I sell access to software that produces scannable and nonscannable tax and business forms -- is that a taxable sale of software, and is the computer hardware I use to build it exempt?

Plain-English summary

STF Services Corp. of East Syracuse, New York sells three software products: SuperForm Tax Forms (prepares federal, state, and local tax forms, including scannable bar codes, plus tax computations, instructions, pop-up notes, due dates, and reference material), SuperForm Sales Tax Rates/Forms (prepares state and local sales and use tax forms and looks up current rates for thousands of jurisdictions), and SuperForm Doing Business Forms (over 3,700 state-specific business filings such as articles of incorporation, LLC organization documents, and dissolution forms). Customers install the products from a compact disc or download them directly from STF's server over the Internet, enter their information, and the software automatically fills in and computes the government-approved, signature-ready (and for tax forms, scannable) forms.

STF asked the Department two questions. First, is selling access to these products a taxable sale of software? Second, is the computer hardware (computers, external hard drives, printers, scanners, servers, monitors, keyboards, mice, network gear, a disc duplicator, and network routers) that STF's staff use to design and develop the software exempt from sales and use tax as computer system hardware used in software development?

On the first question, the Department said yes, this is a taxable sale of software. Because customers pay to install and use software that generates the forms and performs the calculations, the consideration STF receives is for the sale of software, not merely for access to blank forms. The software is "prewritten" (not designed and developed to any one purchaser's specifications), so under Tax Law §§1101(b)(6) and (14), the charge for the license or lease to use it is taxable tangible personal property under §1105(a) -- regardless of whether the customer gets it on a CD or via direct Internet download.

On the second question, the Department applied the §1115(a)(35) exemption for computer system hardware used directly and predominantly (more than 50% of the time) in designing and developing software for sale. Hardware STF's staff use in that role -- the programming staff writing code, desk-top publishing staff formatting forms to match the government originals, and the proofreading staff catching errors -- can qualify. But hardware used predominantly by STF's analyst department (which procures government forms and verifies STF's output against government specifications) does not qualify, because that work is administrative/pre-production, not the design and development of the software itself. Likewise, hardware used predominantly by the technical support department (which helps customers with software problems after the sale) does not qualify, because that is a post-production, customer-support function. The Department also noted it couldn't determine the exempt/taxable status of any specific piece of hardware that is shared across departments, since that depends on which use predominates (more than 50% of the time) for that particular item -- a fact STF hadn't supplied.

What this means for you

Software vendors selling form-preparation or compliance tools

Charging customers to access software that fills in, calculates, and generates government forms (even "just" scannable/fillable tax and business forms) is a taxable sale of prewritten software under New York law, whether delivered on physical media or downloaded over the Internet. The nature of the forms produced doesn't change the analysis -- what's being sold is the software.

Software companies claiming the computer-hardware development exemption

The §1115(a)(35) exemption only reaches hardware used directly and predominantly (over 50% of the time) in the actual design-and-development process -- coding, testing, debugging, documentation, and similar activities. Hardware used mainly for administrative tasks (like verifying forms against government specs) or for post-sale technical support does not qualify, even if that work supports the same overall product. If the same machines are shared across departments, you need records showing which use predominates for each item to support an exemption claim.

Accountants and tax professionals

This opinion is a useful two-part template: it confirms that "form-generating" software is taxed like any other prewritten software regardless of delivery medium, and it walks through how the Department allocates the hardware-development exemption function-by-function (design/development staff vs. procurement/verification vs. technical support) rather than treating an entire IT department's equipment as automatically exempt or taxable.

Common questions

Q: Is selling software that fills in and files government tax forms automatically taxable, even if it's "just forms"?
A: Yes. Because the customer is paying for prewritten software that inputs data, performs calculations, and generates the forms -- not simply for blank forms -- the charge is a taxable sale of software under Tax Law §1105(a), whether delivered by CD or Internet download.

Q: Does it matter whether customers get the software on a disc or by downloading it?
A: No. Under Tax Law §1101(b)(6), prewritten software is taxable regardless of the medium by which it's conveyed to the purchaser.

Q: Is all the computer hardware my development team uses exempt from sales tax?
A: Only the hardware used directly and predominantly (more than 50% of the time) in actually designing and developing the software for sale. Hardware used mainly for procuring/verifying forms or for post-sale technical support does not qualify, even for a company whose whole business is that software.

