Is a Web site development company's charge for consulting on, designing, and building a client's Web site subject to New York sales tax, and does the developer owe tax on the software it buys or writes in-house to do that work?

Plain-English summary

Alan J. Goldstein/The Computer Studio designs and builds Web sites for clients — writing copy, designing pages and artwork, coding HTML and scripts, and building databases — then uploads the finished site to a server run by an outside Internet Service Provider (ISP), or occasionally delivers it on physical media. He asked whether his charges for this work, and the software he uses to do it, are subject to New York sales and use tax.

Web site development itself is not taxed. The Department confirmed a now well-settled line of its own opinions: designing, consulting on, and building a Web site — regardless of whether the site is used for advertising, e-commerce, or other communications and support functions — is not one of the services the Tax Law specifically lists as taxable. So Petitioner's charges to clients for this work are not subject to sales or use tax, and if Petitioner ever starts reselling ISP hosting fees to clients at cost, those pass-through hosting charges aren't taxable either.

The software Petitioner buys to do the work is a different story. Petitioner's own purchases of pre-written (off-the-shelf) software used in building sites are taxable retail purchases of tangible personal property, just like buying any other equipment for the business. Software custom-built to Petitioner's own specifications is not taxed. And software Petitioner writes in-house for his own use isn't subject to use tax at all — unless Petitioner also sells that same kind of software to others in the regular course of business, in which case use tax applies based only on the cost of the physical medium (like a disk) the software is stored on.

What this means for you

Web designers and developers

Your core service — designing, building, and delivering a client's Web site — is not taxable in New York, whatever the site will be used for. But don't assume that immunity extends to your own supply purchases: any pre-written software you buy to help you do the work is taxed like ordinary business equipment. If you write software yourself and only use it internally (never selling it), you generally don't owe use tax on it, but that protection disappears if you also sell similar software as a product.

Business owners hiring a web developer

If you're paying someone to design and build your company's Web site, that charge is not subject to New York sales tax, regardless of whether the site promotes your business, sells product online, or is a purely internal Intranet/Extranet tool.

Accountants and tax professionals

The opinion cleanly separates the service (Web site design/development, nontaxable, following Posmantier, K2 Design, Rolland, and Ski Soft) from the inputs (software purchases, taxable under ordinary retail-sale-of-tangible-personal-property rules per TSB-M-93(3)S). Watch the custom-vs-prewritten software line closely: even a custom-modified prewritten program stays taxable prewritten software unless the customization charge is reasonable and separately stated on the invoice.

Common questions

Q: Is charging a client to build their Web site subject to New York sales tax?
A: No. Web site design and development services are not among the enumerated services the Tax Law taxes, regardless of the site's purpose.

Q: What about hosting fees I pass along from an outside ISP?
A: Also not taxable, per this and earlier opinions (CAV Corp/Stone Soup Multimedia; Ski Soft) — hosting fees aren't a taxable enumerated service and aren't rent for tangible personal property.

Q: Do I owe tax when I buy off-the-shelf software to help design sites?
A: Yes. That's a taxable retail purchase of tangible personal property, just like buying any other tool for your business. Truly custom software built to your own specifications is not taxed.

Q: What if I write my own software in-house and just use it myself?
A: No use tax applies, unless you also sell that same or similar software to others in the regular course of business — then use tax applies, but only on the cost of the disk, tape, or other medium the software is on, not the software's value.

Q: Can I rely on this ruling for my own web design business?
A: The underlying "Web site development is nontaxable" rule reflects a settled, repeatedly-confirmed Department position across several opinions, but this specific document is binding only for Alan J. Goldstein/The Computer Studio on the facts described. Confirm your own facts match before relying on it.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4) (definition of "retail sale")
• Tax Law § 1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law § 1101(b)(6) (tangible personal property, incl. prewritten software)
• Tax Law § 1101(b)(14) (definition of "pre-written computer software")
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c) (tax on enumerated services)
• Tax Law § 1110 (use tax, incl. software written by its own user for sale)
• Tax Law § 1115(a)(35) (exemption for computer hardware used in designing/developing software or Web sites for sale)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• 20 NYCRR § 526.6(c)(7) (property used in a nontaxable service is not purchased for resale)
• TSB-M-93(3)S, March 1, 1993 (taxability of computer software and related services)

Prior rulings referenced:

• David H. Posmantier, Adv Op Comm T&F, June 7, 1999, TSB-A-99(31)S
• K2 Design Incorporated, Adv Op Comm T&F, July 23, 1997, TSB-A-97(43)S
• Pat Rolland, Adv Op Comm T&F, July 23, 1997, TSB-A-97(41)S
• Ski Soft, Inc. d/b/a Ski Areas of New York Internet Publishing Services, Adv Op Comm T&F, June 25, 1997, TSB-A-97(35)S
• CAV CORP d/b/a Stone Soup Multimedia, Adv Op Comm T&F, Dec. 29, 1997, TSB-A-97(87)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a01_21s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(21)S
Sales Tax
July 31, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S990622C

