New York Advisory Opinion TSB-A-81(5)I: Does a self-employed computer programmer/analyst's income qualify as the practice of a profession, exempt from New York's unincorporated business tax?

Plain-English summary

Barry Dayboch, a self-employed computer programmer/analyst, designed computer systems, wrote and modified computer programs, and trained clients on the software he installed. More than 80% of his income came from his personal services, and capital wasn't a material factor in producing it - on paper, exactly the kind of numbers that section 703(c) uses to define an exempt "profession." He asked whether his activities qualified for that exemption from New York's unincorporated business tax.

The Department explained that meeting the 80%-personal-service and no-material-capital thresholds isn't enough by itself - the activity must also qualify as a "profession" under section 703(c) and its regulations. The Unincorporated Business Income Tax Regulations (20 NYCRR 203.11(b)(1)(i)) define "other profession" as an occupation using specialized scientific or learned knowledge, gained through prolonged specialized study, applied by advising, guiding, or teaching others - and specifically exclude services dealing with "the conduct of business itself," including sales promotion and consulting, even when those services involve specialized knowledge. Court precedent (Matter of Koner v. Procaccino) further requires that the activity share the "essential characteristics" of the enumerated professions - law, medicine, dentistry, or architecture.

Applying a nearly identical Appellate Division precedent directly on point - Matter of Robert Shmaruk v. State Tax Commission, involving a self-employed computer specialist who designed and implemented data processing systems - the Department found that advising, designing, and programming computer systems doesn't share the essential characteristics of law, medicine, dentistry, or architecture; instead, it's the type of service generally performed in a trade, business, or occupation. Because Dayboch's activities were functionally identical to the Shmaruk taxpayer's, the Department held his computer programmer/analyst income remained subject to the unincorporated business tax, despite meeting the percentage and capital thresholds.

What this means for you

Self-employed computer programmers, analysts, and IT consultants

Don't assume that meeting the 80%-personal-service and no-material-capital thresholds automatically exempts your income from the unincorporated business tax - New York courts have specifically held that computer programming and systems design don't share the essential characteristics of law, medicine, dentistry, or architecture, so this line of work remains taxable even when it involves specialized technical knowledge.

Self-employed individuals in other specialized-knowledge fields evaluating the professional exemption

Look beyond the percentage tests to whether your field shares the essential characteristics of the enumerated professions (law, medicine, dentistry, architecture) - courts have drawn a hard line between learned professions that advise, guide, or teach and technical trades or consulting services, even sophisticated ones.

Accountants advising self-employed technology consultants on unincorporated business tax exposure

Cite Matter of Robert Shmaruk v. State Tax Commission when evaluating a computer programming or systems design practice for the professional exemption - this is now settled, unfavorable precedent for that specific occupation, regardless of how the client's income otherwise breaks down.

Common questions

Q: I'm a self-employed computer programmer with over 80% personal-service income and no real capital investment - am I exempt from the unincorporated business tax?
A: No. New York courts (Matter of Robert Shmaruk v. State Tax Commission) have held that computer programming and systems design don't share the essential characteristics of the enumerated professions, so meeting the percentage and capital tests alone doesn't qualify you for the exemption.

Q: What professions DO qualify for this exemption?
A: The statute names law, medicine, dentistry, and architecture, plus other professions sharing their "essential characteristics" - occupations using specialized learned knowledge to advise, guide, or teach others, as opposed to trades, businesses, or consulting services dealing with the conduct of business itself.

Q: Why doesn't computer programming count, given how specialized it is?
A: Because courts have found it functions more like a trade, business, or occupation - designing and implementing systems for clients - rather than sharing the essential characteristics of the enumerated learned professions, regardless of the technical sophistication involved.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a81_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (5) I
Income Tax
July 15, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. I810316A

On March 16, 1981, a Petition for Advisory Opinion was received from Barry Dayboch, 11
Plant Lane, Westbury, New York 11590.
The issue raised is whether the activities of Petitioner as a self-employed computer
programmer/analyst constitute the practice of a profession exempt from the Unincorporated Business
Income Tax imposed under Article 23 of the Tax Law.
Petitioner is a self-employed computer programmer/analyst. Petitioner designs computer
systems, creates and codes new computer programs, amends and modifies existing computer
programs, and instructs clients in the use of the software he installs. More than 80 percent of
Petitioner's income is derived from personal services. Capital is not a material income producing
factor.
Section 703(c) of the Tax Law provides: "The practice of law, medicine, dentistry or
architecture, and the practice of any other profession in which capital is not a material income
producing factor and in which more than eighty per centum of the unincorporated business gross
income for the taxable year is derived from personal services actually rendered by the individual or
the members of the partnership or other entity, shall not be deemed an unincorporated business."
The Unincorporated Business Income Tax Regulations defines the term "other profession''
to include "...any occupation or vocation in which a professed knowledge of some department of
science or learning, gained by a prolonged course of specialized instruction and study, is used by its
practical application to the affairs of others, either advising, guiding or teaching them, and in serving
their interests or welfare in the practice of an art or science founded on it. The word profession
implies attainments in professional knowledge as distinguished from mere skill and the application
of knowledge to uses for others as a vocation. The performing of services dealing with the conduct
of business itself, including the promotion of sales or services of such business and consulting
services, does not constitute the practice of a profession even though the services involve the
application of a specialized knowledge." 20 NYCRR §203.11(b)(1)(i).
It has been held that to be entitled to a "professional" exemption, the services performed must
"encompass some of the essential characteristics" of the professions of law, medicine, dentistry or
architecture. Matter of Koner v. Procaccino, 45 A.D. 2d 551, aff'd. 39 NY 2d 258. In the Matter of
Robert Shmaruk v. State Tax Commission, 79 A.D. 2d 832, taxpayer was a "self-employed computer
specialist who developed, designed, and implemented electronic data processing systems for various
business concerns". The Court held that the activities of advising, designing and programming
computer systems do not encompass the essential characteristics of the enumerated professions but
seem to involve the type of services generally performed by those in a "trade, business, or
occupation." Thus, the Court held that the taxpayer was not eligible for the exemption provided by
§703(c) of the Tax Law.
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81 (5) I
Income Tax
July 15, 1981

Accordingly, Petitioner's activities do not constitute the practice of a profession within the
meaning and intent of section 703(c) of the Tax Law, and the income derived therefrom is subject
to the unincorporated business income tax.

DATED: June 15, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau