For sales before September 1991, were a firm's custom software, stock-pricing service, and trade-confirmation reports subject to New York sales tax?

Plain-English summary

Data Exchange, Inc. writes custom software for each customer's specific computer environment and asked whether, during its audit period (Sept. 1, 1988–Aug. 31, 1991), it should have collected sales tax on three things: (1) its custom software and a maintenance agreement giving that customer updates and new releases written for its custom software; (2) a stock-pricing service furnishing a customer with the current market prices of that customer's securities (obtained from a third party); and (3) "Affirms/Confirms" — a monthly record acknowledging that customer's own daily trading activity (also obtained from a third party).

The Department's answers, item by item:

• Custom software — not taxable. Under Technical Services Bulletin 1978-1(S), software prepared after analyzing a customer's requirements, or adapted to a specific environment, is intangible personal property for sales-tax purposes. Data Exchange's custom programs, written for one user's particular computer environment, were intangible, so under § 1105(a) their sale was not taxable.
• Maintenance on the custom software — not taxable. Because the maintenance agreement serviced an intangible (the custom software), its receipts weren't taxable under § 1105(c)(3) (which taxes servicing/maintaining tangible personal property).
• Stock-pricing service — taxable. Furnishing a customer with market prices of its securities is an information service under § 1105(c)(1). Because that information is not personal or individual in nature, the pricing-service receipts were taxable. (Data Exchange already collected tax on these.)
• Affirms/Confirms — not taxable. A record of the customer's daily trading activity is not one of the services enumerated in § 1105(c), so those receipts were not subject to state or local sales tax.
• A law change looms. The opinion notes that Chapter 166, Laws of 1991 amended/added §§ 1101(b)(6) and 1101(b)(14), effective Sept. 1, 1991, to treat prewritten software as tangible personal property. Those changes don't apply to the pre-September 1991 sales at issue but do apply to Data Exchange's later sales where relevant.

What this means for you

Custom vs. prewritten software (and the timing cutoff)

For the period at issue, truly custom software written for one customer was intangible and nontaxable. But watch the date: the 1991 amendments (effective Sept. 1, 1991) make prewritten software tangible personal property and taxable. Prewritten software modified for a customer can still be taxable unless the modification is separately and reasonably stated. If you sell software, classify it carefully and by the correct time period.

Maintenance follows the thing it services

A maintenance agreement on custom (intangible) software was not taxable, because § 1105(c)(3) taxes servicing tangible personal property. Maintenance on taxable software would be treated differently.

Information services: "personal or individual" is the dividing line

Furnishing widely available data — like market prices of securities — is a taxable information service under § 1105(c)(1). The exclusion for information that is personal or individual and not substantially furnished to others is narrow; generic market data doesn't qualify.

A report of the customer's own activity may not be an enumerated service

Compiling a record of the customer's own trading activity (Affirms/Confirms) was not one of the enumerated § 1105(c) services, so it wasn't taxable. The nature of the service, not just that it's delivered on paper, controls.

Common questions

Q: Was custom software taxable in New York before September 1991?
A: No. Software written and adapted for one customer's specific environment was treated as intangible property, so its sale was not subject to sales tax during the audit period.

Q: Was the software maintenance agreement taxable?
A: No — because it serviced intangible (custom) software, it fell outside § 1105(c)(3)'s tax on servicing tangible personal property.

Q: Why was the stock-pricing service taxable but the trade-confirmation report not?
A: The pricing service furnished non-personal market data — a taxable information service under § 1105(c)(1). The Affirms/Confirms report of the customer's own trading activity wasn't an enumerated § 1105(c) service at all.

Q: Does this still apply today?
A: Be careful — the 1991 amendments (effective Sept. 1, 1991) treat prewritten software as taxable tangible personal property. This opinion addresses only pre-September-1991 sales.

Citations and references

Statutes and authorities:

• Tax Law § 1105(a) (tax on receipts from retail sales of tangible personal property)
• Tax Law § 1105(c)(1) (information services; exclusion for information that is personal or individual in nature)
• Tax Law § 1105(c)(3) (servicing or maintaining tangible personal property)
• Tax Law §§ 1101(b)(6), 1101(b)(14) (prewritten computer software as tangible personal property; Chapter 166, Laws of 1991, effective Sept. 1, 1991)
• Department of Taxation and Finance Technical Services Bulletin 1978-1(S) (Feb. 6, 1978) (software as intangible personal property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_38s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (38) S
Sales Tax
May 11, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920127D

