If a company sells point-of-sale equipment and bills staging, software installation, testing, and setup as one lump-sum 'project management' line item, is the whole charge taxable, or can the software-related part be carved out as exempt?

Plain-English summary

STCR Business Systems, Inc. sells point-of-sale (POS) equipment to retail stores. It buys the hardware from a manufacturer, takes delivery in New York, installs prewritten software onto the equipment, makes minor customer-specific tweaks to that software, and then tests, packs, delivers, and sets up the system at the customer's store. STCR billed all of this — staging, software installation, testing, and setup — as one combined invoice line labeled "PROJECT MANAGEMENT," charging sales tax on the full amount.

The Department confirmed STCR's whole charge is indeed taxable, but for a more precise reason than "everything about POS equipment is taxable." New York generally taxes both the hardware itself and the services of testing/installing hardware (§§ 1105(a), 1105(c)(3)), and separately taxes prewritten software as tangible personal property. But services performed on software — including installing it and making purchaser-specific modifications — are normally exempt under § 1115(o), and true custom modifications to prewritten software aren't even treated as taxable "prewritten software" at all (§ 1101(b)(14)).

The catch: that software-services exemption only survives when the customer purchases hardware and software services together and the charge for the software work is reasonable and separately stated on the invoice. Because STCR lumped the software installation/modification work into the same undifferentiated "PROJECT MANAGEMENT" line as the taxable hardware staging, testing, and setup, the software-services charge lost its exempt status and became "a constituent cost and expense" of the taxable hardware sale — meaning the entire combined charge is taxable, not just the hardware portion.

What this means for you

Equipment resellers who also install or customize software

If you sell hardware bundled with software installation or customization services, don't combine everything into one lump-sum invoice line if you want the software-services portion to stay tax-exempt. Break out a reasonable, separately stated charge for the software work — installing, modifying, or customizing software — and only the hardware/testing/setup portion will be taxed; the software-services line can be exempt.

Anyone billing "PROJECT MANAGEMENT" or similarly bundled catch-all line items

Generic bundled line items are a recurring tax trap: New York's rule for mixed taxable/exempt sales is that the whole unit is taxed unless the exempt component is broken out with a reasonable, separately stated price. This isn't unique to software — it's a broader principle any business selling a mix of taxable goods/services and exempt services should apply to invoice design.

Accountants reviewing client invoicing practices

This is a good one to flag proactively: review any client invoice that bundles hardware sales with any kind of software services (installation, customization, support) under one combined charge. A simple invoice restructuring — separately stating the software-services charge, at a reasonable amount — can meaningfully reduce the client's taxable base going forward (though it doesn't retroactively fix past bundled invoices).

Common questions

Q: Is selling point-of-sale hardware and installing prewritten software on it always fully taxable?
A: The hardware sale and hardware-related services (staging, testing, setup) are always taxable. But installing or customizing the software itself is normally exempt — if that charge is reasonable and separately stated from the taxable hardware charge.

Q: What happens if I bundle the software service charge into one line item with hardware charges?
A: The whole combined charge becomes taxable — the software-services exemption is lost entirely once it isn't broken out as its own reasonable, separately stated amount.

Q: Does custom modification of prewritten software change its tax status?
A: Custom modifications to prewritten software, made to a specific purchaser's specifications, aren't treated as taxable prewritten software — but again, only if there's a separately stated, reasonable charge for that modification work.

Q: Does this ruling apply to any hardware-plus-software-services business?
A: This is a fact-specific Advisory Opinion binding only on STCR Business Systems, Inc. and its exact invoicing practice described. The underlying separately-stated-charge principle is broadly applicable, but your own invoicing structure and whether a stated software charge is "reasonable" would need independent review.

