Can a computer reservation system provider buy the equipment it leases to travel-agency subscribers tax-free for resale, and must subscribers pay tax on the full 'monthly fixed charge' even when it's routinely waived through a productivity credit?

Plain-English summary

Apollo Travel Services Partnership provides a computerized reservation system ("CRS") that travel agencies use to book flights, hotels, cars, and other travel products, and to print tickets and itineraries. Apollo typically supplies the subscriber travel agency with the computer equipment (PCs, servers, monitors, modems, printers) needed to access the system. Under Apollo's standard "productivity pricing" agreement, subscribers are technically billed a "monthly fixed charge" for the equipment, but Apollo credits 100% of that charge back to any subscriber who meets a negotiated monthly booking target -- which, per Apollo, covers the vast majority of subscribers, so the fixed charge is rarely if ever actually collected. Apollo asked two things: (1) whether it can buy the computer equipment tax-free as a purchase for resale, since it's leasing the equipment to subscribers; and (2) whether subscribers owe tax on the full fixed charge even when the productivity credit wipes it out.

On the first question, the Department found Apollo's contract really is a lease of the hardware to subscribers, which counts as a taxable "sale" under New York's broad sale definition -- so Apollo's own purchase of that equipment is a tax-free purchase for resale. On the second question, the Department reached back to a factually similar 1993 opinion involving a different CRS provider (Planetarium Travels, Inc.) and reasoned the same way: the "credit" against the fixed charge isn't a real discount from Apollo -- it's Apollo's separate business partner (the company that actually operates the underlying reservation system) paying Apollo a share of transaction revenue tied to the subscriber's bookings, which effectively covers part of the subscriber's bill on the subscriber's behalf. Because the taxable "receipt" includes any amount for which a vendor allows the purchaser a credit, Apollo must collect sales tax on the full monthly fixed charge for every subscriber, regardless of whether the credit later brings the amount actually paid down to zero.

What this means for you

Technology and equipment providers bundling hardware with a subscription service

If your contract genuinely leases hardware to a customer (rather than just licensing software or providing a service), you can typically buy that hardware tax-free for resale -- but check your billing structure carefully for the second issue below.

SaaS, CRS, or similar providers offering usage-based fee credits or waivers

A "credit" that looks like a routine discount can still leave the full pre-credit charge in your taxable receipt if the credit is actually funded by a third party's payment tied to the same activity (here, per-booking revenue from the system operator), rather than being a genuine price reduction you're absorbing yourself. Review whether your "waived" or "credited" fees are really being paid by someone else on the customer's behalf before assuming they're excluded from tax.

Accountants and tax professionals

This opinion directly follows Planetarium Travels, Inc. (TSB-A-93(42)S) on a nearly identical CRS fact pattern, reinforcing that Tax Law § 1101(b)(3)'s inclusion of "any amount for which credit is allowed by the vendor to the purchaser" in the taxable receipt reaches credits funded by third-party payments, not just credits the vendor itself absorbs. This is a useful contrast to TSB-A-98(88)S (also from this batch), where a manufacturer's dealer-cash incentive genuinely reduced the price charged and WAS excluded from the taxable receipt -- the difference is whether the seller keeps any benefit from the arrangement or whether it's a true price cut with nothing retained.

Common questions

Q: Why can Apollo buy the computer equipment tax-free even though subscribers rarely actually pay for it?
A: Because the contract still legally constitutes a lease -- a taxable "sale" under New York's definition -- so Apollo's purchase for the purpose of that lease qualifies as a purchase for resale regardless of how much subscribers end up paying.

Q: If a subscriber never actually pays the monthly fixed charge because of the credit, does Apollo still have to collect and remit tax on it?
A: Yes -- the credit is treated as a payment from a third party (the system operator) rather than a real discount, so the full charge remains in the taxable receipt under Tax Law § 1101(b)(3).