On June 22, 1999, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Alan J. Goldstein/The Computer Studio, 2 Pennsylvania Avenue, Tuckahoe, NY
10707.
The issues raised by Petitioner, Alan J. Goldstein/The Computer Studio, are as follows:
1) Whether receipts from the sales of Petitioner’s Web site development services are subject
to sales and compensating use taxes.
2) Whether the purchase by Petitioner of computer software for use in its Web site
development services, or the use by Petitioner of software it develops in-house, is subject to sales
or compensating use tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is engaged in the business of advertising and Web site development for companies
located both within and outside of New York State. The Web sites Petitioner develops may be used
for purposes of advertising and promotion (the most common application), Internet commerce and
other communications and support functions.
A Web site is a series of linked pages that may be accessed by anyone connected to the
Internet using a computer with World Wide Web browser software. When operational, the Web site
will usually reside on a remote server that is on the premises of, and is operated by, a third party
Internet Service Provider (ISP). The ISP usually provides the following services:
–

Operates and maintains the computers that the World Wide Web server software runs
on, including system back-ups.

–

Maintains other software, such as database software and programming languages,
which may interact with the Web site. This other software may run on the same
machine as the Web server, or on a different machine located at the ISP’s facility.

–

Operates networking facilities to allow the Web server and other supporting software,
as well as Petitioner’s clients’ Web sites, to be accessed by anyone connected to the
Internet.

-2­
TSB-A-01(21)S
Sales Tax
July 31, 2001

The ISP is a separate company from Petitioner and its clients, and may be located either
within New York State or outside of it. Currently, Petitioner’s clients contract directly with the ISPs
for the above services. In the future, Petitioner may contract to resell the services of an outside ISP
to its clients. Once a client’s ISP account is activated and the client is given an Internet address by
the ISP, Petitioner places the Web site on a server which stores the site for access by users of the
World Wide Web. Once the Web site exists on the server, it can be accessed by the public from
around the world.
Petitioner also anticipates developing private Web sites at some time in the future, which will
make use of Web servers and browsers that work the same way they do on the World Wide Web.
These sites will allow potential client companies to distribute private business information to
authorized users only, such as employees (Intranet) and external customers and suppliers (Extranet).
They will generally be segregated from a client’s public Web site as described above.
The Web sites Petitioner develops may contain any combination of the following elements:
–

Pages which contain text and artwork, and are formatted using HTML (a markup
language understood by the browser that determines the way the items will appear on
the page).

–

Embedded programming (scripts) within the HTML pages that may be executed by
the viewer’s browser software, or by software operating on the server at the ISP’s
facility.

–

Software programs and databases that reside with the ISP and interface with Web
pages belonging to the Web site.

–

Software programs that Web pages download to the viewer’s machine, to be executed
there.

–

Software interfaces that interact with applications and/or databases that reside on
computers located at the clients’ facilities.

Petitioner’s Web site development services may include any combination of the following
services:
–

Consulting on business strategy and Web site design.

–

Writing of copy (text), page design and development of artwork for the Web site.

-3­
TSB-A-01(21)S
Sales Tax
July 31, 2001

–

Creating pages for the Web site using HTML, optionally including scripts to be
executed on the viewer’s browser and/or on the server.

–

Writing programs in any of a variety of computer languages and setting up databases.

Petitioner’s Web sites are transferred to its clients in any of the following ways:
–

Uploaded to the ISP’s computer over the Internet (this is the most common method).

–

Delivered to the client via magnetic or other media.

–

Delivered to the ISP via magnetic or other media (rare).

Petitioner and/or its clients are provided a password by the ISP in order to maintain some
control over the server, such as uploading or deleting files, creating file directories, changing
permissions and the like. These tasks are all handled over the Internet. At no time does Petitioner
or its clients actually operate the servers locally. There are many aspects of system operation that
Petitioner and its clients are not able to perform as a result of restrictive permissions set by the ISP,
and/or lack of remote support for those functions.
Most often, the servers and other equipment on the ISP’s premises are owned by the ISP and
are concurrently used by many of the ISP’s customers. Petitioner’s clients may opt to lease a
dedicated server owned by the ISP if there is a lot of activity at their Web sites. One year agreements
of this nature are common, although they can also be on a month to month or longer term basis.
Petitioner’s clients may also purchase their own server, to be operated by the ISP on the ISP’s
premises, using the ISP’s networking facilities and other services.
Applicable Law and Regulations
Section 1101(b) of the Tax Law states, in part:
When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by section
eleven hundred ten, the following terms shall mean:
*

