Does a technology company's purchase of computers and hardware used to build and improve its own ad-serving software platform qualify for New York's sales-tax research and development exemption?

Plain-English summary

DoubleClick Inc. built its now-famous DART ad-serving platform between late 1995 and mid-1998, going through three development phases — from an internal ad-trafficking tool, to a beta version sold as an ad-delivery service to Web publishers, to a scalable commercial product (DFP, later expanded into DFA for advertisers). DoubleClick asked whether the servers, switches, routers, and other computer hardware it bought during this multi-year buildout qualified for New York's sales-tax exemption for property used in "research and development in the experimental or laboratory sense."

The Department said no for the core R&D exemption. Even though DoubleClick's development spanned years and required real technical sophistication, its activities amounted to "trial and error testing and implementation of programs, and the integration of preexisting and new applications" — ordinary iterative software engineering, not laboratory-sense research (basic scientific research, advancing a scientific/technical field, or developing genuinely new products in that sense). Section 1115(a)(10)'s exemption requires more than clever, hard engineering work; it targets experimental/laboratory research specifically, and expressly excludes things like routine testing and quality control.

The Department then walked through the other exemptions that could apply, and when:

• § 1115(a)(12) (production machinery) only covers equipment used directly and predominantly to manufacture tangible personal property for sale — it doesn't cover computers used to design software, only the equipment that actually stamps out sold media like CDs.
• § 1115(a)(35) — a narrower exemption for computer hardware used to design and develop software for sale (including custom software) or Internet websites for sale — only became effective June 1, 1998, partway through DoubleClick's described development period. Hardware used after that date to build software genuinely sold to others could qualify.
• Critically, none of this helped for hardware used to build software DoubleClick used itself to deliver its own marketing services (rather than software actually sold separately to customers) — that hardware never qualified under §§ 1115(a)(10), (12), or (35), no matter the date.

What this means for you

Tech companies developing internal software platforms

Don't assume "research and development" in the tax-law sense covers all serious software engineering. If your team is iterating, testing, and integrating components to build or improve a product — even one requiring deep technical skill over years — that's very likely NOT "experimental or laboratory sense" R&D for sales-tax purposes. The exemption is aimed at more basic/experimental scientific or technical research, not standard software development lifecycle work.

SaaS and platform companies

The critical fork in this ruling is whether your software is genuinely sold to customers (as a product or license) versus used internally to deliver a service. Hardware used to build software you sell separately can potentially qualify for the narrower § 1115(a)(35) hardware exemption (available from June 1, 1998 forward). Hardware used to build software that only powers your own service offering to customers gets no exemption under any of these three provisions.

Accountants and tax professionals advising technology clients

Watch the effective date carefully — § 1115(a)(35) only applies prospectively from June 1, 1998; earlier purchases can't retroactively qualify under it even if the same hardware would qualify today. Also flag the distinction the Department draws between software sold "for sale" versus software that merely supports a service offering, since that distinction — not the sophistication of the work — usually decides the exemption question.

Common questions

Q: Does complex or years-long software development automatically count as R&D for sales-tax purposes?
A: No. New York's R&D exemption targets "experimental or laboratory sense" research — basic research, advancing a scientific/technical field, or developing genuinely new products in that sense — not standard iterative software engineering, however sophisticated.

Q: Is there any exemption for computers used to build software?
A: Yes, but a narrower one: § 1115(a)(35) exempts computer hardware used directly and predominantly to design and develop software (or websites) that is itself sold to customers, effective June 1, 1998 forward. It does not cover hardware used to build software for your own internal use in delivering a service.

Q: What if the same hardware is used to build both internally-used software and software sold to customers?
A: The opinion's tests are about direct and predominant use — hardware used predominantly (over 50% of the time) for a qualifying purpose can qualify; hardware used to build software Petitioner "itself used and did not sell separate and apart from its sales of marketing services" does not qualify under any of these provisions.

