New York Advisory Opinion TSB-A-96(44)S: Is a database data-cleaning/matching service taxable, and are the related software license fees a company charges its clients subject to New York sales tax?

Plain-English summary

State Tax Resources Group's client, "Company ABC," receives customer databases from clients on magnetic media and reformats/updates them into a form suitable for marketing analysis -- standardizing addresses (e.g., "6th Street" becomes "6th St."), matching records into households using a proprietary scoring algorithm (rather than simple "match codes"), assigning a persistent household ID, verifying zip codes and census tracts, and sometimes appending demographic or purchase-history data. Company ABC performs this data service even for clients who don't buy its software, but it also separately licenses nearly-identical software (one-year, nontransferable, nonexclusive licenses) that clients use to generate output from the reformatted data. Company ABC separately states its fees for the data service and the software license.

The Department split the answer. The data manipulation service -- organizing and updating a client's own data into a usable, accurate marketing database -- isn't one of the enumerated services taxed under Tax Law § 1105(c), so Company ABC's separately stated data-service fees aren't subject to sales or use tax. The software licenses are a different story: because the software is virtually identical across all of Company ABC's clients and doesn't need significant modification to be usable by a new client, it meets the definition of "pre-written computer software" under Tax Law § 1101(b)(14) -- and a license to use pre-written software is a taxable sale of tangible personal property under § 1105(a), regardless of the minor client-specific tweaks Company ABC does make. The § 1115(a)(28) exemption for custom software transferred within an affiliated corporate group doesn't apply here since there's no indication Company ABC's clients are affiliated with it in that way. The one way to carve out a nontaxable slice: if Company ABC bills a reasonable, separately stated fee specifically for an individual client's custom modifications (rather than folding it into the general license fee), that separately stated modification charge escapes tax, following the Department's established software line of opinions.

What this means for you

Data-processing and database-cleaning service providers

A pure data organization/cleaning/matching service -- one that doesn't fall into any of the § 1105(c) enumerated categories -- stays untaxed as long as you bill for it separately from any related software. Keep your data-service invoices clearly distinct from any software licensing charges.

Software vendors bundling a license with services or minor customization

Even software you tweak slightly per client remains "pre-written" (and taxable) unless the tweak is significant enough to be genuinely custom-developed to that client's specs. If you want a modification charge to escape tax, state it as its own reasonable, separately identified fee on the invoice -- don't fold it into the general license price, or the whole license fee (and any bundled nontaxable elements) becomes taxable.

Common questions

Q: Why isn't organizing a client's own marketing data a taxable service?
A: Tax Law § 1105(c) only taxes a specific enumerated list of services. Reformatting, standardizing, and matching a client's existing data isn't on that list, so it's non-enumerated and untaxed -- similar to how other non-enumerated data or information services have been treated in prior opinions.

Q: Why are the software licenses taxable if the software is being customized for each client?
A: Minor client-specific tweaks don't change software from "pre-written" to custom-developed -- the software still counts as pre-written (and its license as a taxable sale of tangible personal property) unless the modification is significant AND separately, reasonably billed as its own line item.

Q: What if a license agreement bundles the taxable software fee together with nontaxable elements like training or maintenance?
A: The entire combined fee becomes taxable unless the nontaxable elements (like non-enumerated training/consultation, or § 1105(c) services exempted under § 1115(o) such as installing or maintaining software) are reasonably priced and separately stated on the invoice.

Q: Does it matter that Company ABC's clients are outside New York (Petitioner itself is based in California)?
A: This opinion doesn't address multistate sourcing directly; the ruling addresses the taxability of the services and software themselves under New York law, which would apply based on where Company ABC's clients use or take delivery of the taxable items in New York.

