How should an out-of-state provider of password-based online database access allocate its taxable receipts between New York and out-of-state customers when it bills a New York address but can't track exactly where each password-holder is physically located?

Plain-English summary

KPMG asked this question on behalf of "XYZ Inc.," an out-of-state provider of integrated financial-industry databases accessed by customers' employees nationwide via password-protected workstation software, modem, or a dedicated wide-area network. XYZ charges a flat monthly fee per password issued (not based on usage time or content accessed), and its customers redistribute those passwords to employees scattered across the country. XYZ can track which customer used how many passwords, but not where each password-holder was physically located when accessing the service — a problem, since it's assumed XYZ's service is taxable as an information service, and New York sales tax is a "destination tax" that only reaches sales delivered to (here, accessed from) a New York location. XYZ proposed letting customers with a New York billing address self-certify an estimated New York-usage percentage on Form ST-121 (Exempt Use Certificate) plus an attached statement.

The Department rejected that specific proposal on a technical ground: Form ST-121 is designed for purchasers claiming an existing statutory exemption or exclusion, but XYZ's service isn't otherwise exempt — the only open question is how much of it is New York-sourced at all, which isn't what an exempt-use certificate is for. So a generic exempt-use certificate plus a vague percentage estimate isn't valid documentation.

Instead, the Department laid out what would work: a signed letter from each customer (or an authorized officer/employee) listing the specific number of passwords assigned to employees at specific named locations, including street addresses for any New York locations — not just a round estimated percentage. A letter with real address-level detail (e.g., "X passwords to our Albany office at [address], Y passwords to our New York City headquarters, Z passwords to our Akron and Memphis offices") gives XYZ an acceptable basis for allocating receipts, absent evidence of fraud or that XYZ knew the letter was false. If a customer's letter doesn't contain that level of detail, XYZ must collect tax on the full amount of that customer's receipts. XYZ must keep these letters (and be able to tie each one to specific sales) for at least three years, and must periodically check with each customer to keep the underlying password/location data current. The Department closed with a broader caveat: whether any particular allocation method is reasonable always depends on the full facts and circumstances of that taxpayer's situation — this letter-based approach worked for XYZ's specific facts, but isn't a universal formula.

What this means for you

Providers of password- or seat-based online services sold nationwide

If you can't track exactly where your service is accessed from, don't rely on a generic exempt-use certificate or a customer's rough percentage guess — get address-level detail on where each customer's users/seats are actually located, in a signed letter, and keep it current.

Businesses buying password/seat-based services with users in multiple states

Be ready to provide your vendor with a detailed breakdown of user locations by address if you want New York (and other-state) sales tax allocated accurately rather than charged on your full bill.

Accountants and tax professionals

This opinion is a useful template for the documentation standard on delivery-location allocation for electronically delivered services — vague percentage certifications don't satisfy the recordkeeping burden under 20 NYCRR § 533.2, but a sufficiently detailed, signed, address-level customer letter can.

Common questions

Q: Can a business use Form ST-121 (Exempt Use Certificate) to document that part of its service is out-of-state and therefore not taxable?
A: Not for this purpose — ST-121 is meant for purchasers claiming a specific statutory exemption, not for allocating receipts between in-state and out-of-state delivery when the service itself isn't otherwise exempt.

Q: Is a customer's estimate like "10% of our users are in New York" good enough documentation?
A: No — the Department specifically found a bare percentage estimate insufficient. It wants address-level detail: specific numbers of users tied to specific named office locations.

Q: What happens if a customer won't provide a detailed location letter?
A: The vendor must collect tax on the full amount of that customer's receipts, since without adequate documentation the transaction is presumed taxable in its entirety.

