If my company lets customers access software over the Internet from my own servers (a SaaS model), rather than installing it on their computers, do I still have to charge New York sales tax on it?

Plain-English summary

A logistics-technology company offered customers a menu of products: an "On-Demand TMS" transportation-management system hosted on the vendor's own servers and accessed by customers over the Internet, implementation services, training, and fully outsourced "Managed Services" where the vendor's own staff ran the customer's logistics function. It asked which pieces were subject to New York sales tax. The Department's answer sorted them into different buckets.

The TMS software access is taxable, because it's a sale of "prewritten computer software" no matter how it's delivered. New York law taxes prewritten software "regardless of the medium by means of which such software is conveyed to the purchaser," and a "sale" expressly includes a license or right to use. When a customer logs into TMS over the Internet, the Department said, the customer gains constructive possession and the right to control or direct the use of the software — that's enough to be a taxable sale even though no code file is ever copied or downloaded to the customer's own computer.

Managed Services are not taxable, because there the vendor's own staff does the work with the vendor's own resources — the customer never gets possession or control of any software, and outsourced logistics management isn't one of the services New York's sales tax law specifically lists as taxable.

Implementation and training services are not taxable on their own either, and stay untaxed even when sold alongside the taxable TMS software — as long as they're separately stated on the invoice and the charge is reasonable. If they're bundled into one undifferentiated price with the software, the whole bundle becomes taxable. Finally, travel expense reimbursements follow whatever service they relate to: taxable if tied to the taxable TMS product, exempt if tied to exempt Managed Services (or to training/implementation billed separately and reasonably).

What this means for you

Software and SaaS companies

Hosting your software on your own servers and letting customers log in over the Internet does not get you out of sales tax — New York treats that "access" as a taxable license to use software, just like a boxed software sale, because the customer still gets the practical right to direct how the software is used. Where you host the code or whether any file is ever copied to the customer is irrelevant.

Companies bundling software with services (implementation, training, managed services)

Keep charges for implementation and training separately stated and reasonable on your invoices if you want them to stay untaxed — bundling them into one lump software price pulls the whole thing into taxable receipts. And if you're providing a genuinely outsourced human service (the vendor doing the work with its own staff, not the customer operating software), that can escape sales tax entirely as an unenumerated service, distinct from a software license.

Accountants and tax professionals

The situs (location) for local tax purposes on a hosted-software license is the location of the users who actually access it — if users are both in and out of New York, tax applies only to the New York-user portion of the receipt, per TSB-A-03(5)S. Travel expense reimbursements are part of "receipt" under Tax Law §1101(b)(3) regardless of separate statement, so their taxability rides entirely on whether the underlying service or property is taxable.

Common questions

Q: We never give customers a copy of our software — they just log into our servers. Is that still a taxable software sale in New York?
A: Yes. The Department treats Internet-based access as a transfer of possession because the customer gains the right to use, control, or direct the use of the software, even without ever receiving the code on any medium.

Q: We do the outsourced work ourselves with our own staff instead of letting the customer use software directly — is that taxable?
A: Not automatically. If the customer has no ability to manipulate your software and never gets possession or control of it, and the service itself isn't one specifically enumerated as taxable, that arrangement can be an untaxed service rather than a software sale.

Q: How do we keep implementation and training charges untaxed when we sell them with our software?
A: State them as separate line items with reasonable charges relative to the overall price. If they're not separately stated and reasonable, they get folded into the taxable software receipt.

Q: Are reimbursed travel expenses taxed the same way as the underlying service?
A: Yes — travel expenses are part of "receipt" for sales tax purposes, so they're taxable when connected to a taxable service or product and exempt when connected to an exempt one.