On January 27, 1992 a Petition for Advisory Opinion was received from Data Exchange, Inc.,
140 Terry Drive #118, New Town, PA, 18940.
The issue raised by Petitioner, Data Exchange, Inc., is whether it was liable for collecting
sales tax on receipts from sales of custom software, stock pricing services and trading activity
confirmation services which occurred during the audit period September 1, 1988 through August 31,
1991.
Petitioner is in the business of writing custom designed software programs for the customer's
specific computer environment.
In conjunction with the custom designed software Petitioner offers a software maintenance
agreement under which Petitioner provides the customer with any updates and new releases written
specifically for the customer's existing custom software.
Petitioner also provides a pricing service whereby the customer is furnished with the current
market price of that particular customer's stocks, securities, etc. Petitioner obtains the pricing
information from a third party. Petitioner collects sales tax on the receipts from the pricing service.
Petitioner also provides Affirms/confirms, which are a monthly record of acknowledgments
of the customer's daily trading activity during a particular month. Petitioner obtains this information
from a third party.
Section 1105 of the Tax Law states, in part:
Imposition of sales tax.--. . .there is hereby imposed and there shall
be paid a tax upon:
(a) The receipts from every retail sale of tangible personal property,
except as otherwise provided in this article.
(c) The receipts from every sale, except for resale, of the following
services:
(1) The furnishing of information by printed, mimeographed or
multigraphed matter or by duplicating written or printed matter in any
other manner, including the services of collecting, compiling or
analyzing information of any kind or nature and furnishing reports
thereof to other persons, but excluding the furnishing of information
which is personal or individual in nature and which is not or may not
be substantially incorporated in reports furnished to other persons ....
TP-9 (9/88)

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TSB-A-92 (38) S
Sales Tax
May 11, 1992
(3) Installing tangible personal property,.
tangible personal property.

.or maintaining, servicing or repairing

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.

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.

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TSB-A-92 (38) S
Sales Tax
May 11, 1992
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.
For the period from September 1, 1988 through August 31, 1991 where Petitioner contracted
to design a software program specifically for one user and for that user's particular computer
environment, the software falls within the definition of custom software as defined in Department
of Taxation and Finance Technical Services Bulletin 1978-1(S). Since the sale of custom software
was considered to be the sale of an "intangible" and not a sale of tangible personal property,
Petitioner's receipts from the sale of custom software were not subject to the sales tax imposed under
Section 1105(a) of the Tax Law. Likewise, Petitioner's receipts from the sale of a software
maintenance agreement applicable to the custom software were considered to be receipts from
servicing and maintaining an "intangible" and were not subject to the tax imposed under Section
1105(c)(3) of the Tax Law.
As Petitioner's pricing service entailed furnishing a customer with the current market prices
of that particular customer's stocks, securities, etc., Petitioner was considered to be providing an
information service. Because the information furnished to the customer was not of a type which is
considered uniquely personal or individual in nature, Petitioner's receipts from the sale of the pricing
service were subject to the tax imposed under Section 1105(c)(1) of the Tax Law.
Petitioner's service of providing Affirms/Confirms, which was a record of a customer's daily
trading activity for a particular month, was a service which did not fall within any of the services
enumerated under Section 1105(c) of the Tax Law. Accordingly, Petitioner's receipts from the sale
of such service were not subject to state or local sales tax.
It is noted that Sections 1101(b)(6) and 1101(b)(14) of the Tax Law were amended and
added, respectively, by Chapter 166, Laws of 1991, effective September 1, 1991.
Section 1101 of the Tax Law states, in part:
Definitions.-­
(b) When used in this article for the purposes of the taxes imposed by
subdivisions (a), (b), (c) and (d) of section eleven hundred five and by
section eleven hundred ten, the following terms shall mean:

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TSB-A-92 (38) S
Sales Tax
May 11, 1992
(6) Tangible personal property .... Such term shall also include pre­
written computer software, whether sold as part of a package, as a
separate component, or otherwise, and regardless of the medium by
means of which such software is conveyed to a purchaser.
. . .
(14) Prewritten computer software. Computer software (including
pre-written upgrades thereof) which is not software designed and
developed by the author or other creator to the specifications of a
specific purchaser. The combining of two or more pre-written
computer software programs or pre-written portions thereof does not
cause the combination to be other than pre-written computer software.
Pre-written software also includes software designed and developed
by the author or other creator to the specifications of a specific
purchaser when it is sold to a person other than such purchaser.
Where a person modifies or enhances computer software of which
such person is not the author or creator, such person shall be deemed
to be the author or creator only of such person's modifications or
enhancements. Pre-written software or a prewritten portion thereof
that is modified or enhanced to any degree, where such modification
or enhancement is designed and developed to the specifications of a
specific purchaser, remains pre-written software; provided, however,
that where there is a reasonable, separately stated charge or an invoice
or other statement of the price given to the purchaser for such
modification or enhancement, such modification or enhancement
shall not constitute pre-written computer software.
Because Petitioner's sales in the instant matter occurred prior to September 1, 1991, the
amendment and addition to Sections 1101(b)(6) and 1101(b)(14), respectively, of the Tax Law are
not applicable to those particular sales. However, it is noted that such amendment and addition to
the Tax Law will apply to sales made by Petitioner on or after September 1, 1991, where applicable.

DATED: May 11, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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