When a computer consulting firm sells hardware, prewritten software, installation, and consulting together in one deal, which pieces are taxable and which are exempt?

Plain-English summary

VIPCS is a computer sales and consulting firm offering design/consulting services plus computer repairs, upgrades, and installations. It asked the Department to sort out sales tax across five common scenarios mixing hardware, prewritten software, installation, consulting, and data services.

New York's rules boil down to a few consistent principles: sales of computer hardware and prewritten software are always taxable (§ 1105(a)); installing, troubleshooting, or repairing hardware is a taxable service (§ 1105(c)(3)); but services performed on software alone — installing, configuring, troubleshooting, or repairing it, plus genuine consulting/design work — are exempt under § 1115(o), as long as, when sold alongside taxable property, the charge is reasonable and separately stated on the invoice. If a service isn't separately stated and priced, the whole bundled charge becomes taxable.

Applying that framework to VIPCS's five scenarios:

• Scenario 1 (network design/installation): Design and consulting charges are exempt if customers can buy hardware/software/services separately (i.e., the consulting isn't forced to be bundled) and everything is separately, reasonably priced. Selling and installing the hardware itself is taxable. If nothing is separately stated, the whole charge is taxable.
• Scenario 2 (remote-access reconfiguration, no new hardware/software): Pure software reconfiguration charges are exempt under § 1115(o). Any prewritten software sold alongside is taxable; if the software service charge isn't separated from the software sale, the entire charge is taxable.
• Scenario 3 (troubleshooting an existing PC): If the fix is purely a software reconfiguration, it's exempt. If it involves diagnosing or installing hardware, that part is taxable. Mixed hardware-and-software repair work is taxable in full unless the software-only portion is reasonably and separately stated.
• Scenario 4 (helping a customer select/buy/install a new system, with the customer billed directly by another vendor for the hardware/software): Since VIPCS isn't selling the hardware/software itself here, its research, comparison-shopping, and software-configuration charges (screen savers, backups, networking setup) are exempt if reasonably and separately stated — but its own hardware-installation charge is still taxable.
• Scenario 5 (extracting data onto a CD-ROM): Providing the physical CD-ROM to the customer is a taxable sale of tangible personal property, regardless of how the underlying data-recovery service is billed.

What this means for you

IT consultants, MSPs, and computer repair shops

The single biggest lever you control is invoicing: keep hardware/software sales, hardware installation, and software-only consulting/configuration/repair work on clearly separate, reasonably priced line items. Bundle them into one number and the whole thing becomes taxable — even the parts that would otherwise be exempt.

Businesses buying IT services

If your vendor gives you one lump-sum invoice for a project that includes both hardware and software work, expect the whole charge to carry sales tax; ask for separately stated line items if you want the exempt software-service work (design, consulting, troubleshooting software, custom coding) broken out.

Accountants and tax professionals

This is a template ruling for the general "services on software are exempt, services on hardware are taxable" rule under § 1115(o), reinforced by the separately-stated-charge requirement whenever taxable and exempt items are combined (20 NYCRR 527.1(b)). Also note: custom software modification/enhancement stays exempt from the prewritten-software rules only if it too is reasonably and separately billed.

Common questions

Q: Is a computer consultant's design/consulting fee taxable in New York?
A: Generally no, as long as the fee is genuinely separable — the customer could buy the consulting alone or the hardware/software alone from any vendor — and it's reasonably and separately stated on the invoice.

Q: Is installing a customer's new computer hardware taxable?
A: Yes. Installing tangible personal property (hardware) is a taxable service under § 1105(c)(3), regardless of who sold the hardware.

Q: Is fixing a software problem (no new hardware) taxable?
A: No. Installing, maintaining, servicing, or repairing computer software is exempt under § 1115(o).

Q: What happens if my invoice doesn't separate the hardware and software/consulting charges?
A: The entire combined charge becomes taxable — the exemption for software services and consulting only survives when reasonably and separately stated.

Q: Can another IT firm rely on this exact ruling?
A: No. This Advisory Opinion binds the Department only as to VIPCS and the specific scenarios it described. A business with different billing practices should confirm its own treatment.

