Are charges for web site design and development services subject to New York State sales tax?

Plain-English summary

Pegasus Internet, Inc. designs and builds websites for clients located both in and outside New York, delivering the finished product by placing it on a hosted server, and occasionally by sending the client a copy on a compact disk. The Department confirmed a long, consistent line of its own prior rulings (going back to 1996): designing and creating a website — for advertising, e-commerce, intranets, or any other purpose — is neither a sale of tangible personal property nor one of the specific taxable services listed in the sales tax law, so charges for it aren't taxable at all, regardless of whether the site is uploaded to the web or handed over on a CD-ROM as an incidental part of the same project.

There are, however, real tax consequences on the input side. If Pegasus buys pre-written software to help it build websites, that purchase is itself taxable (custom software Pegasus develops for its own use is not). If a CD-ROM is billed under a wholly separate contract from the web design service itself, that CD-ROM charge is taxable. And any blank CD-ROMs, disks, or similar media Pegasus buys to deliver its (nontaxable) web design work don't qualify for the resale exemption, so Pegasus itself owes tax on those media purchases. The Department also flagged a relevant law change: effective March 1, 2001, computer hardware used directly and predominantly in providing website design/development services became separately exempt from tax under § 1115(a)(35).

What this means for you

Web design and development companies

Your design and development service charges aren't subject to New York sales tax, no matter how the finished site is delivered — uploaded, or handed over on physical media as part of the same engagement. But watch two traps: (1) if you sell the client a CD-ROM under a separate agreement from the design work, that charge is taxable; and (2) the blank media you buy to deliver your own nontaxable services doesn't qualify for the resale exemption, so you owe use tax on it yourself.

Businesses purchasing web design services

You shouldn't be charged sales tax on a genuine web design and development engagement, whether delivered online or on physical media as part of that same project.

Accountants and tax professionals

This opinion is a clean restatement of a settled multi-year line (TSB-A-01(21)S back through TSB-A-97(35)S/(41)S/(43)S and TSB-A-99(31)S) holding web design/development non-taxable, combined with the EMCON incidental-media-transfer rule and the § 1115(a)(35) hardware exemption (effective March 1, 2001) for equipment used directly and predominantly in providing the service.

Common questions

Q: Is web site design and development taxable in New York?
A: No — it's neither a sale of tangible personal property nor an enumerated taxable service.

Q: Does delivering the finished site on a CD-ROM change that?
A: Not if the CD-ROM is delivered as an incident to the same nontaxable design service — but a CD-ROM billed under a separate contract is itself taxable.

Q: Is the developer's purchase of pre-written software used to build sites taxable?
A: Yes — pre-written software the developer buys is taxable at purchase, unlike genuinely custom software the developer creates for its own use.

Q: Can the developer buy blank CD-ROMs/disks tax-free under the resale exemption?
A: No — since they're used to deliver a nontaxable service, they don't qualify for the resale exemption and are themselves subject to tax.

Q: Is computer hardware used to design and develop websites exempt?
A: Yes, effective March 1, 2001, hardware used directly and predominantly for that purpose is exempt under § 1115(a)(35).

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1101(b)(6) (tangible personal property; prewritten software)
• Tax Law § 1105(a), (c) (retail sales; enumerated services)
• Tax Law § 1115(a)(35) (website design/development hardware exemption)
• 20 NYCRR § 526.6(c)(7) (resale exemption inapplicable to property used for nontaxable services)
• TSB-M-93(3)S (Computer Software Sales/Use Tax)

Prior opinions cited:

• TSB-A-01(21)S, Alan J. Goldstein/The Computer Studio, July 31, 2001
• TSB-A-99(31)S, David H. Posmantier, June 7, 1999
• TSB-A-97(43)S, K2 Design Incorporated, July 23, 1997
• TSB-A-97(41)S, Pat Rolland, July 23, 1997
• TSB-A-97(35)S, Ski Soft, Inc., June 25, 1997
• TSB-A-96(79)S, EMCON, Dec. 16, 1996

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a02_13s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(13)S
Sales Tax
June 25, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000406A

On April 6, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Pegasus Internet, Inc., 333 Seventh Avenue, New York, NY 10001.
The issue raised by Petitioner, Pegasus Internet, Inc., is whether its charges for Web site
design and development services are subject to New York State sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is located in New York and provides Web site design and development services
to customers located both within and outside New York. Delivery of the finished Web site is
accomplished by placing the site on a hosted server. On occasion, Petitioner will send its customer
a copy of the Web site on a Compact Disk.
Applicable Law and Regulations
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 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.
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.

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TSB-A-02(13)S
Sales Tax
June 25, 2002

Opinion
Petitioner designs and develops Web sites which are placed on a hosted server. On occasion,
Petitioner will send its customer a copy of the Web site on a compact disk. The Web site
development provided by Petitioner to its clients, which involves designing and the actual creation
of a Web site, does not constitute the sale of tangible personal property and is not included among
the enumerated services that are subject to New York State and local sales and compensating use
taxes. See Alan J. Goldstein/The Computer Studio, Adv Op Comm T & F, July 31, 2001,
TSB-A-01(21)S. This is so, regardless of whether the Web sites are created for purposes of
advertising or promotion, Internet commerce, intranets 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.
Petitioner’s charges for Web site development are not taxable whether the Web site is uploaded
electronically to the World Wide Web or delivered to a client in the form of a CD-ROM or other
media. When a client purchases Web site development from Petitioner and receives the Web site
in the form of a CD-ROM or other media, the transfer of the medium such as a disk or tape to the
client as an incident to the Web site development is not subject to tax under Section 1105(a) of the
Tax Law. See EMCON, Adv Op Comm T&F, December 16, 1996, TSB-A-96(79)S respecting the
transfer of items as an incident to nontaxable engineering services. CD-ROMs or other media such
as disks or tapes purchased by Petitioner for use in delivering the non-taxable Web site development
services to customers are not eligible for the resale exemption and are subject to sales and
compensating use tax if purchased or used by Petitioner in New York. See Section 526.6(c)(7) of
the Sales and Use Tax Regulations.
In the event Petitioner supplies its client with a CD-ROM pursuant to a separate contract or
agreement apart from the contract or agreement for the sale of the Web site design and development
service, then the charge for the CD-ROM would be taxable under Section 1105(a) of the Tax Law.
See EMCON, supra.
The purchase by Petitioner of pre-written software for use in performing its Web site
development services 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. Pre-written
software, even though modified or enhanced to the specifications of a specific purchaser, remains
pre-written software subject to tax. However, if a charge for the customization or enhancement is
reasonable and separately stated on the invoice or billing statement, then the separately stated charge
for the customization or enhancement is not subject to tax. See Technical Services Bureau
Memorandum TSB-M-93(3)S, dated March 1, 1993, entitled State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software.

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TSB-A-02(13)S
Sales Tax
June 25, 2002

Also, it should be noted that Section 1115(a)(35) of the Tax Law was amended, effective
March 1, 2001 to provide an exemption for hardware used directly and predominantly in providing
the service, for sale, of designing and developing Internet Web sites.

DATED: June 25, 2002

NOTE:

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

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