Is an out-of-state electronic health-claims clearinghouse subject to New York franchise tax when it installs equipment and trains customers here, and which of its fees and equipment are subject to sales or use tax?

Plain-English summary

Electronic Transmission Corporation, a Texas company, runs an electronic health-insurance-claims clearinghouse -- it electronically receives and transmits claims between health-care providers and the payors that are its customers. It has no New York office or customers yet, but plans to send employees into New York to install computer software/hardware and train customers' staff. It asked about New York franchise tax and the sales/use tax status of its fees and equipment.

Franchise tax (Corporation Tax). Once the company acquires New York customers and its employees come in to install equipment and train users -- and it has tangible property located in New York -- it is doing business and subject to Article 9-A. Its fees are lump-sum payments (services plus equipment use) apportioned on a reasonable basis (20 NYCRR 4-4.1(c)): the service portion is allocated to New York to the extent services are performed here (the claims processing happens out of state, but installation and training in New York are New York services), and the property portion is allocated to New York to the extent the hardware, software, and scanners are located here.

Sales and use tax. The claims-conversion, one-way-transaction, and clearinghouse fees are charges for services not listed among the taxable services in section 1105(c) (the limited data analysis/reporting is incidental), so they are not subject to sales or use tax. But archival fees -- converting an electronic image to a CD and sending it to the customer -- are a sale of tangible personal property and are taxable (Finserv). On equipment: the company's use of its own software is not subject to use tax if it does not sell similar software (section 1110(a)(F)); purchased prewritten software is taxed on cost, custom-to-spec software is intangible and not taxed, and prewritten-then-modified software is fully taxed unless the modification is reasonably separately stated (Garpac). Hardware and scanners bought out of state and brought into New York are subject to use tax on cost -- a cost the company may build into its charges but may not separately state as tax.

What this means for you

Installing equipment and training creates nexus

Sending employees into New York to install property and train customers, plus keeping property here, makes an out-of-state service provider subject to Article 9-A.

Lump-sum fees split between service and property

Bundled fees are apportioned -- services to where performed, property to where located -- on a reasonable basis with details submitted.

Data handling is a nontaxable service; the CD is taxable

Electronically moving and processing claims is not a section 1105(c) service, but delivering data on a physical CD is a taxable sale of tangible personal property.

Common questions

Q: Are the clearinghouse and transaction fees subject to sales tax?
A: No. They are services not enumerated in section 1105(c), so they are outside the sales tax.

Q: Why is the archival fee taxable?
A: Because delivering the image on a CD is a sale of tangible personal property (Finserv).

Q: Is the company's software subject to use tax?
A: Not its own self-developed software (if it doesn't sell similar software); purchased prewritten software and out-of-state hardware brought into New York are taxed on cost.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 209.1 (Article 9-A franchise tax)
- Tax Law section 1105(c) (sales tax on specified services)
- Tax Law section 1110 (compensating use tax)
- Tax Law section 1110(a)(F) (use of self-developed software not for sale)
- 20 NYCRR 4-4.1(c) (apportionment of lump-sum payments)
- 20 NYCRR 4-4.3 (receipts from services performed in New York)
- 20 NYCRR 4-4.4 (receipts from rental of property in New York)
- Matter of Finserv Computer Corporation v. Tully, 94 AD2d 197, affd 61 NY2d 947
- Garpac Corporation, TSB-A-92(8)S (Feb. 6, 1992)
- Electronic Transmission Corporation, TSB-A-98(17)S / TSB-A-98(4)C (March 9, 1998)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a98_17s_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(17)S
Sales Tax
TSB-A-98(4)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z960325B