Citations and references

• Tax Law § 1101(b)(3), (5), (6), (14) (receipt; sale; tangible personal property/prewritten software; customization exception)
• Tax Law § 1105(a), (c)(3) (imposition of sales tax; installation/repair/maintenance services)
• Tax Law § 1115(o) (exemption for services performed on software)
• 20 NYCRR § 525.2(a)(3) (destination tax)
• 20 NYCRR § 526.5(e) (expenses not deductible from receipts)
• 20 NYCRR § 527.1(b) (taxable and exempt items sold as a single unit)
• 20 NYCRR § 527.5(a) (installing, maintaining, servicing tangible personal property)
• TSB-M-93(3)S, State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software (Mar. 1, 1993)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_24s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-08(24)S
Sales Tax
June 6, 2008

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

PETITION NO. S071227B

On December 27, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from STCR Business Systems, Inc., 10 Prospect Street, Endwell, New York
13760.
The issue raised by Petitioner, STCR Business Systems, Inc., is whether charges for sales
and installation of tangible personal property, including charges for installing software,
equipment testing, and set-up in customer locations, are subject to New York State and local
sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner sells point-of-sale (POS) equipment to retail stores. Petitioner purchases POS
equipment from a manufacturer and takes delivery in New York State. Petitioner stages the
equipment, installs prewritten software into the equipment, and makes minor modifications to the
software related to customer preferences. The equipment is tested, packed, delivered, and set up
at a customer’s location within New York State. Petitioner charges the customer for staging,
installing prewritten software, testing, and setup as a single invoice line item shown as
“PROJECT MANAGEMENT” and charges applicable State and local sales tax on the entire
amount.
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:
*

*

*

(3) Receipt. The amount of the sale price of any property and the charge for any
service taxable under this article … without any deduction for expenses or early payment
discounts and also including any charges by the vendor to the purchaser for shipping or
delivery, …
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*

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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, or any agreement therefore, 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.
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.
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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.
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*

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

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(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
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 525.2(a)(3) of the Sales and Use Tax Regulations provides:
Except as specifically provided otherwise, 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 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….
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*

(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.

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(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.
Section 527.5(a) of the Sales and Use Tax Regulations provides, in part:
Imposition. (1) The tax is imposed on receipts from every sale of the services of
installing, maintaining, servicing or repairing tangible personal property, by any means
including coin-operated machines, whether or not any tangible personal property is
transferred in conjunction with the services.
(2) Installing means setting up tangible personal property or putting it in place for
use.
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*

(3) Maintaining, servicing and repairing are terms used to cover all activities that
relate to keeping tangible personal property in a condition of fitness, efficiency, readiness
or safety or restoring it to such condition.
*

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*

Example 6: A company operates a diagnostic service in which it tests an appliance
for a set fee, but does not repair the appliance. The charge for the diagnostic service is
taxable.
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.
*

*

*

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

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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 conjunction with custom software are exempt from tax.
Opinion
Petitioner purchases point-of-sale (POS) equipment from a manufacturer and sells it to
retail stores. The equipment is delivered to Petitioner in New York State, where Petitioner
installs prewritten software and makes minor modifications to the software based on customer
preferences. All equipment is then tested, packed, delivered, and set up at the customer’s
location.
Petitioner’s sales of the POS equipment itself, along with the services of testing and
installing the equipment, equate to the sales, testing, and installation of computer hardware. Sales
of computer hardware and services of testing and installing computer hardware are subject to
sales tax under sections 1105(a) and 1105(c)(3) of the Tax Law. See section 527.5(a) of the Sales
and Use Tax Regulations. Petitioner’s sales of prewritten software are also subject to tax under
section 1105(a) as sales of tangible personal property. See section 1101(b)(6) of the Tax Law.
The State and local sales tax due is based on the tax rate in effect in the location where the
tangible personal property and services are delivered to the customer. See section 525.2(a)(3) of
the Sales and Use Tax Regulations.
The taxable services enumerated under section 1105(c) of the Tax Law are not subject to
sales tax when performed on computer software. See section 1115(o) of the Tax Law. Custom
modifications or enhancements of prewritten software for a specific purchaser are also not
subject to tax. See section 1101(b)(14) of the Tax Law. However, when the customer purchases
these services to the software in conjunction with the purchase and installation of computer
hardware and the charges for the services to the software are not reasonable and separately stated
on the invoice to the customer, the services to the software become a constituent cost and
expense of the purchase of the equipment and installation services. See sections 1101(b)(14) and
1115(o). Therefore, Petitioner’s lump-sum single-line item charge for staging, testing, and
installing the equipment, and the otherwise nontaxable services to the prewritten software are

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subject to sales tax. See TSB-M-93(3)S, supra. It is noted that if Petitioner provided a separately
stated charge for its services of modifying and installing the prewritten software on its invoice,
and if such charges were reasonable, the amount of such charge would be exempt from tax.

DATED: June 6, 2008

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.