Citations and references

Statutes and regulations:

• Tax Law § 1132(c)(1) (presumption of taxability; burden of proof)
• Tax Law § 1133(a) (vendor personal liability for tax)
• Tax Law § 1142(4) (authority to prescribe allocation methods)
• 20 NYCRR § 525.2(a) (transactions tax; destination tax)
• 20 NYCRR § 532.4 (exemption certificates; burden of proof)
• 20 NYCRR § 533.2 (recordkeeping; substantiating points of delivery)

Prior rulings referenced:

• Paul R. Comeau, TSB-A-90(43)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a03_5s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(5)S
Sales Tax
January 31, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S010614A

On June 14, 2001, the Department of Taxation and Finance received a Petition for Advisory
Opinion from KPMG LLP, 150 John F. Kennedy Parkway, Short Hills, NJ 07078. Petitioner,
KPMG LLP, provided additional information pertaining to the Petition on April 16, 2002.
The issue raised by Petitioner is, for purposes of determining the applicability of New York
State and local sales and use taxes, what method of allocation and what documentation should an
online provider of Internet services use and maintain as proof of out-of-state delivery of its taxable
services delivered via electronic means to in-state and out-of-state locations where the services are
billed to a New York address.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
XYZ Inc. (“XYZ”), a Delaware corporation with its principal place of business located
outside New York in State X, is a provider of online integrated database services to the financial
community both nationally and internationally. Multiple large-scale databases are combined into
two mainframe information systems, neither of which is located in New York.
XYZ’s databases are accessible from customers’ personal computers (“workstations”) using
passwords provided by XYZ. XYZ provides its customers with proprietary software which allows
the subscribers’ workstations to access XYZ’s mainframe. This software is provided free of charge
when a customer subscribes to one or more of its services. Once connected to the system, the
subscriber receives real-time updates via on-line transmissions. These services are delivered to the
customer through modem connections or through XYZ’s wide-area-network (“WAN”). If delivered
through the WAN, XYZ installs a router at the customer’s location free of charge. XYZ pays for
all communication costs associated with the transmissions.
Subscribers to XYZ’s data service have access to the processing power of XYZ’s
mainframes rather than having to store data at their limited facilities. In order to provide access to
the system, XYZ assigns passwords to its customers based on the number of users. Subsequently,
XYZ’s customers distribute these passwords to employees located throughout the United States.
XYZ charges a set monthly fee for its data service. Such fee is based solely on the number
of passwords XYZ assigns to its customer, and is not dependent on the amount of time the
customer’s employees spend accessing XYZ’s databases or on the type of information they access.
XYZ has the ability to track the databases accessed by their customers but not (1) the information
obtained or reports generated, (2) time spent online, or (3) the location of the employees logging on

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and off its system. XYZ issues bills to its customers based on the number of passwords assigned,
and thus has no need to track such usage.
XYZ’s business practice, which does not individually track any particular user, does not
account for the fact that access to its data service originates from various workstations throughout
the United States. In order for XYZ to determine the taxable base on which to apply sales or
compensating use tax, i.e., taxable services delivered (accessed by customers) in New York,
Petitioner proposes that XYZ have its customers with a New York billing address complete Form
ST-121, Exempt Use Certificate, and attach certain documentation (“the Statement”), based on the
following methodology:
In the Statement, XYZ will indicate the total number of passwords issued to each customer.
Each customer must determine the percentage of passwords issued to employees that utilize the
service in New York versus those employees that utilize the service outside New York. XYZ will
regularly update the Statement to reflect the change in the number of passwords issued to each
customer. This process will allow XYZ to properly charge sales or use tax on those sales that occur
in New York.
In this Petition, Petitioner seeks to establish that for services billed to a New York address
XYZ’s good faith acceptance of such Exempt Use Certificate and Statement should be
acknowledged by the Department of Taxation and Finance as sufficient documentation supporting
the percentage of its exempt sales and the correct application and collection of New York sales or
use tax.
Applicable Law and Regulations
Section 1132(c)(1) of the Tax Law provides, in part:
For the purpose of the proper administration of this article and to prevent
evasion of the tax hereby imposed, it shall be presumed that all receipts for property
or services of any type mentioned in subdivisions (a), (b), (c) and (d) of section
eleven hundred five . . . are subject to tax until the contrary is established, and the
burden of proving that any receipt . . . is not taxable hereunder shall be upon the
person required to collect tax or the customer.
Section 1133(a) of the Tax Law provides:
Except as otherwise provided in section eleven hundred thirty-seven, every
person required to collect any tax imposed by this article shall be personally liable
for the tax imposed, collected or required to be collected under this article. Any such
person shall have the same right in respect to collecting the tax from his customer or
in respect to nonpayment of the tax by the customer as if the tax were a part of the