On March 25, 1996, a Petition for Advisory Opinion was received from
Electronic Transmission Corporation, 5025 Arapaho Road, Suite 515, Dallas, Texas
75248.
The issues raised by Petitioner, Electronic Transmission Corporation, are:
(1) When Petitioner acquires customers located in New York, will it be
subject to New York franchise tax? If Petitioner is subject to tax, how should
the sales listed below be apportioned to New York?
(2) What is the sales and use tax status of the following items as it
relates to Cases 1, 2 and 3 described below:
(A) Items billed (invoiced) to customers by Petitioner:
(1) Claims conversion fee (Cases 1 and 2 only)
(2) One-way transaction fee (Case 3 only)
(3) Clearinghouse fee (Case 3 only)
(4) Archival fee
(B) Items not billed (invoiced) to customers by Petitioner:
(1) Computer software - Will any use tax be applicable for the
computer software located in New York?
(2) Computer hardware - Will any use tax be applicable to the rental
fees charged to Petitioner by the owner of the computer hardware and
scanners located in New York? If yes, can Petitioner pass the tax
along to the customer and identify the use tax on its sales invoice?
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is qualified to do business in Texas and has 20 to 25 employees.
It is primarily engaged in "the electronic receipt and transmittal of claims" on
behalf of its customers (self-insured/self administered business entities).
Petitioner does not have an office or any employees in New York. Petitioner does
not have any customers located in New York. Petitioner plans to send employees
into New York to install computer software and train customer employees in the
future.

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Petitioner moves claims electronically between providers of health care
(medical providers, preferred provider organizations (PPOs), and third party
administrators (TPAs)) and its customers, the payors of the claims (self­
insured/self administered business entities). Petitioner owns and has developed
the software programs it uses to conduct its activities. For each customer with
which it has an agreement, Petitioner looks at its original software program to
see if it needs to be modified for that particular customer's needs. If so, it
is modified for that customer.
An example of Petitioner's activities is the following: Petitioner has an
agreement with its customer, a company that has a self-administering health
insurance program. When an employee of the company requires medical attention,
the employee would get medical treatment from a health care provider and then
either the employee or the health care provider fills out an insurance claim form
that is submitted to the employer for payment. The employer electronically sends
the claim to Petitioner for processing. Petitioner checks to see if the claim
is reasonable, complete and valid. (The tolerances for these checks are set by
the employer.) Petitioner then electronically sends information back to the
employer as to whether the claim is (or should) be rejected, or whether it is a
valid claim and should be paid. The employer then issues the check to either the
employee or the health care provider.
The following description of three potential
paperless claim flow and possible pricing structures.

cases

illustrates

the

Case 1.
Petitioner will supply a computer software interface program to be
installed at the customer's corporate headquarters in New York. However, the
customer's branches and retail stores are located in various states. All of the
insurance claim forms will be sent to the corporate headquarters in New York for
processing.
Along with this program, Petitioner may provide a scanner to be utilized in
scanning the claim form into a personal computer at the customer's New York
location.
The data would be edited at the customer's location and then
transmitted electronically to Petitioner's computer located in Texas. Petitioner
would change the file format but would not make any decisions regarding the
information contained on the claim. The data would be processed and transmitted
electronically to its customer, the payor of the claim.
The customer of
Petitioner would be located in New York. The customer's branches may be located
anywhere in the United States.
Case 2. This case is similar to Case 1 except that the customer's branches and
retail locations electronically send the insurance claim forms directly to
Petitioner's location in Dallas, Texas for further processing. The claims are
not handled by the customer's corporate location in New York.
After receipt of the claim by Petitioner, the claim is processed in the same
manner as in Case 1.

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Case 3. This case differs from the other cases in that the claims are not scanned
into the computer at the corporate headquarters located in New York. The claims
are filed electronically by the Petitioner's customer using a local
clearinghouse. The claims are sent electronically from various states through
the existing electronic claim networks (i.e. NEIC, Envoy, BCBS and others) to
Petitioner's location in Dallas, Texas.
Petitioner processes the claim and
transmits the claim electronically to its customer, the payor of the claim.