*

*

(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

-4­
TSB-A-01(21)S
Sales Tax
July 31, 2001

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.
(6) Tangible personal property. Corporeal personal property of any nature.
. . .Such term shall also include pre-written computer software, whether sold as part
of a package, as a separate component, or otherwise, and regardless of the medium
by means of which such software is conveyed to a purchaser. . . .
*

*

*

(14) Pre-written computer software. Computer software (including
pre-written upgrades thereof) which is not software designed and developed by the
author or other creator to the specifications of a specific purchaser. The combining
of two or more pre-written computer software programs or pre-written portions
thereof does not cause the combination to be other than pre-written computer
software. Pre-written software also includes software designed and developed by the
author or other creator to the specifications of a specific purchaser when it is sold to
a person other than such purchaser. Where a person modifies or enhances computer
software of which such person is not the author or creator, such person shall be
deemed to be the author or creator only of such person's modifications or
enhancements. Pre-written software or a pre-written portion thereof that is modified
or enhanced to any degree, where such modification or enhancement is designed and
developed to the specifications of a specific purchaser, remains pre-written software;
provided, however, that where there is a reasonable, separately stated charge or an
invoice or other statement of the price given to the purchaser for such modification
or enhancement, such modification or enhancement shall not constitute pre-written
computer software.

-5­
TSB-A-01(21)S
Sales Tax
July 31, 2001

Section 1105(a) of the Tax Law imposes sales tax on the “receipts from every retail sale of
tangible personal property, except as otherwise provided in this article.”
Section 1105(c) of the Tax Law imposes sales tax upon receipts from the sales, except sales
for resale, of certain enumerated services.
Section 1110 of the Tax Law provides, in part:
(a) Except to the extent that property or services have already been or will be
subject to the sales tax under this article, there is hereby imposed on every person a
use tax for the use within this state . . . except as otherwise exempted under this
article . . . (F) of any computer software written or otherwise created by the user if
the user offers software of a similar kind for sale as such or as a component part of
other property in the regular course of business . . . .
*

*

*

(g) For purposes of clause (F) of subdivision (a) of this section, the tax shall
be at the rate of four percent of the consideration given or contracted to be given for
the tangible personal property which constitutes the blank medium, such as disks or
tapes, used in conjunction with the software, or for the use of such property, and the
mere storage, keeping, retention or withdrawal from storage of computer software
described in such clause (F) by its author or other creator shall not be deemed a
taxable use by such person.
Section 1115 of the Tax Law provides, in part:
(a) Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*

*

*

(35) Computer system hardware used or consumed directly and
predominantly in designing and developing computer software for sale or in
providing the service, for sale, of designing and developing internet websites.
*

*

*

-6­
TSB-A-01(21)S
Sales Tax
July 31, 2001

(o) Services otherwise taxable under subdivision (c) of section eleven
hundred five or under section eleven hundred ten shall be exempt from tax under this
article where performed on computer software of any nature; provided, however, that
where such services are provided to a customer in conjunction with the sale of
tangible personal property any charge for such services shall be exempt only when
such charge is reasonable and separately stated on an invoice or other statement of
the price given to the purchaser.
Section 526.6(c)(7) of the Sales and Use Tax Regulations provides:
Tangible personal property purchased for use in performing a service not
subject to tax is not purchased for resale.
Technical Services Bureau Memorandum, TSB-M-93(3)S, March 1, 1993, pertaining to the
taxability of computer software and certain related services provides, in part:
Effective September 1, 1991, State and local sales and compensating use
taxes are imposed on the sale or use of prewritten computer software and certain
related services.
The effect of this change in the Tax Law is to broaden the types of computer
software that are subject to sales and use taxes. . . . certain software previously
considered "custom" may now be considered prewritten computer software and
subject to such taxes. . . .The only software that is exempt from sales and use taxes
under the new law is software designed and developed to the specifications of a
specific purchaser.
Prewritten computer software is any computer software that is not designed
and developed by the author or other creator to the specifications of a specific
purchaser.
*

*

*

Software that was originally designed and developed to the specifications of
a specific purchaser (i.e., “custom” software) loses its identity as such and becomes
prewritten software, subject to tax, if and when it is sold to someone other than the
person for whom it was specifically designed and developed. . . .
Prewritten software is subject to tax whether sold as part of a package or
separately. Software created by combining two or more prewritten programs or