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purchase price of the property or service, amusement charge or rent, as the case may
be, and payable at the same time; provided, however, that the tax commission shall
be joined as a party in any action or proceeding brought to collect the tax.
Section 1142 of the Tax Law provides, in part:
In addition to the powers granted to the tax commission in this article, it is
hereby authorized and empowered:
*

*

*

(4) To prescribe methods for determining the amount of receipts, amusement
charges, dues or rents and for determining which of them are taxable and which are
nontaxable. . . .
Section 525.2(a) of the Sales and Use Tax Regulations provides, in part:
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*

*

(2) . . . the sales tax is a “transactions tax,” with the liability for the tax
occurring at the time of the transaction. Generally, a taxed transaction is an act
resulting in the receipt of consideration for the . . . rendition of an enumerated
service. The time or method of payment is generally immaterial, since the tax
becomes due at the time of . . . the rendition of such service. . . .
(3) . . . the sales tax is a “destination tax.” The point of delivery or point at
which possession is transferred by the vendor to the purchaser, or the purchaser’s
designee, controls both the tax incidence and the tax rate.
Section 532.4 of the Sales and Use Tax Regulations provides, in part:
(a) General. (1) It is presumed that all receipts for property or service of any
type mentioned in subdivisions (a), (b), (c) and (d) of section 1105 of the Tax Law
. . . are subject to tax until the contrary is established.
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(b) Burden of proof. (1) The burden of proving that any receipt . . . is not
taxable shall be upon the person required to collect the tax and the customer.
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(c) Use of exemption certificates. (1) To enable purchasers entitled to an
exemption from the sales and compensating use tax to avail themselves of the
exemption and for administrative purposes, the Department of Taxation and Finance
provides various exemption certificates. . . . (Emphasis added)
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(e) Exempt use certificate. (1) An exempt use certificate is used to claim
exemption from State and local sales tax on purchases of tangible personal property
or services to be used for an exempt purpose. (Emphasis added)
Section 533.2 of the Sales and Use Tax Regulations provides, in part:
(a) General. (1) For the proper administration of the Sales and Use Tax Law
and to prevent evasion of the sales tax, it is statutorily presumed that all receipts from
sales and purchases of property or services of any type mentioned in subdivisions (a)
through (d) of section 1105 of the Tax Law . . . are subject to the tax until the
contrary is established. The burden of proving that any receipt . . . is not taxable is
on the vendor or the customer. To satisfy his burden of proof, a vendor must
maintain records sufficient to verify all transactions.
*

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(b)(3) The seller must maintain records which substantiate points of delivery
if delivery was made at a place other than his place of business. Such documents
should include receipts from parcel delivery services, common carriers, unregulated
truckers, the United States Postal Service, foreign freight forwarders, and logs from
company vehicles. Such documents must be referenced to specific sales transactions.
Opinion
XYZ is a provider of online integrated database services both nationally and internationally.
XYZ combines multiple large-scale databases into a single mainframe information system accessible
from its customers’ personal computers using passwords provided by XYZ. For purposes of this
Petition, it is assumed that the services XYZ sells are subject to sales tax pursuant to Section
1105(c)(1) or 1105(c)(9)(i) of the Tax Law. Petitioner seeks to establish that for services billed to
a New York address XYZ’s good faith acceptance of such Exempt Use Certificate and Statement
should be acknowledged by the Department of Taxation and Finance as sufficient documentation
supporting the percentage of its exempt sales and the correct application and collection of New York
sales or use tax.