Q: Does this ruling apply to my company's software development hardware?
A: This is a fact-specific Advisory Opinion binding only on DoubleClick Inc. and covers only its 1995–1998 hardware purchases. Whether your hardware qualifies depends on exactly what it's used to build and whether that output is sold separately to customers.

Citations and references

• Tax Law § 1115(a)(10) (research and development exemption)
• Tax Law § 1115(a)(12) (production machinery/equipment exemption)
• Tax Law § 1115(a)(35) (computer hardware for designing/developing software or websites for sale, effective June 1, 1998)
• Tax Law § 1101(b)(6) (tangible personal property; prewritten software)
• 20 NYCRR § 528.11(b), (c) (definition of research and development; direct/predominant use tests)
• Matter of Empire Vision Center, Dec Tax App Trib, Nov. 7, 1991, DTA No. 805767
• Doubleclick, Inc., Adv Op Comm T&F, May 8, 2003, TSB-A-03(19)S

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_28s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-08(28)S
Sales Tax
June 17, 2008

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

PETITION NO. S050314A

On March 14, 2005, the Department of Taxation and Finance received a Petition for
Advisory Opinion from DoubleClick Inc.,111 Eighth Avenue, 10th Floor, New York, NY 10011.
The issue raised by Petitioner, DoubleClick Inc., is whether its purchases of computers
for use in its development of new technology service offerings, as well as other related purchases
of tangible personal property, as described below, qualify for the research and development
exemption pursuant to section 1115(a)(10) of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a digital-marketing-solutions company whose clients include advertisers,
direct marketers, and Web publishers. Petitioner was incorporated in Delaware in 1995 and is
headquartered in New York City. Through its patented DART (ADynamic, Advertising,
Reporting and Targeting@) ad service technology, which is the software platform for many of its
offerings, Petitioner services Internet ads for its clients worldwide and delivers targeted
advertisements to Internet users worldwide.
Petitioner=s business is to provide an infrastructure for marketing in the digital world.
Combining media, data, and technological expertise, Petitioner=s products and services enable
marketers to deliver their advertising message to the desired audience, while helping publishers
maximize their advertising revenue and build their business online. Through the infrastructure it
provides, Petitioner offers its clients planning, execution, measurement, and refinement of online
media campaigns. Petitioner handles all of these facets of the digital-marketing process through
its TechSolutions business unit. TechSolutions operates principally as an application service
provider and clients pay user fees to access the software.
DART
Petitioner=s DART technology platform provides Web publishers with a comprehensive
solution for ad inventory management, targeting, delivery, and reporting and allows advertisers
and their agencies to streamline and control their online advertising campaigns. When a Web
user visits a site with DART technology, image tags embedded in the page link the user's
browser to the DART server and establish a connection between the two. A graphic file is
requested from the DART server to fill the ad space on the Web page being loaded on the user's
screen, usually near the top of the page. The user=s network address (user's IP address) maps to
the user=s DART profile. The network address is referenced against the DART server's database
of more than 400,000 mapped networks. Each mapped network reveals the user's domain (e.g.,
att.net, Microsoft.com, etc.). DART assembles and reviews all of the information it has collected