Q: What if my staff use the same computers for both development work and administrative or support work?
A: The exemption turns on which use predominates (more than 50% of the time) for that specific piece of hardware. Without records showing predominant use, the Department can't determine which purchases qualify -- as happened here, where STF hadn't provided enough detail for the Department to rule on particular items.

Q: Can another software company just rely on this opinion for its own products?
A: No. This is an Advisory Opinion binding only on STF Services Corp. and only as to the facts it described; other taxpayers need their own ruling or should consult a tax professional about how the same rules apply to their specific facts.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(5) (definition of "sale, selling or purchase")
• Tax Law §1101(b)(6) (definition of "tangible personal property," including prewritten computer software)
• Tax Law §1101(b)(14) (definition of "pre-written computer software")
• Tax Law §1105(a) (tax on retail sales of tangible personal property)
• Tax Law §1115(a)(35) (exemption for computer system hardware used directly and predominantly in designing/developing software for sale)
• Sales and Use Tax Regulations §526.7(a) (definition of sale, selling or purchase)
• TSB-M-93(3)S (State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software, March 1, 1993)
• TSB-M-98(5)S (Exemption for Computer System Hardware, June 8, 1998)

Prior opinions referenced:

• Ernst & Young LLP, Adv Op Comm T&F, June 24, 2003, TSB-A-03(28)S
• 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_40s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Taxpayer Guidance Division

TSB-A-08(40)S
Sales Tax
August 28, 2008

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S060726B

On July 26, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from STF Services Corp., 26 Corporate Circle, East Syracuse, New York
13057. Petitioner, STF Services Corp., provided additional information pertaining to the Petition
on August 11, 2006, and February 7, 2007.
The issues raised by Petitioner are:

1. Whether Petitioner’s sale of access to scannable and nonscannable tax and business
   forms provided via Petitioner’s software is a taxable sale of software.
2. Whether the computer system hardware purchased or leased by Petitioner and used or
   consumed predominantly (more than 50% of the use) in designing or developing the
   software that produces scannable and nonscannable tax and business forms are
   exempt from sales and use tax pursuant to section 1115(a)(35) of the Tax Law.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner is in the business of producing scannable and nonscannable tax and business
   form products. Petitioner has three specific product categories:
3. SuperForm Tax Forms
4. SuperForm Sales Tax Rates/Forms
5. SuperForm Doing Business Forms
   The SuperForm Tax Forms product is offered to Petitioner’s customers in a compact disc
   format and also through a direct Internet connection to Petitioner’s server. The product is used
   to prepare federal, state, and local tax forms. Customers install the SuperForm Tax Forms on
   their computers by using the compact discs or downloading directly from the Internet.
   SuperForm Tax Forms users input information requested by the software and the software
   performs tax computations automatically. SuperForm Tax Forms generates government
   approved forms including scannable bar codes that the user can file with federal, state, and local
   tax authorities. The software includes additional functionality; for example, forms are linked to
   tax return instructions, pop-up notes and due dates, quick reference guides, IRS publications,
   state tax directories, practice aids and organizers, and prior years forms and instructions.
   The SuperForm Sales Tax Rates/Forms product is offered to Petitioner’s customers in a
   compact disc format and also through a direct Internet connection to Petitioner’s server. The

-2­
TSB-A-08(40)S
Sales Tax
August 28, 2008

product is used to prepare state and local sales and use tax forms and also includes a function to
look up current sales and use tax rates for thousands of state and local taxing jurisdictions.
Customers install the SuperForm Sales Tax Rates/Forms on their computers by using the
compact discs or downloading directly from the Internet. The product enables users to input data
directly on the computer-generated tax form, and the software automatically computes the tax on
the form. The product generates government approved signature-ready forms which the user can
file with state and local tax authorities. The software includes additional functionality such as
fast form searching by keyword type or number, profiles that fill in client information without
tedious re-keying, and official tax return instructions linked to forms.
The SuperForm Doing Business Forms product is offered to Petitioner’s customers
through a direct Internet connection to Petitioner’s server. Petitioner’s customers can download
the product directly through the Internet connection from Petitioner’s server. The product
contains over 3,700 state-specific forms including articles of incorporation for a regular
corporation, articles of organization for a limited liability company, business name reservation
forms, annual report forms, forms covering mergers and consolidations, changes of registered
agents, general partnership and limited liability company statements of dissolution, articles of
dissolution, and other forms. SuperForm Doing Business Forms users input information to fill in
the necessary areas of the required forms. Some information in certain fields on the forms may
be entered once and saved by the software to be automatically filled in on other forms. The
product generates government approved signature-ready forms.
Petitioner employs staff in various departments to develop its products. The analyst
department is responsible for procuring government forms and verifying that Petitioner’s
software produces the forms according to government specifications. The programming staff
writes the software that runs the forms programs including the calculations code that is
embedded onto the individual forms. The desk-top publishing department manipulates the forms
to look like the original government-approved forms. The proofreading department reviews the
forms for typos and other errors. The technical support department assists customers with any
software problems. Petitioner employees use or consume the computer system hardware
(computers, external hard drives, printers, scanners, servers, monitors, keyboards, mice, network
interfaces, network hubs, disc duplicator, and network routers) predominantly (more than 50% of
the use) to design and develop the three products previously described.
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
TSB-A-08(40)S
Sales Tax
August 28, 2008