A claims conversion fee is applicable to Cases 1 and 2. This is a fee
charged to the customer for scanning the health care claim form and creating an
electronic image which is stored on the customer's computer. The image is then
transmitted to Petitioner and finally back to the customer, the payor of the
claim. Petitioner would invoice its customer for this service on a per claim
basis. This fee includes data analysis and reporting.
A one-way transaction fee is applicable to Case 3. This is a fee charged
to the customer for transmitting the claim from Petitioner to the customer, the
payor of the claim.
A clearinghouse fee is applicable to Case 3. This is a fee charged to the
customer for transmitting claims from the customer, through the local
clearinghouse to Petitioner. Petitioner reprices the claim and transmits the
claim to the customer, the payor of the claim. This fee includes data analysis
and reporting.
An archival fee is applicable to Cases 1, 2 and 3. This is a fee charged
to the customer for converting the claim from an electronic image to a CD. The
CD is sent to the customer located in New York.
Petitioner will install and furnish the computer software to its customers
located in New York but will not charge a license fee or maintenance fee. The
charges are included in the fees listed above. The software and source code will
be owned by Petitioner.
Petitioner will lease computer hardware from vendors. Petitioner states
that the equipment will be leased exempt from Texas sales tax. However, Texas
has ruled that the processing of insurance claims is taxable in Texas.
Petitioner will accept delivery of the equipment in Texas.
Subsequently,
Petitioner will ship the equipment to customers located in various states.
Although Petitioner may furnish computer hardware and scanners to its
customers located in New York State, the sales invoice will not list a charge for
this equipment. The charges are included in the fees listed above.

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Applicable Franchise Tax Law and Regulations
With respect to Issue 1, section 209.1 of Article 9-A of the Tax Law
imposes an annual business corporation franchise tax on every foreign
corporation, unless specifically exempt, for the privilege of doing business, or
of employing capital, or of owning or leasing property in New York State in a
corporate or organized capacity, or of maintaining an office in New York State.
Section 1-3.2(b) of the Business Corporation Franchise Tax Regulations
("Article 9-A Regulations") provides that:
(1) The term doing business is used in a comprehensive sense and
includes all activities which occupy the time or labor of people for
profit. Regardless of the nature of its activities, every
corporation organized for profit and carrying out any of the
purposes of its organization is deemed to be doing business for the
purposes of the tax. In determining whether a corporation is doing
business, it is immaterial whether its activities actually result in
a profit or a loss.
(2) Whether a corporation is doing business in New York State is
determined by the facts in each case. Consideration is given to
such factors as:
(i) the nature, continuity, frequency, and regularity
activities of the corporation in New York State;

of

the

(ii) the purposes for which the corporation was organized;
(iii) the location of its offices and other places of business;
(iv) the employment in New York State of agents, officers and
employees; and
(v) the location of the actual seat of management or control of the
corporation.
Section 1-3.2(c) of the Article 9-A Regulations provides that:
[t]he term employing capital is used in a comprehensive sense. Any
of a large variety of uses, which may overlap other activities, may
give rise to taxable status.
In general, the use of assets in
maintaining or aiding the corporate enterprise or activity in New
York State will make the corporation subject to tax.
Employing
capital includes such activities as:

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(1) maintaining stockpiles of raw materials or inventories; or
(2) owning materials and equipment assembled for construction.
Section 1-3.2(d) of the Article 9-A Regulations provides that:
[t]he owning or leasing of real or personal property within New York
State constitutes an activity which subjects a foreign corporation
to tax.
Property owned by or held for the taxpayer in New York
State, whether or not used in the taxpayer's business, is sufficient
to make the corporation subject to tax. Property held, stored or
warehoused in New York State creates taxable status. Property held
as a nominee for the benefit of others creates taxable status.
Also, consigning property to New York State may create taxable
status if the consignor retains title to the consigned property.
With respect to the allocation of Petitioner's receipts, section 4-4.1 of
the Article 9-A Regulations provides that:
(a) The percentage of the taxpayer's business receipts allocable to
New York State is determined by:
(1) ascertaining the taxpayer's business receipts within New York
State during the period covered by the report; and
(2) dividing the sum of the New York State business receipts by the
taxpayer's total business receipts within and without New York State
during such period.
For purposes of this section, the term "business receipts" means
gross income received in the regular course of the taxpayer's
business, provided such receipts are includible in the computation
of the taxpayer's entire net income for the taxable year.
(b) All business receipts for the period covered by the report ...
must be taken into account. The following business receipts are
allocable to New York State:
(1) 100 percent of receipts from sales of tangible personal property
where shipments are made to points within New York State;
(2) 100 percent of receipts from services performed in New York
State;
(3) 100 percent of rentals from property situated in New York State;

