New York: Accessing of Software via Internet Makes it Taxable!

In New York State Advisory Opinion TSB-A-09(41)S (September 22, 2009), New York concludes the Petitioner’s receipts from licenses for its software are receipts from the sale of prewritten software, which are subject to sales tax to the extent that the software is accessed by the customer’s employees in New York.FACTS

Petitioner is an international software company with an office located in New York. Petitioner has customers and employees in several states including New York. Petitioner licenses a basic software package that is usually further customized to the customer’s needs.

Petitioner’s customers (e.g., insurance companies) use the software to provide rate quotes, insurance contracts, and other insurance documents to insureds and prospective insureds of the customer.

Petitioner provided the following illustration as a typical use of its software: A vehicle owner contacts Petitioner’s customer and indicates that it is interested in purchasing an automobile insurance policy. The customer logs into Petitioner’s software residing on a third party’s server in Virginia using a URL address provided to the customer by Petitioner. The customer enters the vehicle owner’s pertinent information (name, age, sex, location, etc.) into the software via the Internet connection. Petitioner’s software processes the information entered in the system and produces a quote for the insurance policy.

If the vehicle owner indicates that it wants to purchase the policy, the customer can immediately print an insurance ID card on the customer’s printer and the insurance policy will be processed and issued overnight. The policy documents can be printed and mailed to the vehicle owner by the customer or the documents can be e-mailed to the vehicle owner by the customer.

The software (including the custom modifications) may be installed and stored on the customer’s server(s) and is accessed from one or more of the customer’s locations. The customer’s employees may access the software from the location where the software is stored or from other locations both inside and outside the state where the software is stored.

The software may also be installed on servers located within and without New York owned by Petitioner or its agents and accessed by the customer’s employees from within and without New York.

For customers who purchase the software for use on the customer’s servers, Petitioner bills a flat fee for the license to use the base software package.

When the software is stored on servers owned by Petitioner or its agents, Petitioner is responsible for the maintenance of the hardware and the software. In this case, Petitioner charges the customer an additional separately stated "hosting fee."KEY POINTS, ANALYSIS and OPINION

The accessing of Petitioner’s software by Petitioner’s customers constitutes a transfer of possession of the software, because the customer gains constructive possession of the software, and gains the "right to use, or control or direct the use of," the software. See Adobe Systems, Inc Adv Op Comm T & F, November 24, 2008, TSB-A-08(62)S.The location of the code embodying the software is irrelevant. The software is used just as effectively by the customer whether it is stored on the customer’s servers for access by the customer’s employees or is stored on servers owned by Petitioner (or Petitioner’s agents) from which the customer’s employees access the software.

Whether the software is installed on the customer’s server or is stored on Petitioner’s servers, the access and use of the software by the customer’s employees is effectuated. Accordingly, Petitioner's sale of the license to use its basic software package is subject to sales tax under Tax Law §1105(a) regardless of where the software is stored. See Jeffrey J. Coren CPA, TSB-A-09(19)S, May 21, 2009.The situs of the sale for sales tax purposes is the location associated with the license to use (i.e., the location of the customer’s employees that use the software). See Adobe Systems, Inc. supra.

In the present case, if the locations where the customer’s employees will use the software are both in and out of New York State, Petitioner is only required to collect tax based on the portion of the taxable receipts attributable to the employees’ use of the software at locations in New York. (See KPMG LLP, Adv Op Comm T & F, January 31, 2003, TSB-A-03(5)S.) The determination of the proper local tax rate and jurisdiction is also based on the locations associated with the licensees’ use.

Petitioner’s fees for software support encompass defect fixes and software updates and training and help-desk support. Fees for software updates and patches to fix defects are subject to sales tax as the sale of prewritten software. Separately stated and reasonable fees for training and support may be excluded from the receipt subject to tax. (See TSB-M-93(3)S, supra.) However, if a lump sum charge is made to a customer that includes training and support, or if the separate charge for training and support does not reasonably reflect the value of these items, then the entire charge will be taxable.BOTTOM-LINE

Under this Advisory Opinion, if you are selling software or licensing software via the web and allowing customers to access the software, the accessing of the software would constitute a transfer or possession of the software resulting in a taxable sale.

If you have questions regarding your taxability, please contact me at or 612.876.4824 to discuss.

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Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States.  He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect."  For more info, visit his website:

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