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Since the point of delivery determines taxability, only receipts attributable to the customers
of XYZ who receive the information from XYZ in New York State are subject to the imposition of
sales tax. See Section 525.2(a)(3) of the Sales and Use Tax Regulations. When the information is
delivered by electronic means to customers both within and without New York, sales tax should be
allocated between the two. See Paul R. Comeau, Adv Op Comm T&F, August 20, 1990,
TSB-A-90(43)S.
To avail itself of a specific statutory exemption or exclusion from sales or compensating use
tax to which it is entitled, a purchaser may issue a properly completed exemption document to a
seller. See Sections 532.4(c) and (e) of the Sales and Use Tax Regulations. Since XYZ is not
providing a service specifically exempted or excluded by the Tax Law, the ST-121, Exempt Use
Certificate, is not the appropriate document for its customers to use for New York State sales and
use tax purposes. Petitioner’s proposal for XYZ to accept an Exempt Use Certificate and attached
Statement from its customers in order to determine taxable New York sales is not a valid
methodology.
That portion of XYZ’s receipts from sales which are delivered to and consumed by the
purchaser outside of New York is not subject to New York State and local sales and use taxes.
Usually in such circumstances, the seller’s bills of lading or other shipping documents showing the
out of state delivery of the goods and services are considered sufficient documentation of the
nontaxability of the sales. However, in the case of the electronic delivery of a service, it is more
difficult to ascertain where the service is delivered. Here, since XYZ’s customers access the service
by the use of the passwords supplied by XYZ, XYZ is able to identify which customer has consumed
its product. But, the passwords do not allow XYZ to necessarily know the location from which the
service was accessed or at which location the service was received by the customer. However, XYZ,
as a person required to collect tax (when not in possession of a timely and properly completed resale
or exemption certificate from its customer), is liable for the appropriate amount of tax required to
be collected. See Section 1133(a) of the Tax Law.
Under the above circumstances, a letter from XYZ’s customers regarding the business
locations or other appropriate situs of the employees to whom XYZ’s customers will provide the
passwords needed to access XYZ’s service is relevant evidence in regard to the question of how
XYZ should allocate its receipts from the sale of its information service between in-state and out-of­
state sales. How much weight should be given to such a letter depends in part on the amount of the
detail in the letter. A mere statement or estimate in the letter by a customer who has purchased a
given number of passwords for XYZ’s service that, for example, 10% of the passwords are in
New York and 90% are out-of-state, would not be considered sufficient documentation of out-of­
state delivery or sufficient information for collection of local sales taxes in New York. On the other
hand, a letter by a customer stating that a specific number of passwords are assigned by the customer
to its sales office staff at, for example, 110 State Street, Albany, NY, an additional number of
passwords to its headquarters at 1740 Broadway, New York, NY, and similarly a specified number
of passwords to sales offices in Akron, OH, and Memphis, TN, would form an acceptable basis for

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XYZ to allocate its sales relating to such passwords between New York sales and out-of-state-sales,
absent a showing of fraud or knowledge on the part of XYZ that the contents of the letter are untrue.
Such a letter must be signed by the customer (or the appropriate employee or officer thereof), and
contain a statement by the customer specifying the total number of employees for whom it has
purchased passwords and listing, by location, where those employees are stationed, including the
street address for any New York locations. Such letter should acknowledge that it is being furnished
for the purpose of allowing XYZ to determine the appropriate amount of New York State and local
sales and use taxes due.
If XYZ’s customer furnishes XYZ with a letter which does not contain the required
information, XYZ, as a person required to collect tax, should collect tax on the full amount of
receipts from the sale of its services to the customer. XYZ must keep the letters furnished by its
customers as part of XYZ’s sales tax records, and be able to associate each letter with related sales,
for at least three years after the date of the last sale to which the letter relates. The customer is
required to update the letter if there is a change in the number of passwords that are assigned to
employees stationed in New York or the total number of passwords. In order to continue to rely on
the letter, XYZ should regularly review with its customer the information contained in the letter to
insure that the information is still accurate.
It should be noted that, generally, the determination of whether a proposed method for
apportioning receipts from the sale of online services of the kind described in this Advisory Opinion
between in-state and out-of-state sales is a reasonable method for collection of tax requires
consideration of all the facts and circumstances in a particular case.

DATED: January 31, 2003

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.