Citations and references

Statutes, regulations, and guidance:

• Tax Law § 1101(b)(5) (definition of "sale")
• Tax Law § 1101(b)(6) (tangible personal property, including prewritten software)
• Tax Law § 1101(b)(14) (definition of "prewritten computer software")
• Tax Law § 1105(a) (imposition of sales tax on retail sales)
• Tax Law § 1105(c)(2) (producing, fabricating, or processing tangible personal property)
• Tax Law § 1105(c)(3) (installing, maintaining, servicing, or repairing tangible personal property)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• 20 NYCRR 526.5 (definition of "receipt")
• 20 NYCRR 527.1 (imposition; taxable and exempt items sold as a single unit)
• TSB-M-93(3)S (Sales and Compensating Use Taxes on Computer Software, March 1, 1993)

Prior opinions cited:

• Pricewaterhouse Coopers LLP, Adv Op Comm T&F, March 25, 2003, TSB-A-03(11)S
• Moore Business Forms, Inc., Adv Op Comm T&F, February 15, 1995, TSB-A-95(6)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a07_28s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(28)S
Sales Tax
Novemer 14, 2007

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

PETITION NO. S060615A

On June 15, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from VIPCS, 1897 Southside Drive, Oneonta, New York 13820.
The issue raised by Petitioner, VIPCS, is whether its sales of computer hardware,
software, and/or computer-related services as described in the scenarios below are subject to
sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a computer sales and consulting firm which, among other computer-related
services, provides professional design and consulting services and computer repairs, upgrades,
and installations.
Scenario 1
A customer requests that Petitioner network the customer’s computers together.
Petitioner evaluates the location of the computers, designs the network architecture, recommends
products to purchase, orders and delivers hardware, installs and configures the hardware ordered,
and configures the computers so they can communicate with each other and the Internet.
Some hardware consists of stand-alone boxes or units that connect to computers via
wires, cables, or radio waves (wireless networking); other hardware known as “computer boards”
is installed internally within the computer. In some instances, the customer may purchase the
hardware and software from another vendor and Petitioner only provides design, consulting, and
installation service.
Scenario 2
A customer requests the ability to have remote access to its network in its main office
from a branch office. Providing this capability generally requires no additional hardware or
software; it merely requires configuration of existing capabilities in the Windows operating
systems already installed on the computers and configuration of other existing network
equipment, such as routers and firewalls. In some instances either Petitioner or customer may
purchase software as part of the implementation.

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Scenario 3
A customer reports a problem with an existing PC and Petitioner troubleshoots the PC.
Petitioner determines that the problem is caused by a misconfiguration in the system, which
requires no additional hardware or software, and corrects the problem by reconfiguring the
system (e.g., editing a settings file). In some instances, either Petitioner or the customer may
purchase hardware or software upgrades to rectify the problem.
Scenario 4
A customer asks Petitioner to assist with the selection, purchase, and installation of new
computer systems. Petitioner researches current systems, identifies features of interest to the
customer, compares prices, obtains the customer's permission to purchase systems, orders
hardware and software for the customer (for which the customer pays or is billed directly), and
installs hardware at the customer's site. Installation consists of physically connecting components
together (such as a monitor to the computer), installing any additional software already owned or
purchased separately, and performing various configuration actions (such as configuring screen
savers, scheduling data backups, installing hardware drives, and configuring networking
properties so computers can communicate on the Internet).
Scenario 5
A customer requests that Petitioner recover or copy data from one system or media (e.g.,
a floppy drive or bad hard drive) to a CD-ROM. Petitioner does not repair the existing system; it
only extracts data from it, and then provides the customer with a CD-ROM.
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:
*

*

*

(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.

