Does a for-profit school owe sales tax on at-home course software, and are electronic textbook readers exempt as college textbooks?

Plain-English summary

An accredited for-profit school asked the Department about two forward-looking technologies it was considering. In Scenario 1, the school would buy prewritten software that functions as a full at-home "virtual classroom" — course materials, homework, tests, and teacher access via chat, email, or phone — that self-deletes when the course ends. In Scenario 2, "next-generation textbooks" would ship on mini CD-ROMs read by a dedicated handheld device, sold either separately or bundled with the CD-ROM textbook.

The software (Scenario 1): Prewritten software is normally taxable tangible personal property. But the school isn't selling software to students — it's selling a COURSE, and the software is just the delivery mechanism for that nontaxable educational service. So the school's tuition charge (even the portion attributable to the software) isn't taxable to students. The flip side: because the school is USING the software to provide its own nontaxable service (rather than reselling it), the school itself owes sales tax when it buys the software from its supplier.

The textbook reader (Scenario 2): New York's college-textbook exemption only covers actual textbooks — required course materials — not reader hardware. So a standalone reader device sold to students is taxable. But if the school bundles the reader in at no extra cost with an exempt electronic (CD-ROM) textbook, and the combined price is the SAME as the textbook alone would cost, the whole bundled charge stays exempt. If the bundled price is higher, the whole charge becomes taxable (unless the reader and textbook are separately, reasonably priced, in which case only the reader charge is taxed). Whether the SCHOOL owes tax on its own purchase of readers depends on which of those outcomes applies to its sale to students — a taxable sale to students means the school buys the reader tax-free (as a resale), while a nontaxable bundled sale means the school pays tax on its own purchase.

What this means for you

Schools and educational institutions using ed-tech tools

Software or hardware that's just the delivery vehicle for your nontaxable course isn't separately taxed to students, but that generally shifts the tax liability to YOU on your own purchase of the technology — factor that cost into your pricing rather than assuming it passes through tax-free.

Ed-tech and courseware vendors

If you sell learning hardware (readers, tablets, kits) bundled with otherwise-exempt materials like electronic textbooks, price the bundle carefully: a bundle priced identically to the exempt item alone stays fully exempt, but any price increase for the bundle can make the WHOLE charge taxable unless you separately and reasonably state each component.

Accountants and tax professionals

This is a clean two-part reference: the "used to provide a nontaxable service" rule shifting tax liability from student to institution (20 NYCRR 526.6(c)(7)), and the bundled taxable/exempt item rule under 20 NYCRR 527.1(b) applied specifically to the narrow § 1115(a)(34) college textbook exemption.

Common questions

Q: Does a school owe tax on software used to deliver an online course?
A: Yes — the school (not the student) owes sales tax on its purchase, because it uses the software to provide a nontaxable educational service rather than reselling it.

Q: Is a standalone electronic textbook reader exempt as a college textbook?
A: No. The exemption covers only the textbook content itself, not reader hardware.

Q: Does bundling a free reader with an exempt e-textbook change anything?
A: Only if the combined price is higher than the textbook alone — then the whole bundled charge becomes taxable, unless the reader is separately and reasonably priced.

Q: Can another school rely on this Advisory Opinion for its own tech rollout?
A: No. It binds the Department only for the petitioner and the two hypothetical scenarios described; a real deployment's actual facts should be checked independently.

Citations and references

Statutes, regulations, and guidance:

• Tax Law §§ 1101(b)(4)(i), (5), (6), (14); 1105(a), (c); 1115(a)(34)
• 20 NYCRR 526.6(c); 526.7; 527.1(b)
• TSB-M-98(4)S (college textbook exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a06_6s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(6)S
Sales Tax
February 24, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S020411A

On April 11, 2002, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Marcum & Kliegman LLP, c/o Mark L. Stone, CPA, 10 Melville Park
Road, Melville, NY 11747. Petitioner, Marcum & Kliegman LLP, furnished additional
information with respect to the Petition on November 19, 2002; December 15, 2003; and January
12, 2004.
The issue raised by Petitioner, Marcum & Kliegman LLP, is whether the transactions
described below are subject to sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
A school qualifies as an Ainstitution of higher education,@ recognized and approved by the
Regents of the University of the State of New York or accredited by a nationally recognized
accrediting agency or association accepted as such by the Regents of the University of the State
of New York. The school is organized as a for-profit company. The school=s courses of study
lead to the granting of a post-secondary degree, certificate, or diploma. Students are enrolled in
the school either on a part-time or a full-time basis. Any materials or books described below are
required or recommended by the course instructor for a course that is part of the prescribed
curriculum.
Petitioner described the following two scenarios based on these facts. Both scenarios are
hypothetical situations based upon intended uses of technology now entering their final phases of
testing. Each scenario is independent of the other scenario.
Scenario 1
A school is looking into purchasing software for a complex computer-driven education
package. This software would allow students to complete courses at home rather than attend
classes at the school. Use of this computer software would be a required part of the program.
The software meets the definition of pre-written computer software for New York State sales and
use tax purposes.
The software is designed to contain all of the information the teacher would normally
present in a course. It contains the classroom material, reading assignments, homework
assignments, practice problems, and the actual course tests. In addition, this software will allow
a student to access an Internet chat room where a teacher from the school acts as a moderator to
answer student questions relating to their course work. Students also have access to a teacher via
e-mail or toll-free telephone call. Students who register to complete a course in this manner are

