The New York Department of Taxation and Finance recently reviewed a request for an advisory opinion (TSB-A-24(8)S) concerning the taxability and the application of New York sales and use tax regarding the use of a company's web portal. The question was whether these charges would be subject to New York sales tax. After careful consideration, the NYDTF concluded that fees for access to the company’s prewritten software qualify as taxable sales. However, additional charges for optional services such as custom programming, data entry, and training are exempt from sales tax if these fees are reasonable and itemized separately on the petitioner’s invoice.
The Petitioner's Sales Tax Question
In this case, the Petitioner operates a web-based platform designed for property owners and building management companies. The portal enables users to prepare, submit, and review paperless applications related to purchasing, leasing, or refinancing of residential properties. The software facilitates collaboration among geographically dispersed parties to help them work together in real time.
The business provides various services as part of its standard offering. These include software installation, configuration, hardware maintenance, data backup, and customer support. Customers register their properties on the platform and create customized application packages for their buildings. Each application is tailored to the specific needs of the transaction and the building association’s requirements. Applicants access the portal via unique login credentials to complete and sign forms electronically.
It is also important to note that the company offers more personalized services, such as creating customized workflows, developing fee structures, and branding the portal with the customer’s logos and colors. A set fee covers these services, along with initial support and consulting. Additional optional services, including custom programming, form creation, and data entry, are available for separate fees and itemized on invoices.
The DTF’s Opinion – New York Sales Tax on Prewritten Software vs. modifications or customization
The New York Department of Taxation and Finance concluded that the Petitioner’s charges to access and use of its portal are akin and constitute the sale of prewritten software which is subject to sales and use tax in the state of New York. Under N.Y. Tax Law § 1105(a) and N.Y. Tax Law § 1101(b)(6), prewritten software is software not designated to the specifications of a particular user or purchaser. This provision imposes sales tax on prewritten software, whether downloaded or accessed remotely via the cloud, regardless of its form. According to N.Y. Comp. Codes R. & Regs. tit. 20, § 526.7(a)(3), prewritten software is taxable as long as it provides a standardized function to multiple users.
Even when multiple prewritten software programs are combined, such software would still qualify as prewritten software under Tax Law § 1101(b)(14). The sale of prewritten software has been interpreted to cover various scenarios, such as fees for accessing “loan origination and processing services” that allow customers to complete and print loan documents; (b) fees for accessing forms that users can fill out and download; and (c) licenses for software that enables users to upload and edit images.
The business’s web portal services fit the definition of taxable prewritten software under New York law because the platform provides a standardized function to multiple users, allowing them to prepare, submit, and process applications. While the portal offers some customizable features, these adjustments do not change the fact that the core service is prewritten software accessible by all customers in the same general format. Just as prior rulings have found that access to loan processing services, form-filling platforms, and image-editing software constitutes taxable prewritten software, the Petitioner's web portal similarly falls under N.Y. Tax Law § 1105(a).
The Department reached a different conclusion regarding the optional custom programming, data entry, and training services, finding them exempt from New York sales tax. Certain personal and professional services, including custom programming, are exempt from sales tax if such customizations are billed separately and are separately stated from the taxable prewritten software.
The Department stressed the importance of separately stating these optional services on the invoice, as required under N.Y. Comp. Codes R. & Regs. tit. 20, § 527.5(a). If the fees for non-taxable services are bundled with the taxable software charges, the entire charge may be subject to sales tax.
The department also provided some insight as to the applicability of local sales tax; this would depend on the location of Petitioner’s customers’ employees that either use or direct the use of the software. If the software is used within the state and outside of the state, a portion of the sale would be sourced into New York and be subject to sales tax, based upon an allocation of use within New York.
Concluding Thoughts
Overall, we agree with the state’s analysis of the aforementioned advisory opinion. However, this raises two themes that we see our clients and prospective clients struggling with. First, applicability of sourcing of software. Second, the state discusses the difference between prewritten software and customized/modification or enhancements to prewritten software.
Therefore, it is recommended to get in touch with one of our New York attorneys in an effort to consult and review your product offerings and invoices. By doing so, we will be able to give preemptive support, so that your business avoids New York sales and use tax audits, as well assist in structuring your invoices and service agreements in an effort to limit your sales tax exposure.