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(4) 100 percent of royalties from the use of patents or copyrights
in New York State; and
(5) all other business receipts earned in New York State.
(c) If a taxpayer receives a lump sum in payment for services and
also for materials or other property, the sum received must be
apportioned on a reasonable basis.
That part apportioned to
services performed is includible in receipts from services
performed, and that part apportioned to materials or other property
is includible in receipts from sales.
Full details must be
submitted with the taxpayer's report.
Opinion - Corporation Franchise Tax
It has been held that, where a foreign corporation did not have an office
or assets located in New York and no employees were based in New York, the
corporation was doing business in New York when it sent employees into New York
to install automated management systems sold to movie theatres by connecting the
hardware, loading the software, testing the system and training the customers to
use the system. It was not exempt pursuant to Public Law 86-272. Theatron Data
Systems, Inc., Adv Op Comm T&F, April 16, 1990, TSB-A-90(10)C.
Also, a foreign corporation was held to be doing business in New York when
its employees taught software development seminars conducted in New York, even
though the corporation did not employ capital or own or lease property in New
York and did not maintain an office in New York. Project Technology, Inc., Adv
Op Comm T&F, November 6, 1989, TSB-A-89(13)C.
Where a foreign corporation's only presence in New York was the temporary
placement of its employees in New York, to provide clerical and technical
services using the client's equipment and supplies at the client's facilities
under the client's supervision, the corporation was held to be doing business in
New York. Quantum Resources Corporation, Adv Op Comm T&F, January 18, 1991, TSBA-91(2)C.
In this case, Petitioner does not have an office in New York or any
employees based in New York. However, Petitioner plans to send employees into
New York to install computer software and train customer employees. Petitioner
will own the computer software it installs. Also, Petitioner will lease computer
hardware that it will furnish to its customers located in New York. Petitioner
will also furnish its customers with scanners to be utilized in scanning claim
forms into personal computers.
Accordingly, when Petitioner furnishes its customers with computer hardware
and software in New York, Petitioner will own and lease tangible personal
property in New York pursuant to section 209.1 of the Tax Law and section 1­
3.2(d) of the Article 9-A Regulations. In addition, giving due consideration to
the factors set forth in section 1-3.2(b)(2) of the Article 9-A Regulations and
the cases cited above, especially Theatron, supra, Petitioner's employees'

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activities in New York of installing the computer software and hardware and
training its customers' employees constitute "doing business" within the meaning
of section 209.1 of the Tax Law.
Pursuant to section 209.1 of the Tax Law, Petitioner will be subject to the
franchise tax imposed under Article 9-A of the Tax Law for the taxable years that
it owns and leases personal property in New York State or is doing business in
New York State.
It appears from the facts presented that when Petitioner
acquires customers located in New York it will be subject to tax under Article
9-A of the Tax Law because it will have tangible personal property located in New
York and its employees will come into New York to install the tangible personal
property and train its customers for its use.
With respect to the allocation of receipts, section 4-4.3 of the Article
9-A Regulations provides that the receipts from services performed in New York
State are allocable to New York State.
All receipts from the services are
allocated to New York State, whether the services were performed by employees,
agents or subcontractors of the taxpayer, or by any other persons.
It is
immaterial where the receipts are payable or where they are actually received.
Section 4-4.4 of the Article 9-A Regulations provides that the receipts
from the rental of personal property situated in New York State are allocated to
New York State. Receipts of rentals by the taxpayer include all amounts received
by the taxpayer for the use of or occupation of property, whether or not such
property is owned by the taxpayer.
In this case, Petitioner may furnish computer hardware, software and
scanners to its customers, but these items are not billed to the customers. The
charges for their use are included in the fees that Petitioner charges its
customers. Therefore, Petitioner's receipts from the activities described above
are from services performed for its customers in processing health care insurance
claims and the rental of personal property.
Thus, the fees constitute lump sum
payments pursuant to section 4-4.1(c) of the Article 9-A Regulations.
The fees Petitioner receives are for the services performed for its
customers as well as a charge for the computer hardware, software and scanners
situated at the customer's locations. These receipts will constitute lump sum
payments pursuant to section 4-4.1(c) of the Article 9-A Regulations and are
apportioned on a reasonable basis with full details submitted with the report.
The services performed by Petitioner's employees include the processing of the
claims and the installation of the computer hardware, software and scanners and
the training of customers employees for their use. It appears from the facts
presented that the processing of the claims will not be performed in New York
State. However, when Petitioner's employees come into New York to install the
computer hardware, software and scanners or to train customer employees for their
use, those employees will be performing services in New York State. Therefore,
pursuant to section 4-4.3 of the Article 9-A Regulations, the portion of the lump
sum payment from Petitioner's customers that is attributable to the services
provided by Petitioner's employees is allocable to New York State to the extent
services are provided in New York State.
Pursuant to section 4-4.4 of the

