Is a prewritten tax-preparation program taxable when the vendor personalizes it with the buyer's information to prevent copying?

Plain-English summary

Lorraine L. Dunn, CPA, a tax preparer, buys a tax-processing software program. To fill her order, the software company personalizes the program with her name, address, Social Security number, and specific computer and printer information, embedding that data so that no one but Dunn can use it. She asked whether the program and its license-renewal agreements are exempt as intangible software.

The Department held they are taxable.

• The 1978 software test. Under Technical Services Bulletin 1978-1(S), a program is exempt intangible "software" only if either (A) preparing or selecting it for the customer requires the vendor to analyze the customer's requirements, or (B) the program requires adaptation by the vendor to a specific computer environment. Software meeting the test is intangible and exempt; software that doesn't is taxable.
• Personalizing to block copying isn't analysis or adaptation. The vendor inserted Dunn's information only to prevent someone other than Dunn from using a pre-written program. It did not analyze her specific data-processing requirements or adapt the program so her computer could perform functions she needed for her tax business.
• Result. Because the program is essentially pre-written (canned) software that fails the test, the original program and its annual renewals and updates are not exempt intangible property — they are subject to New York State and local sales and use tax.

What this means for you

Adding your name to canned software doesn't make it tax-free

Under the rule this opinion applied, what mattered was whether the vendor analyzed your needs or adapted the program to your environment — real customization of the software's function. Inserting identifying data to lock the copy to one user is an anti-piracy measure, not customization, so the program stayed taxable prewritten software.

Contrast: software genuinely analyzed or adapted for the customer

The same Bulletin produced the opposite result where a vendor truly configured a program for each customer's use. In TSB-A-90(44)S (Astrogamma), an options-pricing program was exempt because the vendor analyzed the customer's requirements and modified the actual program for that customer. The dividing line is analysis/adaptation of function versus mere identity-tagging — Dunn's program fell on the taxable side.

Renewals and updates follow the program

Because the underlying program was taxable, its annual renewal and update agreements were taxable too. Ongoing charges for a taxable program don't become exempt just because they're billed as renewals.

The software rules changed after this opinion

This is a 1990 opinion applying the old analyzed/adapted test. New York later made the sale or license of prewritten software generally taxable by statute, regardless of that test. Don't rely on this or the Astrogamma reasoning to judge a modern software purchase — check current law.

Common questions

Q: My software is personalized with my name and details. Is it exempt?
A: No. Personalizing a prewritten program to stop others from using it is not an analysis of your requirements or an adaptation of the program, so it stays taxable.

Q: What would have made it exempt under the rule then in effect?
A: The vendor would have had to analyze your specific data-processing requirements or adapt the program to your particular computer environment — as in the Astrogamma opinion, TSB-A-90(44)S.

Q: Are the renewal and update agreements taxable too?
A: Yes. Because the underlying program is taxable, its annual renewals and updates are also subject to tax.

Q: Does this still control today?
A: Not directly. New York later made prewritten software generally taxable by statute. Analyze current purchases under current law.

Citations and references

Statutes and regulations:

• Technical Services Bulletin 1978-1(S) — tax status of receipts from computer software sales and services (analyzed/adapted test)

Related Department opinion:

• TSB-A-90(44)S (Astrogamma Inc.) — same Bulletin, opposite result, where the vendor analyzed the customer's requirements and adapted the program

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_24s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-90 (24)S
Sales Tax
February 26, 1990

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S891215E

On December 15, 1989 a Petition for Advisory Opinion was received from Lorraine L. Dunn
CPA, 3960 Pawnee Drive, Liverpool, New York 13090.
The issue raised by Petitioner, Lorraine L. Dunn CPA, is whether charges for a tax processing
software program and subsequent license renewal agreements are exempt from the imposition of
sales and use tax.
Petitioner is a tax preparer who purchases a tax processing program from a software
company. In order for the software company to process and fill her request for the software it
requests specific information which is used to personalize the software which she purchases.
Specifically it requires her name, address, social security number, specific computer information,
and specific printer information. This personal information is then incorporated into the software
package which is then sent to her. Because of the personalized information, no one other than the
purchaser of the program can use the program.
The tax status of receipts from computer program ("software") sales and services is explained
in Department of Taxation and Finance Technical Services Bulletin 1978-1(S), issued February 6,
1978:
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:
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.

-2­
TSB-A-90 (24)S
Sales Tax
February 26, 1990

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.
b.
Application programs--programs that are
created to perform business functions or control or
monitor processes.
c.
Pre-written programs (canned)--programs that
are either systems programs or application programs
and are not written specifically for one user.
d.
Custom programs--programs
specifically for one user.

created

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.
In the instant case the information inserted into the program is inserted by the vendor for the
purpose of preventing someone other than the Petitioner from using the pre-written program which
it has sold to the Petitioner without purchasing their own copy. The pre-written program sold to the
Petitioner does not require an analysis of the Petitioner's specific data processing requirements in
order to program the Petitioner's computer equipment so as to enable her to accomplish specific
functions with her computer system that she required as part of her tax preparation business
activities.

-3­
TSB-A-90 (24)S
Sales Tax
February 26, 1990

Therefore the original tax processing software program and subsequent annual renewal agreements
or updates of the original program are not deemed to be intangible personal property exempt from
New York State and local sales and use tax.

DATED: February 26, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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