Are a disaster-recovery service's monthly subscription fees and usage fees subject to New York sales tax?

Plain-English summary

Contemporary Computer Services, Inc. offers a "disaster recovery" service: it maintains dedicated backup computer equipment in a special room at its own facility, and if a subscribing customer's own computer system goes down in a disaster, the customer gets access to and use of that backup equipment for a period of time (with the customer, not Petitioner, providing the operators and programming). Petitioner charges two separate fees -- a monthly "subscription fee" that covers standing access rights plus a modest annual allotment of "test time" to rehearse disaster procedures, and a "usage fee" charged only for the actual period a customer uses the backup equipment during a real disaster. Petitioner asked whether either fee, and the equipment itself, are subject to sales tax.

The Department split the analysis based on what the customer actually receives. The subscription fee doesn't transfer possession, control, or the right to use any specific piece of equipment -- it just gives the customer an imperfect, shared right (alongside all of Petitioner's other customers) to call on the backup equipment only if a disaster actually happens, with no guarantee of immediate or exclusive access to any particular machine. Because no transfer of possession or the right to control tangible personal property occurs merely by paying the subscription fee (even though it includes some free "test time"), it's treated like buying an intangible, similar to an insurance policy, and isn't subject to sales tax. By contrast, the usage fee is charged specifically for the period when the customer actually has possession of and uses the backup equipment -- that's a rental of tangible personal property, which the Tax Law taxes the same as if the customer had bought or rented ordinary equipment. Finally, because Petitioner buys and maintains the backup equipment solely to make it available for this same taxable usage-fee rental to customers, that equipment counts as inventory purchased for resale, so Petitioner doesn't owe sales tax on its own purchase of the backup equipment either.

What this means for you

Disaster-recovery, backup-computing, and similar standby-access service providers

Structuring your fees the way Petitioner did -- a standing access fee that conveys no specific possession or control rights until an actual triggering event, plus a separate usage charge tied to actual equipment access -- lets you treat the standing fee as a nontaxable intangible while still correctly taxing the fee tied to real equipment use.

Businesses buying equipment that's held exclusively to fulfill a taxable rental or usage-fee arrangement

If your equipment is used only to generate receipts you already tax as a rental (like Petitioner's usage fees), you can buy that equipment tax-free under the resale exclusion, since your only "use" of it is making it available for that taxable resale/rental.

Accountants and tax professionals

This ruling is a clean illustration of how New York distinguishes an intangible standing-access right (nontaxable, similar to insurance) from an actual rental of tangible personal property (taxable) based on whether possession, custody, or the right to control the property has actually transferred -- useful for any subscription-plus-usage-fee service built around backup or standby equipment access.

Common questions

Q: Is a subscription fee for standby access to backup equipment taxable in New York?
A: No, if it merely grants a contingent, non-exclusive right to access equipment only if a triggering event (like a disaster) occurs, without transferring possession or control of any specific equipment.

Q: Is a usage fee charged when a customer actually uses backup equipment taxable?
A: Yes -- once the customer takes possession of and uses specific equipment, that's a taxable rental of tangible personal property.

Q: Can a company avoid sales tax on equipment it buys just to rent out under a taxable usage fee?
A: Yes -- equipment purchased and used exclusively to generate an already-taxed rental or usage fee qualifies for the resale exclusion, so the purchase itself isn't taxed.

Q: Does this ruling apply to my company's disaster-recovery or standby-service fee structure?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your own fee structure and contract terms would need their own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_69s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(69)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S951219A

On December 19, 1995, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Contemporary Computer Services, Inc., 200
Knickerbocker Avenue, Bohemia, New York 11716. Petitioner, Contemporary Computer
Services, Inc., submitted additional information pertaining to the Petition on
February 21, 1996.
The issues raised by Petitioner are as follows:
1.
Whether the charges made by Petitioner to customers for its
disaster recovery service are subject to sales tax.

2. Whether the amount paid by Petitioner for equipment purchased
   for use exclusively in providing the disaster recovery service is
   subject to sales tax.
   Petitioner submitted the following facts as the basis for this Advisory
   Opinion.
   Petitioner provides a number of services to its customers which include
   computer maintenance, computer refurbishing, equipment sales and disaster
   recovery. The disaster recovery service entails Petitioner providing a customer
   with backup computer capability in the event that the customer experiences a
   disaster.
   In order to provide this backup computer capability, Petitioner
   maintains designated computer equipment inside of a separate disaster recovery
   room located at Petitioner’s facility in Bohemia, New York. Both the backup
   computer equipment and the disaster recovery room are used exclusively in
   providing the disaster recovery service. The customer provides the computer
   operators and programming necessary to make use of the backup computer equipment.
   Petitioner bills the customer for the disaster recovery service in two
   ways. There is a subscription fee which is a basic monthly charge that covers
   access to and use of the backup computer equipment in the event the customer has
   a disaster. Petitioner indicates that the subscription fee also covers an agreed
   upon number of hours of access and use annually for the customer to test its
   disaster procedures. (During this "test time," Petitioner is only responsible
   for turning on the backup computer equipment and ensuring that it is
   operational.) There is also a usage fee which is a charge for the actual use of
   the backup computer equipment by the customer when a disaster occurs.
   Petitioner charges sales tax when it bills its customers for both the
   subscription fees and the usage fees.
   Sales tax is not paid on the backup
   computer equipment that is used exclusively in the disaster recovery service when
   the equipment is purchased by Petitioner.