Q: Does this opinion apply to my company's SaaS product?
A: Not automatically. An advisory opinion binds the Department only as to the taxpayer who requested it and only on the facts described. Your product's specific mechanics — what the customer actually gains access to and control over — could change the analysis.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(6) (prewritten software as tangible personal property)
• Tax Law §1101(b)(5) (definition of "sale")
• Tax Law §1101(b)(3) (definition of "receipt")
• Tax Law §1105(a), (c) (taxable property and enumerated services)
• Tax Law §1115(o)
• 20 NYCRR §526.7 (situs of sale; transfer of possession)
• 20 NYCRR §526.5(e) (travel expense reimbursement as part of receipt)
• TSB-M-93(3)S (Sales Tax on Certain Sales of Computer Software)

Cited opinions:

• TSB-A-03(5)S (situs for software license receipts)
• TSB-A-01(13)S; TSB-A-97(44)S (travel expense reimbursement taxability)

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(33)S

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(33)S
Sales Tax
August 13, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S080930C

Petitioner name and address redacted, requests an Advisory Opinion about whether receipts from
the sale of its logistics management products are subject to New York State and local sales taxes. We
conclude Petitioner’s On-Demand TMS System (TMS) is prewritten computer software, and that the
receipts from the sale of this product are subject to State and local sales tax. Petitioner’s managed services
are not subject to sales tax. The implementation services and training services are not subject to tax if they
are sold for a reasonable, separately-stated charge. Finally, reimbursements for travel expenses are subject
to sales tax when the travel expenses are incurred in conjunction with the sale of a taxable product.
Facts
Petitioner offers the following logistics management support products to its customers:
•

On-Demand TMS System (TMS) – TMS consists of software that resides on Petitioner’s servers
outside New York State and is accessed by customers over the Internet. The software is not installed
on customers’ computer systems, and customers are not required to purchase any computer hardware
in order to access the software. Customers log in to TMS in order to manage their transportation
functions. TMS provides customers with daily planning, execution, and settlement functions related
to the management of customers’ transportation and delivery operations. TMS also provides
customers with the ability to view their complete supply chain and private transportation systems via
the Internet. In order to provide these functions, Petitioner maintains a database of shared and
updated information from customers. Although TMS is designed to function in an automated
manner, customers have the ability to input data and make entries into the system. The information
provided by the customer is not incorporated into any report delivered or provided to a third party.

•

Implementation services – Petitioner’s consultants provide technical advice and integration
specifications to allow customers’ computer systems to interface properly with Petitioner’s computer
systems. Implementation services are used for both TMS and Petitioner’s Managed Services,
described below, and are necessary to ensure proper communication between Petitioner’s and
customers’ computer systems.

•

Training Services – Petitioner’s employees train customers’ employees on the use of TMS either
remotely or at the customer’s location.

•

Managed Services – Customers outsource selected logistics management functions to Petitioner.
Customers submit data to Petitioner via the Internet. After receiving the data, all daily operational
tasks of the selected logistics functions are performed by Petitioner’s staff using Petitioner’s
resources.

Each of the services described above are separately accounted for in Petitioner’s books and records and
separately stated in contracts and invoices provided to its customers.

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TSB-A-09(33)S
Sales Tax
August 13, 2009

Petitioner asks the following questions:

