We built software for one airline, then repurposed it as the base for a licensed product we now customize and sell to many different airlines — is that taxable prewritten software, or exempt custom software?

Plain-English summary

Aviation Software, Inc. licenses software that airlines use to scan bar-coded mail sacks (for USPS and foreign postal authorities) at departure and destination, capturing data the airline needs to invoice the postal services. The software's origin story matters: it was first custom-built for one specific airline to meet USPS electronic-data-interchange requirements for a Caribbean mail contract. The developer then formed Aviation Software and used that original program as the base for a new product, customizing it for each new airline customer's own computer systems and scanning equipment — so airline A's version won't run for airline B, and vice versa. The software is transmitted electronically from a New Jersey server; the airline then deploys it to its own scanners, some located at New York airports.

The Department held these license fees are taxable prewritten computer software, not exempt custom software — even though every individual airline's copy is, in a sense, customized just for them. The key rule: New York's definition of "prewritten software" specifically includes software that was originally custom-developed for one purchaser but is then sold to a different purchaser — reusing the original Caribbean-airline software as the template for licensing to other airlines converts it into prewritten software the moment it's resold to someone other than the original commissioning airline. As in other 2009 SaaS opinions, remote access alone (even without downloading a tangible copy) is a taxable constructive transfer of possession, since the airline gains the right to use and control the software.

There's still real relief available: separately stated, reasonable charges for the airline-specific modifications (integrating the base software with each airline's particular computer system and scanning equipment) remain exempt, as long as the invoice breaks out the prewritten-software charge from the customization charge. And because tax follows the location where the software is actually used, receipts must be allocated between airport/business locations inside and outside New York — allocating by specific airport location (as the taxpayer proposed) was accepted as a reasonable method, subject to the facts of the case.

What this means for you

Software companies that started with one custom build and are scaling to a product

If your product's origin was a one-off custom job for a single client, watch the moment you start reselling that same codebase (even heavily modified per customer) to other customers — that's the trigger that converts it into taxable prewritten software going forward, even though each customer's version still looks "customized" to them.

Multi-location B2B software vendors

Structure your invoices to separately state the reasonable charge for customer-specific modifications from the base software license fee — only the modification piece has a shot at staying exempt. And if your customers use the software across multiple states, be ready to allocate your New York tax collection to the specific in-state usage locations rather than taxing (or exempting) the whole receipt.

Accountants and tax professionals

This is a useful companion to other 2009 constructive-possession opinions in this corpus, but the added wrinkle here is the "custom software resold to a different purchaser" rule under Tax Law §1101(b)(14) — worth flagging specifically when a client's product has a custom-build origin story that later became the seed for a multi-customer offering.

Common questions

Q: Each of our customers gets a version customized just for them — doesn't that make it exempt custom software?
A: Not once the underlying base program was originally built for a different customer and is now being reused/resold to others. New York's rule specifically treats software as prewritten if it was custom-developed for one purchaser and then sold to someone else, regardless of how much per-customer customization happens afterward.

Q: Can we still get any exemption for our customization work?
A: Yes — reasonable, separately stated charges for the modifications made to fit each specific customer's systems remain exempt, as long as your invoice breaks that charge out from the base software license fee.

Q: Our customers never download the software or receive a tangible copy — does that avoid tax?
A: No. The location of the code is irrelevant; a customer who gains the right to use, control, or direct the software's use has received a taxable transfer of possession, regardless of delivery mechanism.

Q: Our customers use the software at locations both in and outside New York — how do we tax that?
A: Allocate your receipts based on where the software is actually used (e.g., specific airport or business locations), collecting tax only on the New York-attributable portion — though the reasonableness of any specific allocation method depends on the full facts of your situation.