Citations and references

Statutes and regulations:

• Tax Law §§ 1101(b)(5), 1101(b)(6), 1101(b)(14) (definitions)
• Tax Law § 1105(a), (c) (sales tax on retail sales and enumerated services)
• Tax Law § 1115(a)(28) (affiliated-group custom software exemption)
• Tax Law § 1115(o) (computer software service exemption)

Prior rulings and cases referenced:

• Matter of Astrogamma, Advisory Opinion, Commissioner of Taxation and Finance, June 22, 1992, TSB-A-92(50)S
• Matter of Carucci & Co., Advisory Opinion, Commissioner of Taxation and Finance, March 19, 1992, TSB-A-92(26)S
• Matter of Garpac Corporation, Advisory Opinion, Commissioner of Taxation and Finance, February 6, 1992, TSB-A-92(8)S
• State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software, Technical Services Bureau Memorandum, March 1, 1993, TSB-M-93(3)S
• Matter of Moore Business Forms, Advisory Opinion, Commissioner of Taxation and Finance, February 15, 1995, TSB-A-95(6)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (44)S
Sales Tax
July 11, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S950925A

On September 25, 1995, the Department of Taxation and Finance received a Petition for
Advisory Opinion from State Tax Resources Group, 18006 Skypark Circle, Suite 106, Irvine,
California 92714. Petitioner, State Tax Resources Group, provided the last of additional information
pertaining to the Petition on March 7, 1996.
The issues raised by Petitioner are whether receipts from its client's data manipulation service
and software licenses are subject to New York State sales and compensating use taxes.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Data manipulation: Petitioner's client (Company ABC) receives databases from its clients
on some form of magnetic media, usually tapes. The databases contain information about their
customers. Company ABC reformats and updates these databases using current information supplied
to its clients by their customers. Generally, the databases are converted into a form that can be
utilized by Company ABC's software. However, Company ABC also performs this data
manipulation service for clients that do not purchase its software. The type and amount of
information contained in each database varies based upon the specifications of Company ABC's
client.
The purpose of this data manipulation is to organize the clients' own data resources in a form
that is suitable for marketing analysis. The element most critical to the integrity of the marketing
information database is the accuracy of household matching. Accuracy, in turn, depends on the
quality of the name and address matching algorithms that bring account records together to form the
household unit.
In preparation for matching, each name and address record is standardized to the same set
of rules. For example, "6th Street" and "Sixth Street" become "6th St." Sophisticated pattern
recognition tables are used to cull out legal phrases and descriptors which often appear in a name
line. Tables are also used to differentiate between retail and commercial accounts. These methods
increase the opportunities for matching records with different address structures and standards.
Next, the records are matched by last name and address to form households. Unlike
companies that use "match codes," Company ABC's unique matching routines compare all characters
in the name and address to create a matching score. This allows records with missing, extra or
transposed characters to match if the combination of scores does not drop below a predetermined
confidence level.

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Every household is assigned a unique identification code when it first appears on the file.
This code remains constant from Update to Update as long as the name or address does not change.
As a standard feature, the five digit zip codes and census tract codes are verified or added to
each address record. Zip coding is performed using the most recent files from the U.S. Postal Service
and other proprietary zip code files. Accurate zip codes facilitate accurate household matching and
are necessary for appending census tract codes. In some cases, Company ABC may append
additional fields to its clients' data. Usually this additional data is some form of demographic
information or purchasing history.
Software: Company ABC also provides its clients with software that is used to create various
forms of output from the reformatted databases. The software provided to each of Company ABC's
clients is virtually identical. The software need not be significantly modified to be usable by new
clients.
Company ABC separately states the fees it charges clients for its data manipulation service
and its software. Generally, Company ABC grants clients one-year, nontransferable, nonexclusive
licenses to use its software. Licensing fees are billed in advance and related processing fees or
expenses are billed as incurred.
Applicable Law and Regulations
Section ll01(b) of the Tax Law provides in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section eleven
hundred ten, the following terms shall mean:
*
*
*
(5) Sale, selling or purchase. Any transfer of title or possession or both,
exchange or barter, rental, lease or license to use or consume (including, with respect
to computer software, merely the right to reproduce), conditional or otherwise, in any
manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration
or any agreement therefor.
(6) Tangible personal property. Corporeal 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 ....
*