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granted a Alicense to use@ the software. The software deletes itself after a certain time period,
which coincides with the end of the course. Students are required to supply their own computers
to use the software.
Scenario 2
The next generation of textbooks will be stored on mini CD ROMs, and a high-definition
textbook reader will be necessary to read the textbooks. The next generation textbook reader is a
high-definition screen approximately 5 inches by 7 inches. This screen comes complete with a
low-speed microprocessor and a mini CD ROM reader. Different courses will have different CD
ROMs that will be inserted into the textbook reader. The school may sell the textbook reader to
students separately from the CD ROM textbooks, or may furnish the textbook reader in
conjunction with the sale of the CD ROMs.
Applicable law and regulations
Section 1101(b) of the Tax Law provides, 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 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. . . .
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*

*

(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 . . . .
(6) Tangible personal property. Corporeal personal property of any
nature. . . . Such term shall also include pre-written computer software, whether

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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. . . .
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*

(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.
Section 1105(a) of the Tax Law imposes sales tax upon "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 the receipts from every sale,
except for resale, of certain enumerated services.
Section 1115(a) of the Tax Law provides, in part:
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:
(34) Textbooks purchased by full and part time college students for their
courses; provided, however, that upon purchase such a student shall present a
valid student identification card, and such a textbook shall be required for a
course being taken by such student at an institution of higher education. For
purposes of this subdivision the term:

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(i) ATextbooks@ includes only those books specifically written,
designed or produced for educational, instructional or pedagogical
purposes.
(ii) AInstitution of higher education@ shall mean any institution of
higher education, recognized and approved by the regents of the university
of the state of New York or accredited by a nationally recognized
accrediting agency or association accepted as such by the regents of the
university of the state of New York, which provides a course of study
leading to the granting of a post-secondary degree, certificate or diploma.
Section 526.6 of the Sales and Use Tax Regulations provides, in part:
(a) The term Aretail sale@ or Asale at retail@ means the sale of tangible
personal property to any person for any purpose, except as specifically excluded.
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*

(c) Resale exclusion. (1) Where a person, in the course of his business
operations, purchases tangible personal property or services which he intends to
sell, either in the form in which purchased, or as a component part of other
property or services, the property or services which he has purchased will be
considered as purchased for resale, and therefore not subject to tax until he has
transferred the property to his customer.
*

*

*

(2) A sale for resale will be recognized only if the vendor receives a
properly completed resale certificate. See sections 532.4 and 532.6 of this Title.
(3) Receipts from the sale of property purchased under a resale certificate
are not subject to tax at the time of purchase by the person who will resell the
property. The receipts are subject to tax at the time of the retail sale.
*

*

*

(4)(i) Tangible personal property which is purchased and given away
without charge, for promotion or advertising purposes is not purchased for resale.
It is a retail sale to the purchaser thereof, and is not a sale to the recipient of the
property.
(ii) Tangible personal property which is purchased for promotional or
advertising purposes and sold for a minimal charge which does not reflect its true

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cost, or which is not ordinarily sold by that person in the operation of his
business, is a retail sale to the purchaser thereof, and not a sale to the recipient of
the property.
(iii) A resale certificate may not be used by the person making the
purchases described in subparagraphs (i) and (ii) of this paragraph for such
purchases.
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(6) Tangible personal property purchased for use in performing services
which are taxable under section 1105(c)(1), (2), (3) and (5) of the Tax Law is
purchased for resale and not subject to tax at the time of purchase, where the
property so sold (i) becomes a physical component part of the property upon
which the services are performed, or (ii) is later actually transferred to the
purchaser of the service in conjunction with the performance of the service
subject to tax.
*

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*

(7) Tangible personal property purchased for use in performing a service
not subject to tax is not purchased for resale.
*

*

*

Section 526.7 of the Sales and Use Tax Regulations provides, in part:
Sale, selling or purchase. (Tax Law, '1101(b)(5))
(a) Definition. (1) The words sale, selling or purchase mean any transaction in
which there is a transfer of title or possession, or both, of tangible personal property for a
consideration.
(2) Among the transactions included in the words sale, selling or purchase
are exchanges, barters, rentals, leases or licenses to use or consume tangible
personal property.
Section 527.1(b) of the Sales and Use Tax Regulations provides, in part:
Taxable and exempt items sold as a single unit. When tangible personal
property, composed of taxable and exempt items is sold as a single unit, the tax
shall be collected on the total price.