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(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven
hundred five, such term shall not include gas, electricity, refrigeration and steam. 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 . . . [Emphasis added]
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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 . . . 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 of the Tax Law provides, in part:
Imposition of sales tax. On and after June first, nineteen hundred seventy-one,
there is hereby imposed and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
*

*

*

(2) Producing, fabricating, processing, printing or imprinting tangible personal
property, performed for a person who directly or indirectly furnishes the tangible
personal property, not purchased by him for resale, upon which services are performed.
(3) Installing tangible personal property . . . or maintaining, servicing or repairing
tangible personal property . . . not held for sale in the regular course of business, whether
or not the services are performed directly or by means of coin-operated equipment or by

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any other means, and whether or not any tangible personal property is transferred in
conjunction therewith . . .
Section 1115(o) of the Tax Law provides:
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 526.5 of the Sales and Use Tax Regulations provides, in part:
(a) Definition. The word receipt means the amount of the sale price of any
property and the charge for any service taxable under articles 28 and 29 of the Tax Law,
valued in money, whether received in money or otherwise. The following subdivisions of
this section discuss elements of a receipt.
*

*

*

(e) Expenses. All expenses, including telephone and telegraph and other service
charges, incurred by a vendor in making a sale, regardless of their taxable status and
regardless of whether they are billed to a customer are not deductible from the receipts.
Section 527.1 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. The sales tax is imposed on the receipts from every retail sale of
tangible personal property delivered by the vendor to the purchaser or the purchaser's
designee in this State, unless specifically exempt or excluded under the Tax Law.
(b) 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.
Technical Services Bureau Memorandum, State and Local Sales and Compensating Use
Taxes Imposed on Certain Sales of Computer Software, March 1, 1993, TSB-M-93(3)S,
provides, in part:
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.

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The sale of prewritten software includes any transfer of title or possession, any
exchange, barter, rental, lease or license to use, including merely the right to reproduce,
for consideration. Thus, a payment made by a customer . . . for a license to use, or for the
rental or lease of prewritten software is subject to sales or use tax. . . .
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 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.
*

*

*

Customer Support and Related Services
Services taxable under section 1105(c) of the Tax Law are exempt from tax under
section 1115(o) of the Tax Law where performed on any computer software. However,
where such services to be performed on software are sold in conjunction with the sale of
tangible personal property, such as prewritten software, the charge for such services is
exempt only if it is reasonable and separately stated on the invoice or billing statement
given to the customer.
Thus, charges for customer (user) support or for information services provided by
a vendor to a customer, either in person or by some type of telecommunications
arrangement (e.g., telephone, modem, facsimile machine, etc.), in the nature of training,
consulting, instructing or other diagnostic or troubleshooting services related to
prewritten software are exempt from sales and use taxes where the charges are reasonable
and separately stated. Charges for the service of installing, repairing, maintaining or
servicing prewritten software are also exempt from sales and use taxes where the charges
are reasonable and separately stated on the invoice. Of course, any charges for the above
described services sold in connection with custom software are exempt from tax.

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Programming and systems analysis are also exempt services. However, where
these services are rendered in conjunction with the sale of prewritten software, the charge
for the service is exempt from tax only when the charge for the service is reasonable and
separately stated on the invoice or billing statement given to the customer.
Opinion
Petitioner provides computer services, which include design and consulting services and
computer repairs, upgrades, and installations, focusing on meeting the specific needs of each
customer. Petitioner’s scenarios describe sales of services and tangible personal property in
different combinations. In general, the transactions can be described as sales of computer
hardware and software, installation of computer hardware and software (provided by either
Petitioner or customer), consulting services (including research, evaluation, design, and
troubleshooting), customization of computer software, and data conversion.
Section 1105(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property, including the sale of prewritten software. See sections 1101(b)(6)
and (14) of the Tax Law. Thus, Petitioner’s sales of computer hardware and prewritten software
are subject to sales tax.
Petitioner sells both taxable and nontaxable services to its customers. Only those services
enumerated by section 1105(c) of the Tax Law are subject to sales tax. Petitioner’s separately
stated and billed consulting services for researching, evaluating, comparative pricing, and
designing computer systems to be networked are not subject to sales tax provided the services
are separately sold. Thus, if the customer has the option to purchase the recommended computer
hardware, software, and services (installation, modification, etc.) from either Petitioner or any
other vendor; the customer may purchase computer hardware, software and services from
Petitioner without purchasing consulting services from Petitioner; the customer separately
contracts for the purchase of consulting services; and such services are not merely an expense of
Petitioner in making sales of hardware or software, separately stated and reasonable charges for
the sale of consulting services are not subject to sales tax. To the extent that such services are
only provided in conjunction with the sale of tangible personal property (computer hardware,
software, etc.), they are considered part of the sale of such property and are taxable whether or
not the charges for such services are separately stated. See section 1101(b)(3) of the Tax Law
and Pricewaterhouse Coopers LLP, Adv Op Comm T&F, March 25, 2003, TSB-A-03(11)S.
Among the taxable services enumerated by section 1105(c) of the Tax Law are installing,
maintaining, servicing, and repairing tangible personal property whether or not any tangible
personal property is transferred in conjunction with such service. Therefore, Petitioner’s charges
for installing, troubleshooting, reconfiguring, or repairing computer hardware are subject to sales
tax under section 1105(c)(3), whether Petitioner sells the computer hardware or it is provided by
the customer. Section 1115(o) of the Tax Law exempts charges for installing, maintaining,
servicing, or repairing computer software from sales and use taxes provided such charges are