1. Are Petitioner’s products described above subject to New York State and local sales tax?
2. If the products are subject to sales tax, what is the situs of the transaction for sales tax purposes?
3. Are reimbursements paid to Petitioner by its customers for travel expenses subject to sales tax?
   Analysis
   Petitioner’s charges for use of its “On-Demand TMS System” are receipts from the sale of prewritten
   computer software. TMS consists of software that resides on Petitioner’s server, which its customers access
   via the Internet. Petitioner refers to itself as an “application service provider,” which it describes as a
   business organization that offers software application capabilities from centralized data centers, usually
   through the Internet. Prewritten computer software is included within the definition of tangible personal
   property, “regardless of the medium by means of which such software is conveyed to the purchaser.” Tax
   Law §1101(b)(6). The sale of prewritten computer software is subject to tax as the sale of tangible personal
   property. See Tax Law §§1101 (b)(6); 1105(a).
   “Sale” is defined as “[a]ny 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.” Tax Law §1101(b)(5). Sales and Use Tax Regulation section 526.7 provides generally that “a
   sale is taxable at the place where the tangible personal property or service is delivered or the point at which
   possession is transferred by the vendor to the purchaser or his designee.” Regulation section 526.7(e)(4)
   further provides that a transfer of possession has occurred if there is actual or constructive possession, or if
   there has been a transfer of “the right to use, or control or direct the use of, tangible personal property.” The
   location of the code embodying the software is irrelevant, because the software can be used just as
   effectively by the customer even though the customer never receives the code on a tangible medium or by
   download.
   The accessing of Petitioner’s software by Petitioner’s customers constitutes a transfer of possession
   of the software, because the customers gain constructive possession of the software, and gain the “right to
   use, or control or direct the use” of the software. Although Petitioner characterizes its product as a “service,”
   and contends that it does not sell software to its customers, this characterization is not controlling.
   Petitioner’s customers obtain the right to access the software and input data in order to manage their
   transportation functions. This is true even if no “copy” of the software is transferred to the subscriber.
   Accordingly, the sale of a license to use Petitioner’s software to a subscriber in New York is subject to State
   and local sales tax. The situs of the sale for purposes of determining the proper local tax rate and jurisdiction
   is the location associated with the license to use (i.e., the location of the subscriber’s employees that use the
   software). If the subscriber’s employees that use the software are located both in and out of New York State,
   Petitioner should collect tax based on the portion of the receipt attributable to the employee users located in
   New York. See TSB-A-03(5)S.
   We further conclude that Petitioner’s Managed Services are not subject to sales tax. The Managed
   Services involve outsourcing selected portions of a customer’s logistics management function to Petitioner.
   Petitioner uses its own personnel and resources to provide transportation management to its customers.
   Customers that purchase Managed Services have no ability to manipulate Petitioner’s software. The
   customer does not obtain possession of the software, constructive or otherwise, and does not obtain the right

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TSB-A-09(33)S
Sales Tax
August 13, 2009

to control or direct the use of the software. Accordingly, the sale of Managed Services does not constitute
the sale of prewritten computer software. Moreover, transportation management services are not among the
enumerated services subject to sales tax. See Tax Law §1105(c).
Petitioner’s implementation and training services, by themselves, are not among the enumerated
services subject to sales tax. If these services are sold with Petitioner’s TMS product for a separately stated
and reasonable charge, they are not subject to sales tax. However, if the charge for these services is not
separately stated and reasonable in relation to the entire charge for Petitioner’s TMS product, the charges for
implementation and training services are considered to be part of the receipt from the sale of prewritten
computer software and are subject to sales tax. See Tax Law §1115(o); State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software, TSB-M-93(3)S. When the
implementation services are provided with Managed Services, the charge is part of the receipt for an
unenumerated service and is not subject to sales tax.
Petitioner’s travel expense reimbursement may be subject to sales tax. “Receipt” for sales tax
purposes is the sale price of any property and the charge for any taxable service, “without any deduction for
expenses . . . regardless of whether such charges are separately stated.” Tax Law §1101(b)(3). Petitioner’s
travel expenses are expenses it incurs in providing services to its customers. Therefore, they are within the
definition of “receipt,” and are subject to sales tax to the extent that the related services or property are
subject to sales tax. See Penfold v. State Tax Comm’n, supra; Sales and Use Tax Regulations §526.5(e). If
the services for which Petitioner’s consultants are required to travel are not taxable, the reimbursement for
the related travel expenses is not taxable. See, e.g., TSB-A-01(13)S; TSB-A-97(44)S. For example, if
Petitioner charges its customer for travel expenses incurred in connection with providing Managed Services,
the travel expenses are part of the receipt for an unenumerated service and are not subject to sales tax.
Similarly, if Petitioner charges customers for travel expenses incurred in connection with training or
implementation services, and the charge for those services is separately stated and reasonable in relation to
the overall charge, the travel expenses are not subject to sales tax. However, if Petitioner’s charges for
training or implementation services are not separately stated and reasonable in relation to the charges for
prewritten computer software, the travel expenses incurred in connection with the training and
implementation services are included in the receipt for the sale of prewritten computer software and are
therefore subject to sales tax.

DATED: August 13, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

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.