Which computer repair, software, and support charges are taxable in New York, and which are exempt if separately stated?

Plain-English summary

Xecu-Track Accounting Services, a computer sales and consulting firm, asked the Department to sort out the sales tax treatment of six common billing scenarios in its business, which mixes hardware repair, network configuration, software sales, and phone support.

Scenario 1 -- hardware repair (swapping a hard drive or network card). Taxable in full. Physical computer components are "hardware," which is tangible personal property, and repairing tangible personal property is a taxable service under § 1105(c)(3) regardless of how much time is spent diagnosing versus fixing.

Scenario 2 -- configuring network operating software (keyboard-only, no hardware opened). Exempt if separately billed from any concurrent taxable hardware or prewritten-software sale. Software installation/servicing is exempt under § 1115(o), but if the invoice lumps this together with taxable elements as one price, the whole charge becomes taxable.

Scenario 3 -- software-only troubleshooting on-site or by phone (no hardware opened). Exempt. Software maintenance and repair services are excluded from tax under § 1115(o) whether performed in person or over the phone, as long as the charge covers only software work.

Scenario 4 -- flat annual fee for unlimited phone-only software support. Exempt in full, since the charge covers exclusively software telephone support.

Scenario 5 -- selling a package of annual software updates. Taxable as a sale of prewritten software, unless the update is custom-designed for that specific customer and the charge for it is separately stated.

Scenario 6 -- reselling a third party's phone-support contract (e.g., buying a $500 plan and reselling it for $1,000, with the customer calling the manufacturer directly). Exempt if the resold contract covers only phone support -- Xecu-Track can even buy the underlying contract tax-free as a purchase for resale. But if the contract bundles in taxable elements like software upgrades, the whole resale price is taxable unless the taxable and exempt pieces are separately stated.

The thread running through all six scenarios: hardware work is always taxable; software work (installation, maintenance, troubleshooting, phone support) is exempt; and the only thing that ever converts an otherwise-exempt software charge into a taxable one is bundling it with a taxable element under one lump-sum price instead of stating each charge separately.

What this means for you

Computer service and IT consulting businesses

Structure your invoices to separately state hardware work, prewritten-software sales, and software installation/maintenance/support charges as distinct line items. A single combined price for a service call that touches both hardware and software makes the entire charge taxable, even if most of the work was actually exempt software troubleshooting.

Businesses reselling third-party software support contracts

You can generally buy the underlying support contract tax-free as a purchase for resale, and your resale of a phone-support-only contract is exempt -- but if the contract you're reselling includes taxable elements (like prewritten software or upgrades), you need to separately state those taxable components on your invoice or the entire resale price becomes taxable.

Accountants and tax professionals

This ruling is a compact decision matrix built on § 1115(o)'s software-services exemption and the "reasonable and separately stated" requirement that runs throughout New York's computer-services case law (David Zucker, TSB-A-96(53)S; Arthur Anderson and Co., TSB-A-91(70)S; Software Dynamics, Inc., TSB-A-97(45)S; State Tax Resources Group, TSB-A-96(44)S) -- useful as a reference for any mixed hardware/software billing fact pattern.

Common questions

Q: Is fixing a broken computer part always taxable?
A: Yes. Physical hardware repair -- like replacing a hard drive or network card -- is a taxable service under § 1105(c)(3) regardless of how the time is billed.

Q: Is troubleshooting software over the phone taxable?
A: No, as long as the charge covers exclusively software support and doesn't bundle in taxable hardware or prewritten-software sales under one price.

Q: What happens if a service contract mixes taxable and exempt elements under one flat price?
A: The entire charge becomes taxable unless the taxable and exempt portions are reasonably allocated and separately stated on the invoice or in the written agreement.

Q: Does this ruling apply to my computer service 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. It shows how the Department reasons through many scenarios, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(5) (sale, selling or purchase)
• Tax Law § 1101(b)(6) (tangible personal property; prewritten software included)
• Tax Law § 1101(b)(14) (definition of prewritten computer software)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c)(3) (installing, maintaining, servicing, or repairing tangible personal property)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• 20 NYCRR § 527.5 (installing, maintaining, servicing, repairing)
• TSB-M-93(3)S, dated March 1, 1993 (sales and use tax on prewritten computer software)

Prior rulings referenced: David Zucker, TSB-A-96(53)S; State Tax Resources Group, TSB-A-96(44)S; Moore Business Forms, Inc., TSB-A-95(6)S; TSI International Software Ltd., TSB-A-97(59)S; Software Dynamics, Inc., TSB-A-97(45)S; Arthur Anderson and Co., TSB-A-91(70)S.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(27)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S980112A