Q: Does Apollo owe tax on the variable per-transaction charges or the "shortfall" fees too?
A: The ruling notes Apollo already properly collects and remits tax on those separate charges; the dispute here was specifically about the monthly fixed equipment charge.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(3) (definition of "receipt")
• Tax Law § 1101(b)(4)(i) (definition of "retail sale")
• Tax Law § 1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law § 1105(a) (imposition of sales tax)

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_89s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(89)S
Sales Tax
December 30, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980224D

On February 24, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Apollo Travel Services Partnership, 2550 W. Golf Road, Suite 900, Rolling
Meadows, Illinois 60008. Petitioner, Apollo Travel Services Partnership, submitted additional
information on June 15, 1998.
The issues raised by Petitioner are as follows:
(1) Whether Petitioner leases computer equipment to its subscribers and therefore may
purchase the computer equipment exempt from tax for resale. Alternatively, whether Petitioner is
the consumer of the computer equipment transferred to the subscribers as an incident to, and to
facilitate, the performance and delivery of the travel reservation booking and ticketing services and,
therefore, is subject to New York use tax on the purchase of the equipment.
(2) Whether Petitioner’s subscribers are required to pay sales tax on the full amount, or any
portion, of the fixed monthly charges appearing in their contract with Petitioner.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is engaged in the business of providing computerized reservation and ticketing
services to travel agencies ("subscribers") located throughout the United States. Several subscribers
are located in the State of New York. Petitioner provides the reservation and ticketing services
through a proprietary computer network (the "CRS"). Access to the CRS allows subscribers to
efficiently process reservation and ticketing transactions. The information available to subscribers
through the CRS includes, but is not limited to

C
C
C

Airline flight departure and arrival times, seat availability and costs.
Car rental availability and cost.
Hotel availability and cost.

Subscribers access Petitioner's CRS to perform a variety of travel reservation and ticket
issuance functions. Through the CRS, subscribers may book reservations with a variety of airlines,
tour groups, cruises, hotels, car rental agencies and other travel related businesses. In addition,
subscribers utilize the CRS to print passenger tickets, boarding passes and travel itineraries. In most
instances, Petitioner provides the subscriber with the computer equipment used to access the CRS.

-2TSB-A-98(89)S
Sales Tax
December 30, 1998

Petitioner enters into a written "Subscriber Services Agreement" ("agreement") with its
subscribers, usually under a "productivity pricing" subscriber model. Under the agreement,
Petitioner provides the following:

C
C

Access to the CRS and the reservations and ticketing services.
Computer equipment and software necessary to access and deliver the travel
reservation and ticketing services. Computer equipment includes: PC's, file servers,
monitors, modems and printers.

The agreement also defines the nature and amount of payments to be made by the subscriber
to Petitioner under the "productivity pricing" model. Under the productivity based pricing method,
the only potential charges that Petitioner may collect from subscribers are "variable charges" and
"shortfall" which are discussed in detail below. Although the agreement discusses a "monthly fixed
charge" for the use of the computer equipment, under no circumstances (excluding the start up
months), is this amount ever collected from subscribers. Typically, even the start-up months are free
of charge. Under this pricing methodology, the monthly fixed charge discussed in the agreement
has never been billed or collected from subscribers. In fact, according to the terms of the agreement,
Petitioner never has the right to demand payment of the monthly fixed charge under these
circumstances. According to the sample agreement submitted as part of the Petition, this result is
effectuated by allowing subscribers a credit applicable to the monthly fixed charges for the use of
the computer hardware and software. If the subscriber achieves a certain level of bookings the
subscriber is allowed a credit equal to 100% of the monthly fixed charges.
Petitioner states that the discussion of the monthly fixed charges in the contract is merely a
marketing device used by Petitioner to alert the subscriber to the fact that Petitioner is allowing the
subscriber to use the computer equipment without charge. The monthly fixed charge is an amount
used to determine the total value of the services provided by Petitioner to the subscriber and to
determine the target booking level the subscriber agrees to achieve.
The variable charges for supplemental services are mainly per-transaction based fees for the
various services that Petitioner provides. The supplemental services which subscribers may elect
to purchase include, but are not limited to:

C
C
C
C

The ability to print passenger tickets, boarding passes, travel itineraries and invoices.
The use of certain print queues, preview demands and file creators.
The ability to maintain and retrieve records and generate reports in various levels of
detail.
Support services outside the normal terms of the agreement.

Petitioner states that it has appropriately billed, collected and remitted New York sales or
use tax on all variable charges for supplemental services.

