New York – Taxability of Charges for Online Software Tool

SALT Report 3035 – The New York Division of Taxation issued an advisory opinion regarding whether a Taxpayer’s online software assessment tool and the reports it generates are subject to sales and use taxes. The Taxpayer’s software is used to gather information using a structured online interview process. The interview questions are designed to evaluate the features of a workplace, such as employee health policies, services, and facilities. The software tool analyzes the interview responses based on a scoring mechanism built into the software.  Once the interviews are completed a report is generated so that an employer can better manage its employee health services.

The Taxpayer offers this service in one of two ways:

  • The Taxpayer uses the software to evaluate the interview responses and generates a report that he then sells to the customer; or
  • The Taxpayer sells a single-use or multiple-use license, which provides access to the software tool and the online interview system, to a third-party consultant.  The consultant will use the tool and interview responses to generate a report that it then sells to its customer.

In its response, the Department stated that when the Taxpayer sells access to the software to a third-party consultant, it is considered the sale of prewritten computer software under Tax Law §§ 1101 (b)(6).  Therefore, the Taxpayer must collect sales tax on these sales based on the rate in effect in the location where the third-party accesses the software.  Also, because the third-party consultants are not re-selling the license to use the software, the Taxpayer may not accept a resale certificate for those purchases.

The Taxpayer’s service of gathering data from its customer and using that data to create reports generated by the software is considered a personal or individual information service that would typically be subject to sales tax under Tax Law §1105(c)(1).  However, because the Taxpayer adds to the “intelligence” of the original data by analyzing it and presenting it in a report and the Taxpayer does not provide the information or reports to anyone else, the Taxpayer’s activities are considered personal or individual in nature and are excluded from the sales tax.  Therefore, in this situation, the Taxpayer is not required to collect sales tax when selling reports to a customer.

Finally, the Taxpayer’s own use of the software is subject to use tax because the Taxpayer offers the software for sale in the regular course of business.  The use tax is calculated on the amount paid for tangible personal property such as, discs or tapes, used in conjunction with the software. However, because the Taxpayer does not convert the software to a tangible medium, as it is only available online, the use tax would be calculated at zero.

For Further Information

New York Commissioner of Taxation and Finance – TSB-A-13(30)S