Is application software that a vendor analyzes and adapts to a customer's system taxable in New York, and are the software maintenance charges taxable?

Plain-English summary

Answer Systems, Inc. makes application software. For each customer it analyzes the customer's particular requirements and modifies its software to adapt it to that customer's environment. It also offers an optional annual maintenance agreement — technical assistance over a telephone "hot line" plus updates of any new software releases during the year. It asked whether the software sales and the maintenance charges are subject to New York sales and use tax.

The Department held that both are exempt.

The governing authority is Technical Services Bulletin 1978-1(S) (Feb. 6, 1978), which treats software as exempt intangible personal property when either:

• (A) preparing or selecting the program for the customer requires the vendor to analyze the customer's requirements, or
• (B) the program must be adapted by the vendor to a specific environment (a particular make and model of computer with a specified output device).

Software meeting these criteria — whatever medium it's on — is "deemed to be intangible personal property for sales tax purposes," and its sale is exempt. Software that does not meet the criteria is taxable.

Answer Systems' software requires analysis of the customer's equipment and modifications to make it compatible, so it fits the exempt "prewritten application program" category under paragraphs A and B (citing Astrogamma Inc., TSB-A-90(44)S). And because the maintenance services (modification and post-installation problem-solving) are rendered in connection with intangible property, they are exempt too. So neither the software nor the maintenance agreement is taxable.

What this means for you

The old software test turned on analysis and adaptation

Under the 1978 bulletin applied here, the dividing line was whether the vendor had to analyze the customer's needs or adapt the program to a specific system. If yes, the software was exempt intangible property; if it was a plain off-the-shelf program sold as-is, it was taxable tangible property. Answer Systems fell on the exempt side because real analysis and adaptation were involved.

Maintenance follows the software

When the underlying software is exempt intangible property, a maintenance agreement covering modifications, a support hot line, and updates is also exempt, because the service relates to intangible property rather than to taxable tangible personal property.

Important: the law changed after 1991

This opinion reflects the software rules as they stood in 1991. New York later changed the treatment of prewritten ("canned") software, which is now generally taxable regardless of how it is delivered. Custom software written for a single user remains treated differently. Because the categories and their tax treatment have shifted, do not assume this 1991 result still applies to your software today — check the current rules.

Common questions

Q: Was Answer Systems' software taxable?
A: No. Because the vendor had to analyze the customer's requirements and adapt the program to the customer's environment, the software qualified as exempt intangible personal property under TSB 1978-1(S).

Q: Were the maintenance charges taxable?
A: No. The maintenance (modifications, hot-line support, updates) was a service connected to exempt intangible property, so it was also exempt.

Q: Does this mean my software is exempt today?
A: Not necessarily. New York changed its rules after 1991 and now generally taxes prewritten software. Confirm the current treatment for your specific product.

Citations and references

Statutes and guidance:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1105(c)(3) — tax on installing, maintaining, servicing, or repairing tangible personal property
• Technical Services Bulletin 1978-1(S) (Feb. 6, 1978) — tax status of computer software (analysis/adaptation test)

Cited authority:

• Astrogamma Inc., TSB-A-90(44)S (Aug. 29, 1990)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a91_9s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (9)S
Sales Tax
January 15, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S900911C

On September 11, 1990, a Petition for Advisory Opinion was received from Answer Systems,
Inc., 21050 Vanowen Street, Canoga Park, CA 91304.
The issues raised by Petitioner, Answer Systems, Inc., are whether the sale of computer
software and the receipts from maintenance agreements supporting such software are subject to New
York State and local sales and use taxes.
Petitioner is a manufacturer of application software. It analyzes a given customers particular
requirements and modifies its software to adapt it to the customer's environment. In addition,
Petitioner provides optional annual maintenance agreements which provide the customers with
technical assistance over its telephone "hot line" and updates of new releases of its software, should
any be released during the annual maintenance period.
Section 1105(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property. Section 1105(c)(3) taxes installation, maintenance and repair of such
property. For sales tax application, computers and peripheral devices commonly described as
"hardware" are considered tangible personal property.
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:
Software [means] instructions and routines which, after 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.

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TSB-A-91 (9)S
Sales Tax
January 15, 1991

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 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.
*

*

*

Petitioner's software requires analysis of its customer's computer equipment and certain
modifications are necessary to make its software compatible to such equipment. Therefore, the
software qualifies for exemption as the type of prewritten application program outlined in paragraphs
A and B, subparagraph c, above, which is considered to be intangible personal property;
Astrogamma Inc., Adv Op Comm T & F, August 29, 1990, TSB-A-90(44)S.
Services involving modification of the Petitioner's software and problem solving after its
installation are exempt from tax because said services are rendered in connection with intangible
personal property. See Technical Services Bulletin, 1978-1(S), para. 3; Astrogamma Inc., supra.

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TSB-A-91 (9)S
Sales Tax
January 15, 1991

Accordingly, Petitioner's receipts from the sale of software at issue and from receipts for its
maintenance agreements are not subject to New York State and local sales and use taxes.

DATED: January 15, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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