Q: Can any software company rely on this exact opinion?
A: No. An advisory opinion binds the Department only as to the taxpayer who requested it and the facts described — here, specifically that the base software was originally built for one airline and then reused as a template for other airlines.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(5), (6), (14) (definition of sale; tangible personal property; prewritten vs. custom software, including custom software resold to a new purchaser)
• Tax Law §1105(a) (sales tax on tangible personal property)
• Tax Law §1115(o) (exemption for separately stated, reasonable software modification charges)
• 20 NYCRR §526.7(e), (e)(4) (place of delivery; constructive possession)
• TSB-M-93(3)S (prewritten software and related services)

Cited opinions:

• Software Dynamics, Inc., TSB-A-97(45)S
• KPMG LLP, TSB-A-03(5)S (allocation of receipts across in-state/out-of-state use locations)

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(6)S

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Taxpayer Guidance Division

TSB-A-09(6)S
Sales Tax
January 30, 2009

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S070920A

On September 20, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Aviation Software, Inc., 400 Rella Blvd, Suite 205, Suffern, NY 1090l.
Petitioner, Aviation Software, Inc., provided additional information pertaining to the Petition on
March 13, 2008.
The issues raised by Petitioner are:

1. Whether receipts from the sale of licenses for the use of software that has been
   customized to the specifications of each airline customer are subject to sales and use
   taxes.
2. Whether receipts from airline customers with locations outside of New York may be
   allocated by the location of the airports used by the airline customer.
   Petitioner submitted the following facts as the basis for this Advisory Opinion.
   Petitioner develops customized software for airlines. The airlines using Petitioner’s
   software transport mail for the United States Postal Service (USPS) and foreign postal
   authorities.
   Airline Software, Inc. (ASI) originally received a request from an airline to develop
   software. The airline planned to use the software in its operation to carry US mail throughout the
   Caribbean were the airline to be the successful bidder on a contract with USPS. In order to
   obtain the contract, USPS required the airline to be electronic data interface (EDI) compliant.
   ASI requested the USPS EDI specifications, developed a computer software program to meet
   these specifications, and the airline was awarded the contract with USPS.
   After this software was developed, ASI formed a new corporation, Petitioner, in Nevada
   in April 2004. The software was then transferred as a capital contribution to Petitioner.
   This software was used as the basis for the software currently provided by Petitioner to
   each airline customer. The software is customized by Petitioner for each airline, in order to
   integrate the software with the airline’s computer system and scanning equipment. The resulting
   software will only be usable by the specific airline customer. For example, airline A can not use
   the software that has been customized for airline B and vice versa.
   The customized software is licensed to various airlines. The licenses are nonexclusive
   and nontransferable. The customized software is transmitted electronically to Petitioner’s airline

-2TSB-A-09(6)S
Sales Tax
January 30, 2009
customers via a server in New Jersey. The airline customer then transmits the customized
software to various locations. Petitioner is not involved in the determination as to where the
software is to be utilized.
The customized software is used in the following manner. The airline downloads the
software to its computer systems that include scanners. Employees of the airline use the
scanners to scan sacks of mail being transported by the airline; the sacks are scanned at the point
of departure and at the point of destination. Some of the points of departure and destination are
located at airports in New York. The customized software downloaded into the scanners enables
the airline to “capture” the bar-code information on labels affixed to the sacks of mail being
transported. This information enables the airlines to invoice USPS and foreign postal authorities
for the mail being transported by the airline.
Petitioner charges a per kilo/pound amount for scanning the transported mail and
providing the documentation in support of the fee charged by an airline to USPS. In the future
Petitioner’s invoices will indicate the charge for prewritten software and for customized
software.
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.
(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....
*

*

*

-3TSB-A-09(6)S
Sales Tax
January 30, 2009
(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 prewritten 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. (Emphasis added)
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.
Technical Services Bureau Memorandum entitled State and Local Sales and
Compensating Use Taxes Imposed on Certain Sales of Computer Software dated March 1, 1993,
TSB-M-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.
The effect of this change in the Tax Law is to broaden the types of
computer software that are subject to sales and use taxes. . . . certain software
previously considered “custom” may now be considered prewritten computer
software and subject to such taxes. . . .

-4TSB-A-09(6)S
Sales Tax
January 30, 2009
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
*

*

*

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.
*
Example 1.