On January 12, 1998, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Xecu-Track Accounting Services, Inc., 239 New
Road, Parsippany, NJ 07054.
Petitioner, Xecu-Track Accounting Services, Inc., is a computer sales and
consulting firm which, among other computer related services, installs and
services computer hardware and software, writes original computer programs, and
customizes computer software.
Petitioner describes six scenarios involving its sales of computer
hardware, software and/or computer related services and inquires as to its sales
tax obligations and liabilities in each instance. These scenarios are described
in the opinion portion of the advisory opinion.
Applicable Authority
Section 1101(b) of the Tax Law states, 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 . . .
(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. . . .
*

*

*

(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

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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 1105 of the Tax Law provides, in part:
Imposition of sales tax.-- . . . there is hereby imposed and
there shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal
property, except as otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the
following services:
*

*

*

(3) Installing tangible personal property ... or maintaining,
servicing or repairing tangible personal property ... not held for
sale in the regular course of business, whether or not the services
are performed directly or by means of coin-operated equipment or by
any other means, and whether or not any tangible personal property
is transferred in conjunction therewith. . . .
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.

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Section 527.5 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. (1) The tax is imposed on receipts from every
sale of the services of installing, maintaining, servicing or
repairing tangible personal property . . . .
(2) Installing means setting up tangible personal property or
putting it in place for use.
*

*

*

(3) Maintaining, servicing and repairing are terms used to
cover all activities that relate to keeping tangible personal
property in a condition of fitness, efficiency, readiness or safety
or restoring it to such condition.
Technical Services Bureau Memorandum TSB-M-93(3)S, dated March 1, 1993,
entitled State and Local Sales and Compensating Use Taxes Imposed on Certain
Sales of Computer Software, provides, in part:
Effective September 1, 1991, State and local sales and
compensating use taxes are imposed on the sale or use of prewritten
computer software and certain related services.
The effect of this change in the Tax Law is to broaden the
types of computer software that are subject to sales and use taxes.
. . . certain software previously considered "custom" may now be
considered prewritten computer software and subject to such taxes.
. . . The only software that is exempt from sales and use taxes
under the new law is software designed and developed to the
specifications of a specific purchaser.
Prewritten computer software is any computer software that is
not designed and developed by the author or other creator to the
specifications of a specific purchaser.
The sale of prewritten software includes any transfer of title
or possession, any exchange, barter, rental, lease or license to
use, including merely the right to reproduce, for consideration....
*

*

*

Prewritten software is subject to tax whether sold as part of
a package or separately. Software created by combining two or more
prewritten programs or portions of a prewritten program is still
prewritten software subject to tax. The medium by which the software
is transferred to the purchaser has no effect on the software’s
taxability. Thus, prewritten software is taxable whether sold, for
example, on a disk, tape or by electronic transmission over
telephone lines.

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Sales Tax

Prewritten software, even though modified or enhanced to the
specifications of a specific purchaser, remains prewritten software
subject to tax. However, if a charge for the custom modification or
enhancement is reasonable and separately stated on the invoice or
billing statement, then the separately stated charge for the custom
modification or enhancement is not subject to tax.
Example 1.

A software developer creates an accounting system using
prewritten software modules for general ledger, accounts
receivable,
accounts
payable,
payroll,
inventory
management, etc.
The developer may also sell the
modules separately or bundled in other packages. Even
though the modules may be modified to the specific
requirements of the client’s business, the sale of the
modules is subject to sales or use tax as prewritten
software.
An additional charge for modification or
"custom" programming by the developer would not be
subject to sales or use tax if the developer’s charge
for the modification is reasonable and is separately
stated on the billing statement.
*

*

*

Sale of Software Upgrades
Generally, the sale of a revision or upgrade of prewritten
software is subject to tax as the sale of prewritten software. If,
however, the software upgrade is designed and developed to the
specifications of a specific purchaser, its sale to that specific
purchaser would be exempt as custom software.
*

*

*

Customer Support and Related Services
Services taxable under section 1105(c) of the Tax Law are
exempt from tax under section 1115(o) of the Tax Law where performed
on any computer software.
However, where such services to be
performed on software are sold in conjunction with the sale of
tangible personal property, such as prewritten software, the charge
for such services is exempt only if it is reasonable and separately
stated on the invoice or billing statement given to the customer.
Thus, charges for customer (user) support or for information
services provided by a vendor to a customer, either in person or by
some type of telecommunications arrangement (e.g., telephone, modem,
facsimile machine, etc.), in the nature of training, consulting,
instructing or other diagnostic or troubleshooting services related
to prewritten software are exempt from sales and use taxes where the

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charges are reasonable and separately stated.
Charges for the
service of installing, repairing, maintaining or servicing
prewritten software are also exempt from sales and use taxes where
the charges are reasonable and separately stated on the invoice. Of
course, any charges for the above described services sold in
connection with custom software are exempt from tax.
Programming and systems analysis are also exempt services.
However, where these services are rendered in conjunction with the
sale of prewritten software, the charge for the service is exempt
from tax only when the charge for the service is reasonable and
separately stated on the invoice or billing statement given to the
customer.
Example 2:

A computer vendor sells an “off-the-shelf” software
program to a customer. The vendor charges additional
fees for installing the software, on-site training, and
diagnostic and trouble-shooting customer support. The
sale of the software is taxable since it is pre-written.
However, the charges for installation, on-site training
and customer support services are not taxable if
reasonable and separately stated on an invoice or
billing statement given to the customer.