*

*

*

(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.
(6) Tangible personal property. Corporeal personal property of any nature. . .
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. . . .
*

*

*

(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 of the Tax Law provides, in part:
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.

-4­
TSB-A-08(40)S
Sales Tax
August 28, 2008

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:
*

*

*

(35) Computer system hardware used or consumed directly and predominantly in
designing and developing computer software for sale. . . .
Section 526.7(a) of the Sales and Use Tax Regulations provides, in part:
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.
Technical Services Bureau Memorandum entitled State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software, March 1, 1993, TSBM-93(3)S provides, in part:
Effective September 1, 1991, State and local sales and compensating use taxes are
imposed on the sale or use of prewritten computer software and certain related services.
*

*

*

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.
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 on or after September 1, 1991,
for a license to use, or for the rental or lease of prewritten software is subject to sales or
use tax. The transfer of public domain software without any charge is not taxable
because there is no consideration.
*

*

*

-5­
TSB-A-08(40)S
Sales Tax
August 28, 2008

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.
Technical Services Bureau Memorandum entitled Exemption for Computer System
Hardware, June 8, 1998, TSB-M-98(5)S, provides, in part:
Section 97 of Chapter 56 amended the New York State Tax Law to exempt from
New York State and local sales and compensating use (use) taxes purchases, leases or
rentals of computer system hardware that is used or consumed directly and predominantly
in designing and developing computer software for sale. This exemption, which is
provided for under Tax Law '1115(a)(35), is effective June 1, 1998.
*

*

*

Only the purchase of those components of the computer system hardware and
associated parts that are used directly and predominantly in the design and development
of computer software for sale is exempt from sales and use taxes under section
1115(a)(35).
Computer System Hardware. Computer system hardware is any organized
assembly of physical equipment that is united and regulated by interaction or
interdependence to accomplish a set of specific computer system functions. The term
includes any connected or directly related device or equipment which enables the
computer to store, retrieve or communicate to or from a person, another computer or
another device, the results of computer operations, computer programs or computer data.
Examples of computer system hardware are: microcomputers; minicomputers;
main-frame computers; personal computers; external hard drives; portable disk drives;
compact disc read only memory (CD-ROM) drives; external modems; printers; scanners;
servers; monitors; keyboards; mouses; network interfaces; network hubs; and network
routers.
*

*

*

Directly and Predominantly. The purchase of computer system hardware is
eligible for the exemption only if the computer hardware meets the tests of direct and
predominant use.

-6­
TSB-A-08(40)S
Sales Tax
August 28, 2008

Directly means that the computer system hardware is actually used in designing
and developing computer software for sale, or that the hardware has an active, causal
relationship in the design and development of computer software for sale. For example,
computer system hardware that is used to create, modify or store computer programs
under the control of a developer is considered to be used directly in the design and
development of computer software. Computer system hardware that is used to print the
computer programs and documentation during the design and development stages is also
considered to be used directly in the design and development of the computer software.
Computer system hardware used in activities that are collateral to the actual
design and development process is not considered to be used directly in designing and
developing computer software for sale. For example, use of computer system hardware
in administration, production or distribution activities is not considered direct use for
purposes of this exemption. Administration includes activities such as sales promotion,
general office work, purchasing, maintenance, and clerical tasks (such as preparation of
work, production and time records). Production includes those activities involved in the
duplication of the finished software and packaging the software for sale. Distribution
includes all operations subsequent to production, such as storing, displaying, selling,
loading and shipping finished products.
Predominantly means that the computer system hardware must be used more than
50% of the time in the design and development of computer software for sale.
*