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on the user to this point, including the content (news, sports, etc.) of the sites being visited.
DART assigns each individual user a unique user ID number (i.e., a DoubleClick cookie ID).
DART then scans the many ads waiting for delivery, matching an ad and its targeting criteria
with the user and the information gathered. Using the unique user ID number, DART also
reviews the number of times the user has seen a specific ad, in order to control frequency, and
evaluates whether a sequential ad should be delivered. A targeted ad is selected and delivered to
the user within milliseconds. When a user clicks on the ad, the DART technology redirects the
user's browser to the site that placed the ad.
Development of DART
The architecture behind the DART technology was developed over a number of years.
The initial years of Petitioner's existence saw significant research and development activity and
extensive capital investment. Petitioner purchased a great deal of computer hardware, including
servers, switches, routers, and other related equipment, and purchased software as well, to
facilitate the research and development of the DART technology. Once a working platform had
been developed, research and development continued to expand to modify and improve product
offerings and maintain a leading competitive position.
Phase I (Fourth Quarter 1995 – Third Quarter 1996)
DART was first conceptualized as a tool to facilitate the trafficking of Internet
advertising for Petitioner's Media business. The initial development phase saw the creation of
three core systems. Ad Server software was developed to execute ad delivery and simple
targeting of ads to Internet users. Ad Manage software was developed to provide DART users
with an interface to manage ad campaigns using the DART system. Finally, Reports software
was developed to generate reports of ad campaign performance, billing, and revenue share
splitting. Shortly after this rudimentary creation of DART, it became apparent that there could be
a separate market to sell this ad delivery service to Web publishers directly as an ASP (i.e., not
as an add-on to Petitioner's Media offering). Pursuit of this opportunity led DART development
into Phase II.
Phase II (Fourth Quarter 1996 - Second Quarter 1997)
During Phase II, the beta version of DART was developed for Web publishers. The beta
version contained similar core systems as the model used in the Media network, but it was much
more robust. Development on the Ad Server component resulted in more sophisticated targeting
and the ability to track an advertisement. A new component called Show Availability was added,
providing users with an inventory forecasting tool. Ad Manage was enhanced to give DART
customers the ability to directly manage ad campaigns (in the Phase I version, clients had to
instruct Petitioner to execute changes to the campaign). The Reports software was replaced with
RepM, which enhanced reporting capabilities for tracking campaign performance and providing
more billing, accounting, and revenue split detail.

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Phase III (Third Quarter 1997 - Second Quarter 1998)
Development efforts during Phase III resulted in the creation of the commercial version
of DART, called DART for Publishers or DFP. Aimed strictly at Web publishers, DFP
contained more features than the beta version, including enhanced targeting and reporting
features, and most importantly, provided for scalability. During this period, use of the Internet
grew exponentially and, with it, the market for advertising. Due to the increased volume of ads
being delivered, Petitioner made significant research and development and capital investment to
handle the rapidly expanding volume and provide enhanced scalability capabilities to its clients.
Also during this period, it became apparent that DART could not only serve Web
publishers in trafficking ads to their sites, but could also serve the advertisers themselves (and
their agencies) in sending ads to specific publisher sites. Further development was undertaken to
create DART for Advertisers or DFA. DFA used similar systems as DFP (e.g., Ad Server, Ad
Manage, and RepM) but expanded those systems to address needs unique to advertisers. For
instance, DFA contained a new system called Spotlight, which tracked advertisements "post­
click." With Spotlight, a DFA client could track whether an advertisement resulted in a sale,
among other things. The commercial version of DFA was made available to advertisers in mid­
1998.
This Advisory Opinion addresses Petitioner’s purchases of computers and other tangible
personal property during the period from December 1, 1995, through November 30, 1998.
Applicable law and regulations
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:
*

*

*

(10) Tangible personal property purchased for use or consumption directly and
predominantly in research and development in the experimental or laboratory sense.
Such research and development shall not be deemed to include the ordinary testing or
inspection of materials or products for quality control, efficiency surveys, management
studies, consumer surveys, advertising, promotions or research in connection with
literary, historical or similar projects.
*

*

*

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(12) Machinery or equipment for use or consumption directly and predominantly
in the production of tangible personal property . . . for sale, by manufacturing, processing,
generating, assembling . . . but not including parts with a useful life of one year or less or
tools or supplies used in connection with such machinery or equipment. . . .
*