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Article 9-A Regulations, the portion of the lump sum payment from Petitioner's
customers that represents the charges for the tangible property (hardware,
software and scanners) is apportioned to New York to the extent that the property
is located in New York State.
Applicable Sales and Use Tax 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:
*

*

*

(4) Retail sale. (i) A sale of tangible personal property to
any person for any purpose, other than (A) for resale ...
(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 ....
(8) Vendor. (i) The term "vendor" includes:
(A) A person making sales of tangible personal property or
services, the receipts from which are taxed by this article;
(B) A person maintaining a place of business in the state and
making sales, whether at such place of business or elsewhere, to
persons within the state of tangible personal property or services,
the use of which is taxed by this article;
(C) A person who solicits business either:
(I) by employees, independent contractors, agents or other
representatives; or ...
(14)
(including

Pre-written computer software.
Computer
prewritten upgrades thereof) which is not

software
software

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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
prewritten 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.
The Department of Taxation and Finance issued Bulletin No. 1978-1(S) on
February 6, 1978, which discusses the application of sales tax to receipts from
sales of computer programs as follows:
Software - Instructions and routines (programs) which, after an
analysis of the customer's specific data processing requirements,
are determined necessary to program the customer's electronic data
processing equipment to enable the customer to accomplish specific
functions with his EDP system. To be considered exempt �software�
for purposes of this bulletin, one of the following elements must be
present:
A. Preparation or selection of the program for the customer's use
requires an analysis of the customer's requirements by the vendor.
or
B. The program requires adaptation, by the vendor, to be used in a
specific environment i.e., a particular make and model of computer
utilizing a specified output device. For example, a software vendor
offers for sale a pre-written sort program which can be used in
several computer models. Prior to operation, instructions must be
added by the vendor which specify the particular computer model in
which the program will be utilized.

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The software may be in the form of:
a. Systems programs (except for those instruction codes which are
considered tangible personal property in paragraph 1 above) ­
programs that control the hardware itself and allow it to compile,
assemble and process application programs.
b. Application programs - programs that are created to perform
business functions or control or monitor processes.
c. Pre-written
programs (canned) -- programs that are either
systems programs or application programs and are not written
specifically for one user.
d. Custom programs - programs created specifically for one user.
Software meeting the above criteria, whether placed on cards,
tape, disc pack or other machine readable media or entered into a
computer directly, is deemed to be intangible personal property for
sales tax purposes, and as such its sale is exempt from New York
State and local sales and use taxes. Software or programs which do
not meet the criteria are subject to tax....
Section 1105(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.
Services which are not
specifically described in the statute are not subject to sales tax.
Section 1110(a) of the Tax Law provides in Part:
Except to the extent that property or services have already
been or will be subject to the sales tax under this article, there
is hereby imposed on every person a use tax for the use within this
state ... (B) of any tangible personal property (other than computer
software used by the author or other creator) manufactured,
processed or assembled by the user, ... (F) of any computer software
written or otherwise created by the user if the user offers software
of a similar kind for sale as such or as a component part of other
property in the regular course of business.

