The New York Department of Taxation and Finance recently issued an Advisory Opinion TSB-A-24(9)S. This opinion addressed the taxability of services related to a web-based trading platform for foreign exchange transactions. The Petitioner sought clarification on whether annual license and transaction fees would be subject to New York State sales tax. In its opinion, the Department concluded that most of the fees are taxable. Certain reasonable and separately stated charges, such as user support and third-party integration fees, may be exempt from sales tax.
Sales Tax Implications for Charges on Foreign Exchange Trading Platforms
Petitioner operates a web-based electronic trading system for currency trading in the foreign exchange market. The platform serves a range of financial professionals. Users are classified as either Liquidity Providers (Makers), who provide liquidity to the market, or Customers (Takers), who take liquidity. The platform facilitates real-time trading, review, and approval of trade proposals between these users. Various fees are imposed for access and use of the system, including the following:
- The Annual License Fee is a flat charge imposed on both Makers and Takers, providing access to the trading system. The fee is not dependent on the number of individual users, and Petitioner currently collects sales tax on the license fee.
- The User/Transaction Support Charges are monthly fees based on the number of users and cover customer support and training services. This fee is sourced from the user’s location, and sales tax is collected accordingly.
- Transaction Charges are imposed based on the system’s trading functionalities. Makers are charged a fee for executed transactions, while Takers are not charged for requesting quotes.
- In addition, Other Charges are applied, including fees for Secure ID Tokens required to access the system and additional functionalities.
The NYDTF’s Sales Taxability Analysis
The New York Department of Taxation and Finance analyzed the taxability by applying N.Y. Tax Law § 1105(a), the general taxation provision, which imposes sales tax on receipts from every retail sale of tangible personal property. Under N.Y. Tax Law § 1101(b)(6), prewritten computer software is classified as tangible personal property. Software is taxable regardless of the delivery method, including cloud-based or electronically accessed platforms. Furthermore, N.Y. Tax Law § 1101(b)(5) and corresponding regulation 20 NYCRR 526.7(e)(4) define a taxable sale to include the “right to use” software.
Petitioner’s customers purchase access to the trading software to establish credit lines, request trade quotes, and execute trades. The Department concluded that this constitutes the sale of prewritten software. Thus, the charges for Annual License Fees, Transaction Charges, and other system-related fees are subject to sales tax. As tangible personal property, charges for Secure ID Tokens are also taxable.
These software sales are based on the location of the customers' employees who use the software. When employees within and outside New York State access software, Petitioner must allocate and collect sales tax based on the proportion of users in New York.
However, the User/Transaction Support Charges are treated differently. These charges are exempt from sales tax if they are separately stated and reasonable, per N.Y. Tax Law § 1115(o).
Additionally, providing a monthly report to Makers is considered an information service, as it allows for detailed data on the Maker's market statistics and performance. Under N.Y. Tax Law § 1105(c), information services are generally taxable unless the service is "personal or individual in nature" and the data is not substantially incorporated into shared reports.
The Department noted that while the reports are customized, they also include benchmarking data comparing the performance of different Makers. The report may remain exempt from tax if the comparative data is sufficiently anonymized and a minimal part of the service and considered by a court to be "de minimis."
The de minimis exception refers to situations where an incidental part of a service does not fundamentally change the nature of the service as a personal or individual information service. While the DTF did not provide a specific legal definition in this advisory opinion, it is commonly understood to mean that minor or insignificant elements do not alter the overall tax classification of the service.
To apply in this instance, the benchmarking must be insignificant relative to the overall service. The DTF noted that whether a part of a service is de minimis is a question of fact for a court, and thus not appropriate for an advisory opinion.
Concluding Thoughts and Next Steps
Three key determinations are at the heart of this advisory opinion. The first two are fairly straightforward and align with previous advisory opinions. First, charges related to the prewritten software for the annual license are taxable, as prewritten software is considered tangible personal property under New York law. Second, User/Transaction Support Charges are exempt from sales tax, provided they are separately stated and reasonable.
The complexity arises with the Other Charges, which the Department classified as informational services. Under New York Tax Law § 1105(c), these services would typically be subject to sales tax unless they are "personal or individual in nature," the comparative benchmarking data provided as part of the service qualifies for the de minimis exception. The challenge lies in determining whether the comparative data is sufficiently anonymized and plays only a minor role, which courts are left to decide on a case-by-case basis.
If you are dealing with similar issues related to New York sales tax and the classification of informational services and application of New York sales tax, our team of experienced New York tax attorneys and professional can provide you with the guidance you need. New York sales and use tax matters can be notoriously complex, but our New York attorneys are well-versed in all facets of tax law. Contact us today to ensure your business remains compliant with New York tax laws.