*

*

(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 528.11 of the Sales and Use Tax Regulations provides, in part:
(b) Research and development.
(1) Research and development, in the
experimental or laboratory sense, means research which has as its ultimate goal:
(i) basic research in a scientific or technical field of endeavor;
(ii) advancing the technology in a scientific or technical field of
endeavor;
(iii)the development of new products;
(iv) the improvement of existing products; and
(v) the development of new uses for existing products.
(2) Research and development in the experimental or laboratory sense does not
include:
(i) testing or inspection of materials or products for quality control (for machinery
and equipment used for quality control in the production of products for sale, see section
528.13 of this Part);
(ii) efficiency surveys;
(iii) management studies;
(iv) consumer surveys, advertising and promotions; and
(v) research in connection with literary, historical or similar projects.
(c) Directly, predominantly, exclusively. (1) Direct use in research and
development means actual use in the research and development operation. Tangible
personal property for direct use would broadly include materials worked on, and
machinery, equipment and supplies used to perform the actual research and development

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work. Usage in activities collateral to the actual research and development process is not
deemed to be used directly in research and development.
(2) Tangible personal property is used predominantly in research and
development if over 50 percent of the time it is used directly in such function.
Opinion
Petitioner is a digital-marketing-solutions company whose clients include advertisers,
direct marketers, and Web publishers. Through its patented DART technology, the software
platform for many of its offerings, Petitioner services Internet ads for its clients and delivers
targeted advertisements to Internet users worldwide. These targeted advertisement deliveries are
premised on the information Petitioner gathers and analyzes with regard to persons viewing the
ads.
Petitioner asserts that during the period described in this Opinion (Fourth Quarter 1995 –
Second Quarter 1998), Petitioner conducted research in connection with its DART technology
and was continually developing new or enhancing existing technology. Although the activities
Petitioner describes were undertaken in the development of new and better software programs
and applications that enhanced the DART technology, it does not appear from the facts in this
Opinion that such activities entailed more than the trial and error testing and implementation of
programs, and the integration of preexisting and new applications. Such activities do not
constitute research and development in the experimental or laboratory sense for purposes of
section 1115(a)(10) of the Tax Law and section 528.11(b) of the Sales and Use Tax Regulations.
Petitioner’s purchases of computers and other tangible personal property used for such activities,
therefore, did not qualify for the exemption from sales and use taxes under section 1115(a)(10).
Computer system hardware used to design and develop software, including custom
software, for sale became eligible for exemption pursuant to section 1115(a)(35) of the Tax Law
effective June 1, 1998.
Prewritten computer software, as well as compact discs (CDs), tapes, and other tangible
media encoded with prewritten software, is considered to be tangible personal property. See
section 1101(b)(6) of the Tax Law. The machinery and equipment used directly and
predominantly (more than 50% of its use) to create and encode the actual discs and tapes sold,
which equipment might include the computers that directly operate the production machinery
encoding and creating the tangible personal property, qualify for the exemption from sales tax
under section 1115(a)(12) of the Tax Law for machinery and equipment used directly and
predominantly in the production of tangible personal property for sale. (But see also Matter of
Empire Vision Center, Dec Tax App Trib, Nov 7, 1991, DTA No.805767, where the computers
used to determine the setting necessary to calibrate the exempt machinery and equipment that
produced the property being sold were themselves not considered to be directly involved in
production and, therefore, did not qualify for the exemption.)

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To the extent Petitioner was engaged in creating software to market for sale, as opposed
to software for its own use in delivering its marketing services, the computers used directly and
predominantly in the research, design, and development of software for sale, whether prewritten
software or custom software, may have qualified for exemption from tax under section
1115(a)(35) of the Tax Law, on and after June 1, 1998.
However, if such computers were used to create software that Petitioner itself used and
did not sell separate and apart from its sales of marketing services, such computers, as well as
any other machinery and equipment used to create the software, will not qualify for exemption
under the provisions of either section 1115(a)(12) or 1115(a)(35) of the Tax Law. Accordingly,
computers and other equipment purchased by Petitioner during the period described in this
Opinion that were used to create software for Petitioner=s own use in providing services to its
customers were not exempt under section 1115(a)(12) or (35), or section 1115(a)(10), of the Tax
Law. See Doubleclick, Inc., Adv Op Comm T&F, May 8, 2003, TSB-A-03(19)S.

DATED: June 17, 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.