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Opinion - Sales and Use Tax
With respect to Issue 2(A) of the Petition:
(1) Claims conversion fees charged by Petitioner with respect to Cases 1
& 2 as noted above do not fall within the specified services subject to tax under
section 1105(c) of the Tax Law and are outside the scope of the tax and thus are
not subject to sales or use tax.
(2) & (3) Petitioner's one-way transaction fees and clearinghouse fees
charged to customers in Case 3, also represent charges for services that do not
fall within the specified services subject to tax under section 1105(c) of the
Tax Law and are outside the scope of the tax and thus are not subject to sales
or use tax.
(4) Archival fees charged by the Petitioner to the customer in Cases 1,2
and 3, for converting an electronic image to a CD and sending the CD to the
customer located in New York represents the sale of tangible personal property
and will be subject to sales and use taxes.
(Matter of Finserv Computer
Corporation v. Tully 94 AD2d 197, affd 61 NY2d 947)
Petitioner also notes that the claims conversion fee and the clearinghouse
fee include data analysis and reporting. However, such analysis and reporting
are not the primary functions of the Petitioner. Petitioner's primary business
function is the electronic movement of health insurance claim forms between
providers of health care (medical providers, preferred provider organizations
(PPOs), and third party administrators (TPAs)) and its customers, the payors of
the claims. Petitioner's data processing service, including the limited data
analysis and reporting function, is not one of the specified services subject to
tax under Section 1105(c) of the Tax Law and thus is not subject to sales or use.
With respect to Issue 2(B) of the Petition:
(1) Petitioner owns and has developed the software programs it uses to
conduct its business activities. For each customer with which Petitioner has an
agreement, Petitioner looks at the original software program to see if
modifications of the software program for any particular customer will be needed.
If so, the software is modified for that customer. Petitioner’s use in New York
State of computer software in connection with Petitioner's services to its
customers, as described above, will not be subject to use tax, provided
Petitioner designs and develops the software and does not offer similar software
for sale as such, or as a component part of other property, in the regular course
of business.
See Section 1110(a)(F) of the Tax Law.
Petitioner's use of
software in the manner described above will be subject to use tax if Petitioner
does offer for sale similar software in the regular course of business. The use
tax in such case will be based on the consideration paid by Petitioner for the
disks, tapes or other tangible personal property, used as the blank medium that
contains or is used in conjunction with the software. See Section 1110(g) of the
Tax Law.

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If Petitioner does not design and develop its own computer software, but
purchases the software from another person, Petitioner's use of software located
in New York State will be subject to use tax based upon Petitioner's cost of the
software where such software is pre-written computer software. If, however, the
software purchased by Petitioner is designed or developed by the author or
creator to Petitioner's specifications, such software is considered to be
intangible personal property and not subject to the sales or compensating use
tax. Where the software is pre-written software that is modified or enhanced to
meet Petitioner's specifications, such software is entirely subject to sales and
use tax unless there is a reasonable, separately stated charge on an invoice or
other statement of the price given to the Petitioner for such modification or
enhancement. If Petitioner is charged a reasonable, separately stated charge on
its invoice for the custom programming, only the charges for the pre-written
portion of the program will subject to sales and use taxes. (Garpac Corporation,
Adv Op Comm of T&F, February 6, 1992, TSB-A-92(8)S.)
(2) Petitioner's use of hardware and scanners purchased out of state and
subsequently located in New York State will be subject to use tax under section
1110 of the Tax Law based upon the cost of such hardware and scanners to
Petitioner. The use tax is an expense Petitioner may choose to absorb or pass
on to the customer by increasing its charges for the services provided. Since,
in either instance, the use tax represents a cost of doing business, Petitioner
may build such cost into the charges to its customers, but may not separately
state the charges as tax on such invoice.

DATED: March 9, 1998

NOTE:

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

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