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Technical Services Bureau Memorandum entitled Sales and Use Tax Exemption For
College Textbooks, June 5, 1998, TSB-M-98(4)S, provides, in part:
Definition of Eligible Textbooks
The exemption applies to new or used textbooks and related workbooks
required or recommended for a course at an institution of higher education. The
institution of higher education or the instructor of the course must have designated
the book as either required or recommended. This includes course-packs and
workbooks produced and required or recommended by the institution or
instructor. The exemption applies whether the textbooks are printed or are on
computer floppy disk or CD-ROM.
The exemption does not apply to any book (fiction or nonfiction) that is
not required or recommended for a course of study at an institution of higher
education.
Opinion
The following are the questions presented by Petitioner concerning the scenarios
described above and the appropriate answers.
Scenario 1
1.

Q. If the school purchases the prewritten software and provides it to the student as part
of the course of study, does the school have to pay sales and use tax on the purchase
of the software?
A. In this scenario, the school provides the student with prewritten software which
allows the student to take a course independently at home. A license to use the
software is granted to the student for the duration of the course. The software is
designed to have all the information the teacher would normally present. While
taking the course, the software provides students with everything they need to
complete the course on their own, and at the end of the course the software deletes
itself. Students have e-mail, toll-free telephone, and Internet chat room access to a
teacher who answers questions about the course work. The software is the platform
through which the lectures, course materials, homework, exams, teacher conferences,
etc., are conveyed to the student, and, in effect, the software functions as the
classroom for the course. The student=s primary objective is to complete the course of
study. The school is not selling the software to the students, but rather, provides the
students with the means by which a student can complete a course of study at home.
The software is of no other use to the student as evidenced by the fact that the
software deletes itself at the end of the course. Although the course material is

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presented to the student on the computer via use of the software, the student is
earning the same course credit as a student who is presented the course material by
attending class at the school. Since section 1101(b)(6) of the Tax Law provides that
prewritten computer software is tangible personal property, its sale is subject to tax
under section 1105(a). However, the school=s charge to students is for providing a
course; it is not a charge for prewritten software. The use of the software is an
integrated part of the school=s provision of a nontaxable educational service. The
school is required to pay sales tax on its purchase of the prewritten software because
the software is used by the school to provide a nontaxable educational service to the
students. See section 526.6(c)(7) of the Sales and Use Tax Regulations.

2.

Q. Do the students owe sales and use tax on the portion of the tuition attributable to the
cost of the prewritten software?
A. As in question 1, the students pay a fee to take a course which includes limited
instructor access and prewritten software. There is no separate charge for the
software. Since section 1101(b)(6) of the Tax Law provides that prewritten computer
software is tangible personal property, it is subject to tax under section 1105(a).
However, as discussed in the answer to question 1, the school=s charge to the students
is for providing a course; it is not a charge for prewritten software. The use of the
software is an integrated part of the school=s provision of a nontaxable educational
service. Therefore, the portion of the tuition attributable to the prewritten software is
not taxable to the student.

Scenario 2
1.

Q. Can the student purchase the high definition-textbook reader as an exempt college
textbook or as an exempt required material?
A. The textbook reader purchased by students as part of the required course work does
not constitute a textbook as provided for in section 1115(a)(34)(i) of the Tax Law.
Therefore, the purchases of the textbook reader by the students are subject to sales
tax.

2. Q If the purchase of the CD ROM textbooks includes a free high-definition textbook
   reader, will the sale of CD ROM textbooks be subject to sales and use tax?
   A. The purchase of a textbook in the form of a CD ROM by a full-time or part-time
   student as part of required course work is eligible for exemption as provided for in
   section 1115(a)(34) of the Tax Law and further explained in TSB-M-98(4)S, supra.
   If the purchase of the textbook includes a high-definition textbook reader, the whole
   charge will be exempt if the charge to the student is the same as the charge without

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the reader. However, if the charge is higher, the charge then includes an amount for
the textbook reader. In this case, the entire charge will be subject to tax since it will
constitute a single sale which combines both taxable and exempt items for a single
charge. If the receipts for the sale of the textbook reader and the textbook are
separately stated and reasonable, only the charge for the textbook reader will be
subject to tax.
3.

Q. Is the school required to pay sales tax on the amount it pays for the high-definition
textbook reader that it furnishes to students?
A. If the provision of the textbook reader to the students is not subject to tax (See
Answer to Question 2 of this scenario), the school must pay sales tax on its purchase
of the textbook reader. See section 526.6(c)(4) of the Sales and Use Tax Regulations.
If the provision of the textbook reader to the students is subject to tax (See Question 2
of this scenario), the school=s purchase of the textbook reader is not subject to tax
because it is a purchase for resale.

DATED: February 24, 2006

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.