NY TSB-A-85(23)S Sales Tax 1985-06-24

Are custom-modified computer programs the vendor tailors to each customer's ATM system taxable, or exempt intangible property?

Short answer: Under the rule in effect at the time, the programs are exempt intangible personal property, because the vendor must analyze each customer's requirements and modify the actual program for that customer. Avant-Garde Computer Systems, Inc. developed basic programs it licenses mostly to financial institutions to 'drive' their Automatic Teller Machines; the programs cannot be used without vendor-performed modifications (screen changes, account types, transactions handled, institution and terminal ID numbers, and terminal address/location), and the vendor must analyze each licensee's needs to determine the modifications. Under the Department's 1978 interpretive bulletin (Taxpayer Services Bureau Bulletin 1978-1(S)), software qualifies as exempt intangible personal property if either (A) preparing or selecting the program for the customer requires the vendor to analyze the customer's requirements, or (B) the program requires vendor adaptation to a specific environment. Because Avant-Garde's programs require both an analysis of the customer's requirements and modification of the actual program, they are intangible personal property and are not subject to New York State or local sales and use tax. Note: New York later changed this treatment — since a 1991 law change, prewritten (canned) software is generally taxable as tangible personal property, while software written to a particular customer's specifications remains exempt.

Apply this to your situation

This page answers the general question as of 1985. Ezel answers yours, under current New York tax law, with citations.

Disclaimer: This is an official New York State Department of Taxation and Finance Advisory Opinion (TSB-A), issued by the Office of Counsel at a taxpayer's request. It is limited to the facts set forth in it and binds the Department only with respect to the petitioner to whom it was issued, and only if that petitioner fully and accurately described all relevant facts; another taxpayer cannot rely on it. Importantly, this opinion applies the software rule in effect in 1985 (the 1978 interpretive bulletin treating qualifying software as intangible personal property). New York amended its law in 1991 to treat prewritten (canned) software as taxable tangible personal property, whether delivered on media or electronically, while software designed and developed to a particular customer's specifications generally remains exempt — so the tax treatment of a given program today may differ from the result here. New York State and local sales taxes are administered centrally by the Department. This summary is informational only and is not legal or tax advice. Consult a licensed New York tax professional about your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.

View original ruling (PDF)

Plain-English summary

Avant-Garde Computer Systems, Inc. developed basic computer programs it licenses primarily to financial institutions to "drive" their Automatic Teller Machines. A licensee can't use a basic program without vendor-performed modifications — changes to the screen, the account types, and the transactions handled; a separate identification number for each institution and each ATM terminal; and each terminal's address/location. To do that, Avant-Garde must analyze each licensee's needs. It asked whether these programs are exempt intangible personal property.

The Department held that, under the rule then in effect, the programs are exempt intangible personal property.

The governing standard (1985). The Department's 1978 interpretive bulletin (Taxpayer Services Bureau Bulletin 1978-1(S)) treated a program as exempt intangible personal property if either:
- (A) preparing or selecting the program for the customer requires the vendor to analyze the customer's requirements, or
- (B) the program requires vendor adaptation to a specific environment (a particular make/model of computer or output device).
These programs qualify. Avant-Garde's programs require both an analysis of the customer's requirements and modification of the actual program for that customer. So they are intangible personal property and not subject to New York State or local sales and use tax.
A note on what the vendor still owes. Under the same bulletin, a seller of exempt software pays sales/use tax on any tangible personal property transferred with the exempt service, and the hardware, utilities, and supplies used to develop exempt software are not themselves exempt. (The ruling states the software result; these are the bulletin's companion rules.)

What this means for you

This is a pre-1991 result — check current law before relying on it. In 1985, New York treated qualifying software as intangible and exempt. Since the 1991 statutory change, prewritten (canned) software is taxable tangible personal property (however delivered), while software genuinely custom-written to a customer's specifications generally remains exempt. Don't assume today's answer matches this one.

The line then was analysis and adaptation. What made this software exempt was that the vendor had to study each customer's requirements and modify the actual program to fit — not sell a shrink-wrapped, ready-to-run product.

Even with exempt software, tangibles are taxable. A vendor of exempt software still owes tax on any physical goods it hands the customer and on the hardware and supplies it uses to build the software.