*

*

A software developer creates an accounting system using
prewritten software modules for general ledger, accounts
receivable, accounts payable, payroll, inventory management, etc.
The developer may also sell the modules separately or bundled in
other packages. Even though the modules may be modified to the
specific requirements of the client’s business, the sale of the
modules is subject to sales or use tax as prewritten software. An
additional charge for modification or “custom” programming by
the developer would not be subject to sales or use tax if the
developer’s charge for the modification is reasonable and is
separately stated on the billing statement.
*

*

*

Sale of Software Upgrades
Generally, the sale of a revision or upgrade of prewritten software is
subject to tax as the sale of prewritten software. If, however, the software
upgrade is designed and developed to the specifications of a specific purchaser, its
sale to that specific purchaser would be exempt as custom software.
Opinion
Petitioner develops software specifically for use by airlines transporting mail. Each
individual airline customer may have a different computer system and scanning equipment and

-5TSB-A-09(6)S
Sales Tax
January 30, 2009
Petitioner must customize the software to meet the system and equipment specifications.
Petitioner’s software originally was developed for a specific airline for use in transporting mail
throughout the Caribbean. Subsequently, Petitioner determined there would be a broader market
for this software, and the software was then made available for use by other airlines transporting
mail in the United States and other foreign countries. Petitioner states that the software created
for the airline in the Caribbean was used as the basis for the software currently being marketed
throughout the United States and other foreign countries.
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.” Section 1101(b)(6) of the Tax Law. The sale of prewritten computer software is
subject to tax as the sale of tangible personal property. See sections 1101(b)(6) and 1105(a) of
the Tax Law . Sale is defined as “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.” Section 1105(b)(5) of the Tax Law . Section
526.7(e) of the Sales and Use Tax Regulation 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.” Section 526.7(e)(4)
further provides that, with respect to a “license to use,” a transfer of possession has occurred if
there is a transfer of 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 customer gains constructive possession of the
software, and gains the “right to use, or control or direct the use of," the software. The transfer
of Petitioner's software to its customers in New York is subject to sales tax if the software is
prewritten software.
Prewritten software for purposes of section 1101(b)(14) of the Tax Law includes software
designed and developed to the specifications of a specific purchaser when it is sold to a person
other than such purchaser. Therefore, the portion of Petitioner’s software that is used as the basis
for the software currently being marketed to various airlines is prewritten software as described
in section 1101(b)(14). Prewritten software is subject to sales and use tax under section 1105(a)
of the Tax Law as tangible personal property when delivered to purchasers in New York State.
See section 1101(b)(6) of the Tax Law.
Though Petitioner is modifying its software, the modifications do not affect the
software’s overall character as prewritten software. Petitioner’s receipts from the sale of its
software and any charges to modify such software will be subject to sales and use taxes, unless
charges for the prewritten portion and the modifications are reasonable and separately stated on
an invoice or other statement given to the purchaser. If reasonable and separately stated, the fees

-6TSB-A-09(6)S
Sales Tax
January 30, 2009
for modification of the software to the specifications of the individual airline customer will not
be subject to sales and use taxes. See sections 1101(b)(6) and 1115(o) of the Tax Law. See also
Software Dynamics, Inc., Adv Op Comm., July 23, 1997, TSB-A-97(45)S.
Petitioner’s software is downloaded by an airline to its computer systems. The airline
then transmits the software to various locations for use in scanning sacks of mail at points of
departure and points of destination. The situs of the sale for purposes of determining the proper
incidence of tax is the location associated with the license to use (i.e., the location of the
customer’s employees that use the software). In the present case, if the airport locations and
other business locations (e.g., corporate data processing center, accounting department, etc.)
where the customer will 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 locations in
New York. The portion of Petitioner’s receipts from sales of software that are delivered and
used by the purchaser outside of New York are not subject to New York State and local sales and
use taxes. The determination of the proper local tax rate and jurisdiction is also based on the
location associated with the license to use.
Allocating the sale of Petitioner’s software based upon the specific airport (and other
business locations) where the customer uses the software would appear to be an acceptable basis
for allocation of Petitioner’s receipts from the sales of licenses for the use of its software. It
should be noted that, generally, the determination of whether a proposed method for
apportioning receipts from the sale of software as described in this Advisory Opinion is
a reasonable method for collection of tax requires consideration of all the facts and
circumstances in a particular case. See KPMG LLP, Adv Op Comm T&F, January 31, 2003,
TSB-A-03(5)S.

DATED: January 30, 2009

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.