-3TSB-A-98(89)S
Sales Tax
December 30, 1998

The "shortfall" is a fee assessed against subscribers who fail to meet their negotiated "target
booking level." A subscriber's "target booking level" is the number of reservations a subscriber has
agreed to book through the CRS. If the subscriber fails to meet its target booking level, the
subscriber is required to pay a fee or "shortfall". This shortfall is calculated by multiplying an
amount ($2) by the difference between the subscriber's target booking level and the actual booking
level achieved. Petitioner estimates that approximately 70-75 percent of subscribers consistently
meet or exceed their target booking levels. Therefore, the shortfall fee is generally not billed.
Petitioner states that it has appropriately billed, collected and remitted New York sales or use tax
on the shortfall billings.
The sample Agreement submitted as part of the Petition, provides as follows:
WHEREAS, ATS [i.e., Petitioner] markets certain travel related services; and
WHEREAS, Subscriber desires to utilize one or more such services;
NOW, THEREFORE, in consideration of the premises and the mutual
obligations hereinafter set forth, ATS and Subscriber hereby agree as follows:
*

*

*

*

*

*

1. DEFINITIONS

D. "Charges" means all amounts payable by Subscriber to ATS under this
Agreement.
*

*

*

G. "Hardware" means all equipment Leased or sold by ATS to Subscriber.
*

*

*

L. "Services" means Hardware, Software, and other services provided by
ATS to Subscriber.
*

*

*

-4TSB-A-98(89)S
Sales Tax
December 30, 1998

2. PROVISION OF SERVICES
   A. ATS shall license the Software and Lease the Hardware set forth on each
   Attachment A, or other attachment, to Subscriber pursuant to the terms and
   conditions of this Agreement.
   *

*

*

13. CHARGES
    A. Subscriber shall pay to ATS license, purchase, installation, and service
    fees; taxes; and other fees as set forth in this Agreement and in each Rider,
    Attachment A, and all other applicable attachments to this Agreement, without setoff
    or counterclaim. Monthly fees commence upon the Services being operational....
    The sample Attachment A submitted as part of the Petition includes the "MONTHLY FIXED
    CHARGES" which is a total of various monthly charges for specific computer equipment that is
    provided by Petitioner to its customer.
    The PRODUCTIVITY ATTACHMENT of the Agreement (Attachment C) provides in part,
    as follows:
    The provisions of this Productivity Attachment shall apply only to the
    Monthly Fixed Charges specified on the Attachment A(s) clearly marked as
    "Productivity-Based Pricing". Pursuant to the following terms, Subscriber may be
    entitled to a credit applicable to the Monthly Fixed Charges on Subscriber's use of
    the Hardware and Software set forth on each such Attachment A to the Agreement
    or may be charged according to an alternative formula. Any term not defined herein
    shall have the meaning given such term elsewhere in the Agreement.
14. Commencing on the effective date of the Agreement and continuing for the
    number of months specified below, Subscriber's credit shall be equal to the
    percentage identified below as "Starting Discount".
15. Upon completion of the period for which a Starting Discount is provided,
    for each month thereafter, ATS shall calculate the average monthly Apollo Net
    Bookings Subscriber has made through Apollo Services during the previous twelve
    (12) month period ("Review Period"). The Charges for which Subscriber shall be
    responsible for that month shall be determined as follows.

-5TSB-A-98(89)S
Sales Tax
December 30, 1998

A. If during a Review Period Subscriber achieves the level of monthly
average Apollo Net Bookings specified below ("Target Bookings"), a credit of 100%
shall be applied to Subscriber's Monthly Fixed Charges for the following month.
Petitioner also submitted a sample "DISTRIBUTOR SALES AND SERVICE
AGREEMENT" between Petitioner and the company that supplies the CRS (hereinafter Company
A). This agreement provides, in part, as follows:

1. Introduction: Company A generates Distribution Services for use by
   Subscribers and Vendors and has established a network of distributors that shall be
   responsible for the marketing of its Distribution Services and for the provision of
   ongoing maintenance and support services. This Agreement specifies the terms and
   conditions under which Distributor [i.e., Petitioner] will become a Company A
   distributor of Distribution Services and is not intended by the parties to affect any
   other relationship between the parties or their Affiliates.
   *

*

*

19. Payments: A. In consideration of the services provided by Distributor
    pursuant to this Agreement, Company A will pay to Distributor each month an
    amount equal to a portion of the fees that it receives from Vendors (immediately
    upon Company A’s receipt thereof) in respect of bookings and other transactions
    made in the Company A System by Distributor's National Subscribers, such portion
    to be determined in accordance with the provision of Attachment D to this
    Agreement.
    B. Distributor will pay to Company A a sum equal to the Cost to Company
    A of processing transactions in the Company A System arising out of the provision
    of Distribution Services on behalf of Non-Air Vendors (including Limited Air
    Charters) to National Subscribers in respect of National Products in the National
    System....
    ANNEX I, of the "Distributor Sales and Service Agreement" provides, in part as follows:
    Vendor. "Vendor" means a vendor of travel-related services, such as an
    airline, rail company, ferry operator, hotel, rental car company, tour, package, or
    cruise operator, or travel insurance company, that participates in Reservations
    Services.
    Attachment D of the "Distributor Sales and Service Agreement" provides the arrangement
    whereby the revenue received by Company A is split between Company A and its distributors, such
    as Petitioner.

-6TSB-A-98(89)S
Sales Tax
December 30, 1998

Applicable Law and Regulations
Section 1101(b) of the Tax Law defines the term "Receipt" in part, as follows:
(3) Receipt. The amount of the sale price of any property and the charge for
any service taxable under this article, valued in money, whether received in money
or otherwise, including any amount for which credit is allowed by the vendor to the
purchaser, without any deduction for expenses or early payment discounts, and also
including any charges by the vendor to the purchaser for shipping or delivery
regardless of whether such charges are separately stated in the written contract, if
any, or on the bill rendered to such purchaser and regardless of whether such
shipping or delivery is provided by such vendor or a third party, but excluding any
credit for tangible property accepted in part payment and intended for resale...
(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.
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."

-7TSB-A-98(89)S
Sales Tax
December 30, 1998

Opinion
Issue #1
Sections 1.G. and 2.A. of the Agreement submitted by Petitioner indicate that Petitioner is
leasing the Hardware, which includes the computer equipment, to its subscribers/customers. The
leasing of the computer equipment constitutes a "sale, selling or purchase" in accordance with
Section 1101(b)(5) of the Tax Law. Therefore, when Petitioner purchases the computer equipment,
it is considered a purchase for resale and does not constitute a retail sale of tangible personal
property subject to sales tax as provided by Sections 1101(b)(4) and 1105(a) of the Tax Law.
Issue #2
Planetarium Travels, Inc., Adv Op Comm T&F, July 13, 1993, TSB-A-93(42)S, dealt with
the taxability of purchases and offsetting credits involving a travel agency (Planetarium Travels) and
a provider of services whose business and methods of operation are very similar to that of Petitioner.
In Planetarium Travels, Inc. the travel agency was eligible for a credit if its number of bookings
equaled a certain set amount. The Opinion stated, in part:
Petitioner’s contract with American [the service provider] specifically
provides that Petitioner is not eligible for a credit unless “SABRE Bookings equal
... the amount of Fixed Monthly Credit Booking level shown above....For the purpose
of the Schedule A, SABRE Bookings means the number of airline, hotel or rental car
segments (which obligates a participant to pay a booking fee to American)”.
Accordingly, Petitioner is not receiving a true discount or a credit but is
actually having a third party pay a part of its obligation to American on its behalf.
Consequently, in accordance with Section 1101(b)(3) of the Tax Law the amount of
the credit which Petitioner receives from American is not deductible when
computing the sales tax.
As provided in Section 1101(b)(3) of the Tax Law, a taxable receipt includes the amount for
which a credit is allowed by a vendor to a purchaser. It should be noted that the relevant credit at
issue in this Advisory Opinion is not a credit against Petitioner’s shortfall fee, but a credit against
the Monthly Fixed Charges charged to Petitioner’s subscribers. As in Planetarium Travels, Inc.,
supra, the credit allowed by Petitioner against the Monthly Fixed Charges is based on the number
of bookings made by a subscriber through the CRS, and Petitioner receives payments from a third
party, Company A, with respect to these bookings. Accordingly, based on Section 1101(b)(3) of the

-8TSB-A-98(89)S
Sales Tax
December 30, 1998

Tax Law and Planetarium Travels, Inc., supra, Petitioner must collect sales tax on the full amount
of the "Monthly Fixed Charges" with respect to any customer/subscriber.

DATED: December 30, 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.