Is a vendor's sale of medical practice-management software taxable, when the software is either sold as-is, customized, or recompiled to add a doctor's insurance ID for electronic billing?

Plain-English summary

Compu Service sells computer systems to doctors — hardware plus "THE MEDICAL MASTER," a medical office-management program that lets physicians submit insurance claims electronically. Compu Service didn't question the tax on hardware; it asked how sales tax applies to the software, described in two categories.

The Department applied the 1988 software test: software is exempt (intangible) only if the vendor must analyze or adapt it.

• The rule. Under Tax Law § 1105(a), sales of tangible personal property are taxed and sales of intangible property are not. Per Technical Services Bureau Bulletin 1978-1, software is exempt intangible property if either (A) preparing or selecting it for the customer requires the vendor to analyze the customer's requirements, or (B) the program requires the vendor to adapt it to a specific environment (e.g., a particular computer model/output device).
• Category #1 (no e-billing; possible custom modifications). If the Medical Master requires analysis or modification to be usable by the client, it's exempt software. But if it's sold with no analysis or modification, it's a taxable sale of tangible personal property — and later modifications don't change that outcome.
• Category #2 (recompiled for the doctor's ID / e-billing). Installing the doctor's unique identification number and recompiling the programs so the doctor can use the electronic-billing mode is an adaptation. That clearly converts the software from tangible to intangible property, so the Category #2 software is not taxable.

What this means for you

In this 1988 framework, whether software is taxable turned on vendor effort, not on the medium. Software the vendor had to analyze the customer's needs for, or adapt to the customer's specific setup, was treated as exempt intangible property. Software handed over as-is, with no analysis or adaptation, was taxable tangible personal property — and doing custom tweaks after the sale didn't retroactively make the original sale exempt.

"Personalizing" the software can be the deciding step. Here, recompiling the program to embed the doctor's own insurance ID for electronic billing was enough of an adaptation to make that software exempt.

Important: the rules have changed. This opinion applies New York's 1988 custom-vs-prewritten approach. New York's treatment of computer software has since changed, so don't apply this result to a current transaction without confirming the present law.

Common questions

Q: We sell a medical practice-management program. Is it taxable in New York?
A: Under this 1988 opinion, only if it's sold as-is with no analysis of the customer's needs or adaptation to their system. If the vendor must analyze or adapt it, it was treated as exempt intangible property. (Note the rules for software have since changed.)

Q: We customize the software after the sale — does that make the original sale tax-free?
A: No. Modifications made after an as-is sale don't change the taxability of that sale.

Q: We recompile the program to add each doctor's insurance ID for e-billing. Taxable?
A: The opinion treated that recompiling as an adaptation that converts the software to intangible property, so that software wasn't taxable.

Q: Can I rely on this today?
A: Be careful — New York's rules for taxing computer software have changed since 1988. Verify the current rule for any present-day sale.

Citations and references

Statute and authority:

• Tax Law § 1105(a) — imposes sales tax on retail sales of tangible personal property; sales of intangible property are not taxed
• Technical Services Bureau Bulletin 1978-1 (Computers) — defines software and treats it as exempt intangible property when (A) preparation/selection requires the vendor to analyze the customer's requirements, or (B) the program requires vendor adaptation to a specific environment

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_29s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(29)S
Sales Tax
May 26, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S880114A

On January 14, 1988, a Petition for Advisory Opinion was received from Compu Service 153
Ross St., Brooklyn, New York 11211.
The issue raised is whether the sale of software under following circumstances is subject to
sales tax under section l105(a) of the Tax Law.
Petitioner sells computer systems for doctors. The system consists of hardware and software
sold with installation as a single package. Petitioner does not question the application of sales tax
to hardware and its installation, but requests clarification of the application of sales tax to its sales
of software.
Petitioner's software (THE MEDICAL MASTER) is a medical practice office management
system which enables physicians to submit health insurance claims electronically to their
intermediaries. Each medical health insurance company has its own specifications for the layout of
the transmitted data. However, any marketable medical software must follow these specifications.
In addition, each user (doctor) receives a unique number by which he is identified by the insurance
company.
Petitioner described his sales in the following manner:
Category #1

The doctor does not use the electronic billing mode of the system but
may request other customized modifications on the management part
of the system. If such modifications prove beneficial for other users,
the modification is permanently incorporated into the system.

Category #2

The doctor will use only electronic claims submission for a specific
intermediary, i.e. Medicaid, or only Medicare, or all possible
insurance carriers. When a doctor decides to utilize the electronic
billing mode, he must fill out an application with the pertinent
insurance carrier. He then receives an identification number.Upon
reviewing the doctor's list of insurance companies which he wishes
to bill electronically, Petitioner must then install the I.D. number in
the pertinent programs and subsequently recompile those programs
in the system. Thereafter, each claim which the physician submits
will have his key identification for reimbursement purposes. This
procedure ensures the doctor that his system is personalized with his
I.D. for his sole use only.

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

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

-2­
TSB-A-88(29)S
Sales Tax
May 26, 1988
Section 1105(a) of the Tax Law imposes a tax upon the sale at retail of tangible personal
property. The imposition of sales tax does not apply to the sale of intangible property. Software
which meets the criteria set forth in Technical Services Bureau Bulletin 1978-1 is considered
intangible personal property.
Technical Services Bureau Bulletin 1978-1 defines software as:
"Instructions and routines (programs) which, after an analysis of the customers 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:
A.

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

B.

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.

If, in category #1, the "Medical Master" requires analysis or modification in order to make
it useable by Petitioner's clients, it would be considered exempt software. However, if petitioner sells
the "Medical Master" without any analysis or modifications, the sale is a sale of tangible personal
property which is subject to tax. Subsequent modifications will not change this result.
The recompiling of the programs in the system after the installation of a doctor's
identification number (category #2) in the software so that the doctor may use the electronic billing
mode of the program is considered an adaptation which would clearly convert the software from
tangible personal property to intangible property. Consequently, the software described in category

2 is not subject to sales tax.

DATED: May 26, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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