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Petitioner’s sample Disaster Recovery Services Agreement provides, in part:
USE OF CCSI BACKUP CAPABILITY
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B. In the event of a Disaster to Customer’s Computer Facility,
Customer, subject to the provisions relating to Multiple Disasters,
shall have access to and use of the CCSI Backup Capability within
twenty-four (24) hours or less as requested, after delivery of a
Disaster Notification to CCSI. If necessary, initial notification
and request for access may be oral, but such oral notice must be
followed by a written Disaster Notification within twenty-four (24)
hours after initial notification ....
C. Customer shall continue to have the right of access to and use of
the CCSI Backup Capability for up to six (6) consecutive weeks.
After said six-week period, Customer shall be entitled to continued
access to and use of CCSI Backup Capability, provided that Customer
has made a good faith effort to remedy the Disaster at its Computer
Facility, and provided that it continues to pay all applicable
charges hereunder, provided further, however that if another
Subscription Holder experiences a Disaster during this extended
period of use by Customer, said Subscription Holder shall be
entitled to priority use of the CCSI Backup Capability.
D. At no additional cost, Customer shall have access to and use of
the CCSI Backup Capability during each twelve month period of the
term of this Agreement for the number of hours set forth ... in
order to test its Disaster procedure (“Test Time”).
CCSI shall
retain the right to unilaterally designate Customer’s Test Time,
provided that Customer shall receive at least ten (10) days notice
prior to the designated Test Time.
Scheduled Test Time may be
cancelable by CCSI upon receipt of a Disaster Notification from a
Subscription Holder. Attempts will be made by CCSI to reschedule
Test Time, but no allowances or credits will be made for Test Time
unused due to scheduling conflicts or cancellation ....
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FEES
A. In consideration of the right of access to the CCSI Backup
Capability, Customer shall pay the monthly Subscription Fee which
shall be on the first day of each month during the term of this
Agreement ....
B. Customer shall pay CCSI a Usage Fee ... for the period during
which use is made of the CCSI Backup Capability .... During such
period, Customer shall not be required to pay the Subscription Fee
....

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METHOD AND TIME OF PAYMENT
The Subscription Fee for each calendar month during the term of this
Agreement shall be invoiced to Customer in the preceding month, and
shall be paid by Customer within thirty (30) days from the date of
invoice.
All other fees and charges (including applicable taxes) incurred by
Customer for Backup Capability in any calendar month will be
invoiced by CCSI to Customer during the succeeding calendar month
and shall be paid by the Customer within thirty (30) days from the
date of the invoice.
MULTIPLE DISASTERS
In the event of a Disaster, Customer shall have the right of access
to and use of the CCSI Backup Capability.
However, the Backup
Capability provided for herein is being offered by CCSI to other
Subscription Holders and, to the extent it is possible that Multiple
Disasters could be experienced by Customer and other Subscription
Holders, none of the terms and conditions contained herein shall be
interpreted or construed as a covenant, promise or guaranty of any
kind that the Customer will have immediate and exclusive access to
and use of the CCSI Backup Capability .... Customer shall cooperate
with CCSI in accommodating other Subscription Holders who have
delivered a Disaster Notification to CCSI.
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EQUIPMENT MODIFICATIONS
CCSI reserves the right to unilaterally change the Equipment
Configuration, CCSI shall give Customer sixty (60) days prior
written notice of any significant changes, and CCSI shall permit
Customer a reasonable amount of additional free test time after such
substantial changes ....
The sample Disaster Recovery Services Agreement defines "subscription fee"
to mean "the basic monthly charge imposed by CCSI ... and payable by Customer,
entitling Customer to access and use of the CCSI Backup Capability in the event
Customer experiences a Disaster." "Usage fee" is defined to mean "the charge
imposed by CCSI ... and payable by Customer for the period during which Customer
makes use of the Equipment ... following delivery of a Disaster Notification."
The sample Agreement provides for a subscription fee of $1,500 per month for 36
months, a usage fee of $2,500 per eight hour shift or portion thereof, and 40
hours of test time per year.

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Applicable Law and Regulations
Section 1101(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:
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(4) Retail sale. (i) A sale of tangible personal property to
any person for any purpose, other than (A) for resale as such or as
a physical component part of tangible personal property, or (B) for
use by that person in performing the services subject to tax under
paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of
section eleven hundred five where the property so sold becomes a
physical component part of the property upon which the services are
performed or where the property so sold is later actually
transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax ....
(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.
of any nature ....

Corporeal personal property

Section 1105 of the Tax Law imposes sales tax on:
(a) The receipts from every retail sale of tangible personal
property, except as otherwise provided in this article.
Section 526.6(c) of the Sales and Use Tax Regulations provides, in part:
Resale exclusion. (1) Where a person, in the course of his
business operations, purchases tangible personal property or
services which he intends to sell, either in the form in which
purchased, or as a component part of other property or services, the
property or services which he has purchased will be considered as
purchased for resale, and therefore not subject to tax until he has
transferred the property to his customer.

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Section 526.7 of the regulations provides, in part:
§526.7 Sale, selling or purchase.

(Tax Law, § 1101(b)(5))

(a) Definition. (1) The words sale, selling or purchase mean
any transaction in which there is a transfer of title or possession,
or both, of tangible personal property for a consideration.
(2) Among the transactions included in the words sale, selling
or purchase are exchanges, barters, rentals, leases or licenses to
use or consume tangible personal property.
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(c) Rentals, leases, licenses to use. (1) The terms rental,
lease and license to use refer to all transactions in which there is
a transfer for a consideration of possession of tangible personal
property without a transfer of title to the property ....
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(e) Transfer of possession.
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(4) Transfer of possession with respect to a rental, lease or
license to use, means that one of the following attributes of
property ownership has been transferred:
(i) custody or possession of the tangible personal property,
actual or constructive;
(ii) the right to custody or possession of the tangible
personal property;
(iii) the right to use, or control or direct the use of,
tangible personal property.
Section 526.8 of the regulations provides, in part:
§526.8 Tangible personal property.

(Tax Law, § 1101(b)(6))

(a) Definition. The term tangible personal property means
corporeal personal property of any nature having a material
existence and perceptibility to the human senses ....
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(c) Tangible personal property does not include:
(1) real property;
(2) intangible personal property.
Opinion
Issue 1.
Petitioner’s monthly subscription fees for its disaster recovery service
represent receipts from the sales of an intangible (similar to insurance) and are
not subject to sales tax.
Payment of the subscription fee merely grants a
customer an imperfect or unfixed right, in common with all of Petitioner’s
customers, to access and use Petitioner’s backup computer equipment only in the
event that the customer suffers a disaster, delivers proper notification,
cooperates with Petitioner’s multiple disaster protocol and otherwise complies
with the provisions in the Disaster Recovery Services Agreement. Petitioner does
not guarantee that the customer will have immediate and exclusive access to or
use of any specific piece of backup computer equipment.
Nor is there any
substantial certainty that the customer will ever need access to or the use of
Petitioner’s backup computer equipment.
Upon execution of the Agreement or payment of the monthly fees, the
customer does not receive actual or constructive possession of (or title to)
Petitioner’s backup computer equipment, or the right to the use or control of
this equipment. At no time prior to a disaster, proper notification, etc. does
Petitioner transfer possession of the backup computer equipment to the customer
or can the customer accept possession of the equipment. Thus, no transaction on
which to impose the sales tax has taken place until these events have occurred.
Whether the subscription fee also covers test time or whether the test time
is provided by Petitioner for no consideration is of no consequence. The test
time is provided merely as an incident to Petitioner’s disaster recovery service
and does not change the nature of the intangible that is being sold. Moreover,
the availability of 120 hours of test time over the three-year life of the
Agreement is not sufficient to warrant the apportionment or taxation of the
monthly subscription fees.
It is also noted that neither a disaster recovery service nor test time is
a taxable service specifically enumerated in the Tax Law.
However, Petitioner’s usage fees imposed during the time when a customer
has possession and makes use of the backup computer equipment constitute receipts
from the sale (i.e., a rental, lease or license to use) of tangible personal
property and are subject to sales tax.
Issue 2.
The amount paid by Petitioner for its backup computer equipment is not
subject to sales tax.
Petitioner maintains the designated backup computer
equipment inside of a separate disaster recovery room. This computer equipment

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was purchased and is used exclusively in providing Petitioner’s disaster recovery
service. Only purchases made for the exclusive purpose of resale come within the
resale exclusion provided for in Section 1101(b)(4)(i) of the Tax Law. Because
Petitioner’s backup computer equipment is used only by its customers who pay
usage fees for such use, the equipment is considered purchased exclusively for
resale.

DATED: November 19, 1997

NOTE:

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

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