*

*

Designing and Developing. The term designing and developing includes
systems analysis, program design, coding, testing, debugging and documentation that are
part of the design and development of computer software for sale. Thus, the term
includes activities carried on from the conceptual stage, through the planning, evaluation
and testing stages of development.
*

*

*

Supplies. This exemption does not apply to consumable supplies such as toner,
ink, printer paper, floppy diskettes, removable disk cartridges, high capacity disks,
portable disk drive disks, writeable and erasable CD-ROM drive disks, mouse pads, wrist
pads, and the like.
Opinion
Petitioner’s SuperForm Tax Forms and SuperForm Sales Tax Rates/Forms products are
offered to customers in a compact disc format. These products as well as the SuperForm Doing

-7­
TSB-A-08(40)S
Sales Tax
August 28, 2008

Business Forms are also offered through a direct Internet connection to Petitioner’s server.
Customers install the products on their computers by using the compact discs or downloading
directly from the Internet. Users input information as requested by the software and the software
uses the information to complete the required areas of the form and performs the necessary tax
computations automatically. The software generates government approved forms including
scannable bar codes that the user can file with federal, state and local authorities. The software
also includes additional functionalities which provide the user access to additional information
and instructions that assist the user in completing the required returns.
Customers purchase Petitioner’s product to access various functional forms. The forms
with additional functionalities necessary to complete the forms are provided to the customers via
compact disc or the Internet. Once the customer installs the product on its computer the
customer can access the fill-in forms with built-in calculations. Therefore, the consideration
received by Petitioner is for the sale of software to the customer which provides access to
computer generated fill-in and functional forms and the ability to complete the forms. The
software is prewritten software since it is not designed and developed to the specifications of a
specific purchaser. The fee paid for the lease or license to use or consume prewritten computer
software, regardless of the medium by means of which such software is conveyed to the
purchaser, is subject to New York State sales tax under section 1105(a) of the Tax Law. See
sections 1101(b)(6) and (14) of the Tax Law and Ernst & Young LLP, Adv Op Comm T&F, June
24, 2003, TSB-A-03(28)S. Therefore, Petitioner’s receipts from the sales of its products whether
delivered in a compact disc format or via direct Internet connection are receipts from sales of
software subject to New York State sales tax under section 1105(a) of the Tax Law.
Computer system hardware that is used directly and predominantly in the design and
development of software products for sale is exempt from sales and use tax under section
1115(a)(35) of the Tax Law. See TSB-M-98(5)S, supra. Directly means that the computer
system hardware is actually used in designing and developing computer software for sale, or that
the hardware has an active, causal relationship in the design and development of computer
software for sale. Use of computer system hardware in administration, production, or
distribution activities is not considered direct use for purposes of this exemption. Predominantly
means that the computer system hardware must be used more than 50% of the time in the design
and development of computer software for sale. The term “designing and developing” includes
activities carried on from the conceptual stage, through the planning, evaluation, and testing
stages of development. See TSB-M-98(5)S, supra.
Petitioner’s sales of its SuperForm Tax Forms, SuperForm Sales Tax Rates/Forms, and
SuperForm Doing Business Forms products are sales of software. Therefore, computer system
hardware purchased or leased by Petitioner which is used or consumed directly and
predominantly in designing or developing these products is exempt from sales and use tax.
The functions of procuring and verifying government forms for which the analyst

-8­
TSB-A-08(40)S
Sales Tax
August 28, 2008

department is responsible, as well as the functions of the technical support department, are
administrative, pre-production, and post production activities. For purposes of section
1115(a)(35) of the Tax Law, such functions are not performed directly in the creation, design,
development, or testing of the software. Therefore, purchases of computer system hardware for
use predominantly in these departments do not qualify for the exemption provided under section
1115(a)(35) and such purchases will be subject to the applicable State and local sales taxes.
Petitioner may use the same computer system hardware for its administrative, production
(design, development, testing, etc.) and post-production (customer support) activities. Petitioner
has not furnished enough information for this Opinion to make any determination as to whether
any particular computer hardware purchased or leased by Petitioner is used both directly and
predominantly (i.e., more than 50%) in the design and development of computer software for
sale. The predominant (more than 50%) use of the computer hardware will determine the sales
tax status of such purchase. See Doubleclick, Inc., Adv Op Comm T&F, May 8, 2003,
TSB-A-03(19)S.

DATED: August 28, 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.