Are a Web-development company's charges for domain registration, host site maintenance, Web page design, and interactive games -- and its own purchases from programmers -- subject to New York sales and use tax?

Plain-English summary

CAV Corp, doing business as Stone Soup Multimedia, is a "presence provider" -- it designs and develops Web pages for clients and publishes them online. As part of that work, it pays for and passes through to clients the fees for domain name/InterNIC registration and host site maintenance (keeping the site live at its Internet location), and it also creates custom interactive games designed specifically for each client's own Web page. CAV Corp doesn't sell or transfer any tangible personal property to its clients as part of this work, and doesn't buy or sell any prewritten (off-the-shelf) software. It also receives bills from outside programmers and designers who work on client Web sites and interactive games. CAV Corp asked five related questions: are its charges for domain/InterNIC registration, passed-through hosting fees, and custom interactive games subject to sales tax, and are its own payments to outside programmers and designers subject to use tax?

The Department answered all five questions the same way: none of it is taxable. Designing, programming, and placing Web pages on the Internet isn't included among the services New York's sales tax law specifically lists as taxable, so CAV Corp's charges for domain/InterNIC registration, host site maintenance pass-through, and custom interactive game development are all outside the sales tax's reach. The same logic applies in reverse to CAV Corp's own purchases: since custom programming and design work built specifically for each client's Web page and games isn't an enumerated taxable service either, CAV Corp doesn't owe use tax on what it pays outside programmers and designers for that work.

What this means for you

Web design, development, and "presence provider" companies

Charges for designing, programming, and hosting-related pass-through services for client Web sites -- including custom interactive content built specifically for a client -- generally aren't subject to New York sales tax, since Web development isn't one of the law's enumerated taxable services. This applies as long as you're not also selling or transferring tangible personal property or prewritten software as part of the engagement.

Businesses hiring outside contractors for custom Web development or interactive content

If the work is genuinely custom (designed specifically for your own project, not off-the-shelf prewritten software), your payments to those contractors shouldn't trigger New York use tax either.

Accountants and tax professionals

This ruling reaffirms the position from Ski Soft, Inc., TSB-A-97(35)S, that Web page design and development services fall outside Tax Law § 1105(c)'s enumerated list. The key distinguishing fact throughout is that no tangible personal property or prewritten software changes hands -- a Web development engagement that does include such a transfer could reach a different result.

Common questions

Q: Are charges for building and hosting a client's Web site taxable in New York?
A: No, as long as the engagement is limited to design, development, and related pass-through services (domain registration, hosting) without a separate sale of tangible personal property or prewritten software.

Q: Are custom interactive games built for a specific client's Web page taxable?
A: No -- since they're designed specifically for that client (not prewritten software), they fall outside the enumerated taxable services.

Q: Does a Web developer owe use tax on payments to outside programmers for custom work?
A: No, for the same reason -- custom programming and design work isn't an enumerated service subject to use tax.

Q: Does this ruling apply to my Web design or development business?
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. If your engagement involves selling tangible personal property or prewritten software, the analysis could differ.

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_87s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(87)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S971023A

On October 23, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from CAV CORP d/b/a Stone Soup Multimedia, 936
Broadway 4th Floor, New York, NY 10010.
Petitioner, CAV CORP d/b/a Stone Soup
Multimedia, provided additional information pertaining to the Petition on October
24, 1997 and November 4, 1997.
The issues raised by Petitioner concern the applicability of sales and
compensating use taxes to its charges for design, development and placement of
Web pages for the Internet. Specifically, Petitioner inquires:
(1) Whether charges by Petitioner to its clients for Domain Registration
and InterNIC Registration are subject to sales tax.
(2) Whether charges by Petitioner to its clients for host site maintenance
fees are subject to sales tax when such charges are billed to Petitioner and
passed through to its clients.
(3) Whether charges to Petitioner by programmers and designers for working
on Web site development are subject to use tax.
(4) Whether charges by Petitioner to its clients for creating interactive
games for such client's Web pages on the Internet are subject to sales tax.
(5) Whether charges to Petitioner by programmers and designers for work
on interactive games for Petitioner's client's on the Internet are subject to use
tax.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is a "presence provider."
That is, Petitioner designs and
develops Web pages for its clients and electronically publishes the data. Once
the Web pages are created, Petitioner pays a fee for the domain name and InterNIC
registration, assignment and maintenance of the Internet address. Petitioner
also pays a host site maintenance fee to keep the site at a certain location on
the Internet. Petitioner passes these fees through to its clients when it bills
them.
Petitioner receives bills from programmers and designers for work on Web
sites as well as for work on interactive games which become part of Petitioner's
client's Web page.

-2­
TSB-A-97(87)S
Sales Tax

Petitioner does not make any sales, or other transfers, of tangible
personal property to its clients as part of its Web page development services.
Petitioner does not purchase or sell pre-written software as part of these
services.
Petitioner's interactive games are designed specifically for each
client's Web page.
Opinion
Petitioner's Web page development service provided to its clients, which
involves designing, programming and placing of Web sites on the World Wide Web,
is not included among the enumerated services that are subject to New York State
and local sales and compensating use taxes. (See, Ski Soft, Inc., Adv Op Comm
T&F, June 25, 1997, TSB-A-97(35)S.) Accordingly, Petitioner's charges for the
sale of its Web site development service described in issues (1), (2) and (4) are
not subject to sales and compensating use tax.
Petitioner's purchase of
programming and design services for Web site development and design of
interactive games described in issues (3) and (5), which are designed
specifically for each client, are not among the enumerated services subject to
use tax pursuant to Section 1110 of the Tax Law.

DATED: December 29, 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.