Common questions

Q: Was custom-tailored software taxable in New York in 1985?
A: No. Under the rule then in effect, software the vendor prepared by analyzing the customer's requirements or adapting to the customer's environment was exempt intangible property.

Q: Does this ruling still tell me my software is exempt today?
A: Not necessarily. New York changed the law in 1991 to tax prewritten (canned) software as tangible personal property; only software written to a particular customer's specifications generally stays exempt. Check current rules for your product.

Q: If my software is exempt, do I owe tax on anything?
A: Yes. You still pay tax on any tangible personal property you transfer to the customer and on the hardware, utilities, and supplies you use to develop the exempt software.

Citations and references

Tax Law:

1105(a) — taxes receipts from every retail sale of tangible personal property

Departmental guidance applied:

Taxpayer Services Bureau Bulletin 1978-1(S) — software is exempt intangible personal property if the vendor must analyze the customer's requirements (A) or adapt the program to a specific environment (B); tangible property transferred, and development hardware/supplies, remain taxable

Source

Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1985.htm
Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a85_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85(23)S
Sales Tax
June 24, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S840503A

On May 3, 1984, a Petition for Advisory Opinion was received from Avant-Garde Computer
Systems, Inc., 5 Herbert Drive, Latham, New York 12210.
The issue raised is whether computer programs developed by Petitioner for use in its
customers' Automatic Teller Machines qualify as intangible personal property exempt from New
York State and Local Sales and Use Tax.
Petitioner has developed basic computer programs which are licensed primarily to financial
institutions for use in "driving" such institutions' Automatic Teller Machines.
These basic programs cannot be utilized by the licensees without certain modifications
performed by Petitioner which include:

changes in screen
changes in account type
changes in transactions handled
separate identification number for each institution
separate identification number for each ATM terminal
address/location for ATM terminal.
Petitioner is required to analyze each licensee's needs and requirements in order to ascertain
the appropriate modifications to each licensee's basic program.
The Department of Taxation and Finance issued an interpretive bulletin on February 6, 1978
which discusses the application of sales tax to receipts from sales of computer programs as follows:
"Software- Instructions and routines (programs) which, after an analysis of the
customer's specific data processing requirements, are determined necessary to
program the customer's electronic data processing equipment to enable the customer
to accomplish specific functions with his EDP system. To be considered exempt
'software' for purposes of this bulletin, one of the following elements must be
present:

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2
TSB-A-85(23)S
Sales Tax
June 24, 1985

Preparation or selection of the program for the customer's use requires an
analysis of the customer's requirements by the vendor.
or

The program requires adaptation, by the vendor, to be used in a specific
environment i.e., a particular make and model of computer utilizing a
specified output device. For example, a software vendor offers for sale a pre
written sort program which can be used in several computer models. Prior to
operation, instructions must be added by the vendor which specify the
particular computer model in which the program will be utilized.

The software may be in the form of:
a.

Systems programs (except for those instruction codes which are considered
tangible personal property in paragraph 1 above) - programs that control the
hardware itself and allow it to compile, assemble and process application
programs.

Application programs - programs that are created to perform business
functions or control or monitor processes.

Pre-written programs (canned) - programs that are either systems programs
or application programs and are not written specifically for one user.

Custom programs - programs created specifically for one user.

Software, meeting the above criteria, whether placed on cards, tape, disc pack or
other machine readable media, or entered into a computer directly, is deemed to be
intangible personal property for sales tax purposes, and as such its sale is exempt
from New York State and local sales and use taxes. Software or programs which do
not meet the criteria are subject to tax. The person selling exempt software is
required to pay the applicable sales or use tax on any tangible personal property
transferred to the customer in connection with the exempt service. In addition, the
hardware, utility services and supplies used to develop the exempt software are not
eligible for any sales tax exemptions." Taxpayer Services Bureau Bulletin, 1978-1(S).

-3
TSB-A-85(23)S
Sales Tax
June 24, 1985

Accordingly, as the computer programs (software) developed by Petitioner require an
analysis of the customer's requirements and modification of the actual program for use by such
customer, such programs are considered to be intangible personal property and therefore not subject
to New York State and local sales and use tax.

DATED: May 30, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.

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