Software Maintenance Agreements
If a software maintenance agreement 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 charge for the entire
maintenance agreement is 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 purchaser.
Example 3:

A vendor of computer systems sells a maintenance
agreement to provide on-site training, repairs, software
upgrades, and customer support by telephone for a
customer’s computer system (hardware and prewritten
software). The portion of the cost of the agreement
allocated to prewritten software upgrades and for repair
or maintenance of the computer system hardware is
taxable. However, the portion of the cost allocated for
on-site training, repairs and maintenance of the
prewritten software and telephone support is exempt if
the cost is reasonable and separately stated in the
written agreement and the customer invoice.

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Opinion
The following are the scenarios presented by Petitioner concerning its
computer business and the appropriate answers.
Scenario 1: Petitioner is called to service a computer because it is not
functioning properly. For example, an internal part, such as a hard
drive or network card, may have become defective. In servicing the
computer, Petitioner opens it up and puts in a new part, such as the
hard drive or network card. Approximately half Petitioner’s time is
spent assessing what the problem is and the other half is spent on
actual repairs. Petitioner bills by the hour for the time it takes
to do this.
Answer:

The internal parts of a computer, such as a hard drive or network
card, fall within the definition of the term “hardware,” i.e., the
physical components (as electronic and electrical devices) of a
computer (Webster’s Ninth New Collegiate Dictionary (1985 Ed.)).
For purposes of sales and use tax, computers and peripheral devices
commonly described as “hardware” are considered tangible personal
property as defined in Section 1101(b)(6) of the Tax Law.
The
services of installing, maintaining, servicing or repairing tangible
personal property are taxable under Section 1105(c)(3) of the Tax
Law. Accordingly, the total receipts Petitioner receives from its
services of maintaining, servicing and repairing computer system
hardware are subject to sales tax (see David Zucker, Adv Op Comm
T&F, September 5, 1996, TSB-A-96(53)S; TSB-M-93(3)S, supra).

Scenario 2: Petitioner configures the operating software of a computer network,
in order to set up all the network computers and the software on
those computers to work together. In this scenario, the computer is
not opened; the work is done using the keyboard. This service could
also include the sale of software and/or hardware.
Petitioner
inquires as to the taxability of its services both at the time of
the initial network installation or configuration and at a later
date when it returns to service the network (using the keyboard
only) and charges the client hourly.
Answer:

TSBM-93(3)S, supra, provides guidance with respect to sales of
computer software and related services. The services of installing,
maintaining, servicing or repairing tangible personal property which
are taxable under Section 1105(c)(3) of the Tax Law are exempt from
tax under Section 1115(o) of the Tax Law where performed on any
computer software, provided the charge for the service is reasonable
and separately stated on an invoice or other document of sale given
to the customer. Accordingly, if Petitioner’s charges for the
initial installation or configuration and servicing (even at a time
after the original installation) of network operating software are
separately billed on an invoice from the sale of any additional
taxable
services
or
tangible
personal
property
Petitioner
concurrently sells to its customer, receipts from such charges are
not subject to sales tax (David Zucker, supra).

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Contrarily, when Petitioner’s nontaxable services are included
within a contract which includes taxable elements, and the total
receipts Petitioner receives from the sale of such contract are
billed to the customer as a lump sum, the total receipts are subject
to the tax imposed under Section 1105 of the Tax Law (David Zucker,
supra; State Tax Resources Group, Adv Op Comm T&F, July 11, 1996,
TSB-A-96(44)S; Moore Business Forms, Inc., Adv Op Comm T&F, February
15, 1995, TSB-A-95(6)S). Taxable elements include the sale and/or
installation of computer hardware and the sale of pre-written
software. Pre-written software is subject to tax whether sold as
part of a package or separately.
If computer network charges include the sale of additional software,
the only software that is exempt from sales and use taxes is
software designed and developed to the specifications of a specific
purchaser (TSB-M-93(3)S, supra). If Petitioner is merely selecting
and/or enhancing particular pre-written software programs for its
customers, or is designing personalized computer programs by
configuring the proper combination of software modules (some of
which are pre-written), the receipts from the fees Petitioner
charges its customers for the sale of such software are considered
sales of tangible personal property and are subject to the taxes
imposed by Sections 1105 and 1110 of the Tax Law. Provided they are
separately stated on an invoice or other statement given to the
customer, receipts attributable to any unique programming of
software, including modifications or enhancements, and updates, are
not subject to tax (see TSI International Software Ltd., Adv Op Comm
T&F, September 30, 1997, TSB-A-97(59)S; Software Dynamics, Inc., Adv
Op Comm T&F, July 23, 1997, TSB-A-97(45)S; State Tax Resources
Group, supra). However, in a transaction where the charge is for
both taxable elements and qualifying exempt software or programming,
the total charge is subject to sales and use taxes unless the
portion of the charge applicable to the qualifying exempt software
or programming is reasonably allocated and separately stated from
the other charges.
Scenario 3: Petitioner services a computer network that is experiencing a
malfunction. The technician who goes out to the customer site does
not need to open up or service the computer hardware. He or she
only needs to debug the software to correct problems, such as
printer problems.
Petitioner inquires as to the sales tax
obligations that would arise if 1)all of the service is performed by
the technician on site using the keyboard, or 2)the technician is
able to fix the problem over the phone by coaching the customer to
use the keyboard, and the technician charges hourly for these
services.

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Answer:

Software maintenance and repair services are exempt from tax under
Section 1115(o) of the Tax Law. Accordingly, Petitioner’s receipts
from charges to its customer, either in person or by telephone,
which are exclusively for customer support, or diagnostic or
troubleshooting services, rendered in connection with pre-written or
custom software are exempt from tax (TSB-M-93(3)S, supra).
Alternatively, the entire charge for such services performed under
a maintenance agreement which includes both taxable and nontaxable
elements, as discussed in Scenario 2 above, is subject to sales tax
unless, as mandated by Section 1115(o) of the Tax Law, the charge is
separately stated between the taxable and exempt items provided
under the agreement (see Arthur Anderson and Co., Adv Op Comm T&F,
November 8, 1991, TSB-A-91(70)S; Software Dynamics, Inc., supra).

Scenario 4: Petitioner sells a software service contract to its customer under
which Petitioner provides unlimited software support by telephone
only. The customer is billed a flat fee for one year.
Answer:

Charges for customer (user) software support either in person or by
telephone related to pre-written or custom software are not subject
to sales tax under section 1105(c) of the Tax Law. See Section
1115(o) of the Tax Law. Accordingly, Petitioner’s receipts from the
flat fee it charges to customers exclusively for software telephone
support are exempt from tax (Arthur Anderson and Co., supra;
TSB-M-93(3)S, supra).

Scenario 5: Petitioner sells a customer a package of annual software updates.
This will only involve sending the customer the update (on a disc or
CD-ROM) with instructions as to how to load the software on the
customer’s computer.
Answer:

Generally, the sale of a revision or upgrade of pre-written software
is subject to sales and use tax as the sale of tangible personal
property under Sections 1105 and 1110 of the Tax Law. If, however,
Petitioner designs and develops the software update to the
specifications of a specific customer, charges attributable to such
update are not subject to tax provided they are separately stated on
an invoice or other statement given to the customer (Software
Dynamics, supra).

Scenario 6: Petitioner re-sells a third-party software service contract which
provides unlimited telephone support on a software package. For
example, the manufacturer of the software package sells Petitioner
a phone support plan for $500 and Petitioner, in turn, sells it to
a customer for $1,000. The customer calls the manufacturer to get
any phone support it requires under the contract; Petitioner does
not actually provide the service to the customer.
Answer:

Charges for telephone software support services are not subject to
sales and use taxes as described in Scenario 4 above. Therefore, in
this instance, if the only services performed under a maintenance

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contract Petitioner purchases from a third party supplier and
resells to its customer are telephone support services, Petitioner’s
charges to the customer are not subject to tax. However, if the
maintenance contract were to provide for the sale of taxable
elements (for example, pre-written computer software and pre-written
upgrades) in conjunction with telephone support, the entire charge
for the maintenance contract would be subject to sales tax unless
the charge for the taxable and exempt elements provided under the
agreement were reasonable and separately stated on an invoice or
other statement of the price given to the customer (Arthur Anderson
and Co., supra; Moore Business Forms, Inc., supra). Petitioner, as
the reseller of the service contract, would be required to collect
from its customer any sales and use tax due on the sale of the
service contract. Petitioner could purchase the service contract
from a third-party in New York State exempt from tax as a purchase
for resale. See Section 1101(b)(4)(i) of the Tax Law and Section
526.6(c) of the Sales and Use Tax Regulations.

DATED: April 14, 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.