*

*

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(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.
Section l105(a) of the Tax Law imposes sales tax on, "[t]he receipts from every retail sale
of tangible personal property, except as otherwise provided in this article."
Section 1105(c) of the Tax Law imposes tax on the receipts from every sale, except for
resale, of certain enumerated services.
Section ll15(a) of the Tax Law provides in part:
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*
*
*
(28) Computer software designed and developed by the author or creator to
the specifications of a specific purchaser which is transferred directly or indirectly
to a corporation which is a member of an affiliated group of corporations within the
meaning of subparagraph six of paragraph (b) of subdivision seventeen of section
two hundred eight of this chapter except for clauses (ii) and (iii) of such
subparagraph that includes such purchaser, or to a partnership in which such
purchaser and other members of such affiliated group have at least a fifty percent
capital or profits interest (but only if the transfer is not in pursuance of a plan having
as its principal purpose the avoidance or evasion of tax under this article),

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but in no case including computer software which is pre-written, as defined in
paragraph six of subdivision (b) of section eleven hundred one of this article and
available to be sold to customers in the ordinary course of the seller's business.
Section 1115(o) of the Tax Law provides:
Services otherwise taxable under subdivision (c) of section eleven hundred
five or under section eleven hundred ten shall be exempt from tax under this article
where performed on computer software of any nature; provided, however, that where
such services are provided to a customer in conjunction with the sale of tangible
personal property any charge for such services shall be exempt only when such
charge is reasonable and separately stated on an invoice or other statement of the
price given to the purchaser.
Opinion
Company ABC organizes and updates its clients' pertinent input files into accurate and useful
information that is suitable for marketing analysis. In some cases, Company ABC also incorporates
data from external sources. This data manipulation service is not one of the enumerated services
subject to tax under Section 1105 of the Tax Law. Thus, Company ABC's separately stated fees for
the sale of its data manipulation service are not subject to New York State and local sales and use
taxes.
Company ABC's licenses to use its software are sales of tangible personal property, the fees
from which are subject to tax pursuant to Section l105(a) of the Tax Law. This software is virtually
identical for every client and falls within the definition of "pre-written computer software" found in
Section l101(b)(14) of the Tax Law. Since there is no indication that Company ABC's clients are
corporations or partnerships described in Section 1115(a)(28) of the Tax Law, it would appear that
the sales are not exempt from tax under this section of the law. Although Company ABC modifies
its software (albeit not significantly) in accordance with a specific client's specifications, the
modifications do not affect the software's character as pre-written computer software and
consequently as tangible personal property. However, if Company ABC provides its clients with
reasonable, separately stated fees or invoices or other statements of the fees for modifications
designed and developed for the individual clients, the modifications would not constitute pre-written
computer software and these separately stated fees would not be subject to sales tax. See, Matter of
Astrogamma, Adv Op Comm T&F, June 22, 1992, TSB-A-92(50)S; Matter of Carucci & Co., Adv
Op Comm T&F, March 19, 1992, TSB-A-92(26)S; Matter of Garpac Corporation, Adv Op Comm
T&F, February 6, 1992, TSB-A-92(8)S; State and Local Sales and Compensating Use Taxes
Imposed on Certain Sales of Computer Software, Technical Services Bureau Memorandum, March
1, 1993, TSB-M-93(3)S.
Similarly, if a license agreement provides for the sale of taxable elements (for example, the
pre-written computer software and pre-written upgrades) in conjunction with nontaxable elements,
the entire fee for the agreement would be subject to sales tax, unless the fees for the nontaxable

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elements are reasonable and separately stated on the invoice or other statement of fees given to the
client. Nontaxable elements would include Section 1105(c) services that are exempt from tax in
accordance with Section 1115(o) of the Tax Law, such as installing, maintaining, servicing or
repairing the software, and services that are not enumerated in Section 1105(c) of the Tax Law, such
as training or consultation. See, Matter of Moore Business Forms, Adv Op Comm T&F, February
15, 1995, TSB-A-95(6)S.

DATED: July 11, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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