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reasonable and separately stated on an invoice or other statement of the price given to the
purchaser. Thus, Petitioner’s charges for installing, troubleshooting, reconfiguring, or repairing
computer software are not subject to tax when reasonable and separately stated on the customer’s
invoice. In addition, Petitioner’s charge for the custom modification or enhancement of software
is not subject to tax provided such charge is reasonable and separately stated from any charge for
prewritten software or other tangible personal property provided to the customer. See section
1101(b)(14) of the Tax Law and TSB-M-93(3)S, supra.
In Scenario 1, Petitioner's charges for design and consulting services are not subject to
sales tax if such services and the hardware and the software can be purchased separately, and
such services are separately contracted, provided that the charges for design and consulting and
for hardware and software are separately stated and reasonable. Petitioner's charges for the sale,
installation, and configuration of hardware are subject to tax under sections 1105(a) and
1105(c)(3) of the Tax Law. If Petitioner does not charge separately for these items, the entire
charge to the customer is subject to tax. See section 527.1(b) of the Sales and Use Tax
Regulations.
In Scenario 2, Petitioner’s charges to reconfigure the customer’s software to provide
remote access to the customer’s network are not subject to sales tax. Such charges are for
servicing software and are exempt from tax pursuant to section 1115(o) of the Tax Law. Sales of
prewritten software to the customer are subject to tax under section 1105(a) of the Tax Law. If
Petitioner does not charge separately for the software servicing and the prewritten software, the
entire charge is subject to tax. See section 1115(o) of the Tax Law and section 527.1(b) of the
Sales and Use Tax Regulations.
In Scenario 3, Petitioner is performing a repair service, which involves troubleshooting
the problem and then making the necessary repair. If the repair is limited to troubleshooting and
fixing or reconfiguring a customer’s software, the service is exempt from sales tax under section
1115(o) of the Tax Law. If the repair involves diagnosing, repairing, or installing hardware,
whether sold by Petitioner or provided by the customer, the service is subject to sales tax under
section 1105(c)(3) of the Tax Law. If Petitioner provides troubleshooting or repair services
involving both software and hardware or if Petitioner provides troubleshooting or repair services
in conjunction with the sale of hardware or prewritten software, the entire charge will be subject
to sales tax except that reasonable and separately stated charges made for troubleshooting or
repair services to the software are not subject to sales tax.
In Scenario 4, Petitioner’s services include identifying the customer’s current system
features, researching features of interest to the customer, price comparisons, ordering new
hardware and software for the customer, installing hardware and software, and configuring the
new system. In this scenario, the customer is directly billed by and pays another vendor for the
hardware and software. Thus, Petitioner is not selling hardware or software to the customer.
Petitioner’s reasonable and separately stated charges for identifying the customer’s current
system features, researching price comparisons and features of interest to the customer, installing

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software, configuring screen savers and networking properties, and scheduling data backups are
for services that are not subject to sales tax. However, Petitioner's charges for installing
hardware are subject to tax under section 1105(c)(3) of the Tax Law.
In Scenario 5, Petitioner extracts a customer’s existing data from a computer, copies the
data onto a CD-ROM, and furnishes the CD-ROM to the customer. The provision of the CDROM to the customer is subject to sales tax pursuant to section 1105(a) of the Tax Law as a sale
of tangible personal property. See Moore Business Forms, Inc., Adv Op Comm T&F, February
15, 1995, TSB-A-95(6)S.

DATED: November 14, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.