-7­
TSB-A-01(21)S
Sales Tax
July 31, 2001

portions of prewritten programs is still prewritten software subject to tax. The
medium by which the software is transferred to the purchaser has no effect on the
software’s taxability. Thus, prewritten software is taxable whether sold, for example,
on a disk, tape or by electronic transmission over telephone lines.
Prewritten software, even though modified or enhanced to the specifications
of a specific purchaser, remains prewritten software subject to tax. However, if a
charge for the custom modification or enhancement is reasonable and separately
stated on the invoice or billing statement, then the separately stated charge for the
custom modification or enhancement is not subject to tax.
The incidental use of a development language (e.g., COBOL, BASIC, C, etc.)
or of libraries of "prewritten" functions or routines in designing and developing a
"custom" software program to the specifications of a specific purchaser will not, in
and of itself, make the sale of an otherwise custom program taxable. The "custom"
program must be examined as a whole to determine whether it is exempt from tax.
If the prewritten components of a custom program are sold separately, their sale is
subject to tax.
*

*

*

Use tax generally applies to taxable uses of prewritten computer software in
the same manner that the use tax applies to uses of other tangible personal property,
except that: (1) no use tax is imposed on software used by its author if the author
does not offer similar software for sale in the regular course of business, and (2)
where software is used by its author and the author does sell the same or similar
software in the regular course of business, use tax applies and is computed on the
cost of the medium (floppy disk, magnetic tape, etc.) that contains or is used in
conjunction with the program.
Opinion
Petitioner designs and creates Web sites which, at the end of this process, exist as computer
text, graphics and underlying programming code. Petitioner’s Web sites are designed to interact with
the Internet by means of coded instructions that are understood and interpreted by a viewer’s
browser. The Web sites are used by Petitioner’s client companies for purposes of advertising and
promotion, Internet commerce and other communications and support functions.
The services which Petitioner provides its clients include any combination of consulting,
page design/creation, and development of artwork for the Web site. After the site is designed, it is

-8­
TSB-A-01(21)S
Sales Tax
July 31, 2001

uploaded by Petitioner to an Internet Service Provider’s (ISP) server or to Petitioner’s client’s server,
located on the premises of and operated by an ISP. The Web site can then be accessed by anyone
connected to the Internet using browser software. The Web site may also be delivered via magnetic
or other media either directly to Petitioner’s clients or, rarely, to an ISP. Currently, Petitioner does
not maintain servers or host Web sites for fees, but in the future it may contract to resell these
services purchased from outside ISPs to its clients. Also in the future, Petitioner may develop private
Web sites which will allow its clients to distribute private business information to authorized users
only.
The Web site development service that Petitioner provides to its clients, which involves
consulting, designing and the creation of a Web site by Petitioner, and in many cases the transfer of
Web sites to remote servers, somewhere on the Internet and accessible by the public, is not included
among the enumerated services that are subject to New York State and local sales and compensating
use taxes. This is so, regardless of whether the Web sites are created for purposes of advertising or
promotion, Internet commerce or other communications and support functions (see David H.
Posmantier, Adv Op Comm T&F, June 7, 1999, TSB-A-99(31)S; K2 Design Incorporated, Adv Op
Comm T&F, July 23, 1997, TSB-A-97(43)S; Pat Rolland, Adv Op Comm T&F, July 23, 1997,
TSB-A-97(41)S; Ski Soft, Inc., d/b/a Ski Areas of New York Internet Publishing Services, Adv Op
Comm T&F, June 25, 1997, TSB-A-97(35)S). Accordingly, Petitioner’s charges to its clients for
such services are not subject to sales or compensating use tax. Any future charges for hosting fees
charged by an ISP that Petitioner pays and passes through to its clients are not subject to sales or
compensating use tax (see CAV CORP d/b/a Stone Soup Multimedia, Adv Op Comm T&F,
December 29, 1997, TSB-A-97(87)S; Ski Soft, Inc., supra). The hosting fees are not charges for
services that are included among the enumerated services that are subject to tax. Additionally, such
fees are not fees for the rental of tangible personal property.
Petitioner’s purchase of prewritten software for use in performing its Web site development
service is subject to tax under Section 1105(a) of the Tax Law as a purchase at retail of tangible
personal property. See Section 1101(b)(6) of the Tax Law. The purchase by Petitioner of custom
software designed and developed to Petitioner’s specifications is not taxable. Prewritten software,
even though modified or enhanced to the specifications of a specific purchaser, remains prewritten
software subject to tax. However, if a charge for the custom modification or enhancement is
reasonable and separately stated on the invoice or billing statement, then the separately stated charge
for the custom modification or enhancement is not subject to tax. See TSB-M-93(3)S.
Petitioner’s use in its Web site development service of software that it develops in-house is
not subject to compensating use tax if similar software is not offered for sale by Petitioner in the
regular course of business. If similar software is offered for sale in the regular course of business,

-9­
TSB-A-01(21)S
Sales Tax
July 31, 2001

then Petitioner’s use of the software would be subject to tax based on the cost of the medium that
contains or is used in conjunction with the program. See TSB-M-93(3)S.

DATED: July 31, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.