 5, or can be charged
   separately for customers requesting a systems integration of the software packages. Petitioner will
   write the programming code and integrate the system for those customers who choose to use the
   design software in conjunction with the Documaster System in a network environment. This
   requires that the service be done on-site at the customer's location. Petitioner will be charged an
   hourly rate for this particular service.

-4­
TSB-A-95 (6)S
Sales Tax
February 15, 1995
Answer
Section 1105(c) of the Tax Law imposes sale's tax on certain enumerated services. Since
consulting services are not included within the services enumerated under section 1105(c) of the Tax
Law, the receipts from charges to customers for consulting services will generally be excluded from
the tax. However, when the consulting services are included within a management service contract
which includes both taxable and nontaxable elements, as discussed in item 5, above, the receipts
from fees charged for the consulting service will be subject to the tax imposed under section 1105(a)
of the Tax Law when the fees charged for the management contract are billed to the customer as a
lump sum. Contrarily, if the management service contract reasonably and separately states the
charges for the consulting service and if the charge for the consulting service is separately billed on
the invoice or other document of sale given to the customer, the receipts from the charges for the
nontaxable elements will not be subject to the tax imposed under section 1105(a) of the Tax Law.
(State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer
Software, TSB-M-93(3)S, Sales Tax, March 1, 1993)
The receipts from Petitioner's charges to customers requesting a systems integration of the
software packages, for writing the programming code and integrating the system to enable customers
to use the design software in conjunction with the Documaster System in a network environment will
be given the same status as the receipts from charges for software for sales tax purposes.

DATED: February 15, 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.