Are a Web design agency's web-site development, media placement/advertising, ad-network, and site-tracking consulting services subject to New York sales tax?

Plain-English summary

K2 Design Incorporated calls itself an "Interactive Advertising Agency." In 1997 -- early in the commercial Web's history -- it offered four separate lines of business: (1) Web Site Development, building a client's site from scratch (designing the visual appearance, then programming it to work online) and placing it directly on a server the client chooses, without ever handing over a disk; (2) Media Placement Services, its "Net Media" division's traditional advertising work across print, TV, radio, and the Web, billed hourly plus a media-placement commission; (3) Web Site Networks, its "Cliqnow" division's business of linking independent, already-existing websites into a themed network (like a "Golf Network"), selling advertising space across the whole network and splitting the ad fees 50/50 with the member sites; and (4) Consulting Services, hourly-billed "tracking" analysis telling clients about who visits their sites. K2 asked whether any of these were subject to sales tax.

The Department found none of it taxable. Web site development isn't among New York's enumerated taxable services, regardless of whether the site is built for advertising or for some other purpose like engaging or informing visitors. It's also not taxable as "prewritten computer software," because K2 builds each site "from start to finish" for one particular client -- the opposite of prewritten software, which by definition isn't built to a specific purchaser's specifications. Advertising services are generally excluded from tax, and since K2 doesn't sell or transfer tangible personal property as part of its media placement or ad-network businesses, receipts from those services aren't taxable either (though the Department noted that advertising transactions in general need case-by-case review, since some do involve taxable property transfers). And K2's site-tracking consulting -- giving clients data and analysis about visitors to their own websites -- likewise isn't an enumerated taxable service.

What this means for you

Web design and development agencies

Building a website from the ground up for a specific client -- design plus the programming needed to make it work -- is not taxed as a sale of software or as an enumerated service, as long as the finished site isn't just a repackaged, off-the-shelf (prewritten) product. Handing the client a disk of finished code, versus placing the site live on a server, can matter to this analysis, so keep your delivery method consistent with a genuinely custom build.

Digital and traditional advertising agencies

Traditional media placement and ad-network businesses are generally untaxed advertising services, but only so long as you aren't also selling or transferring tangible personal property to the client as part of the arrangement -- watch for that trigger specifically, since it can flip an otherwise nontaxable engagement into a taxable one.

Firms offering web-analytics or site-tracking services

Consulting services that give a client information specifically about its own website's visitors are not an enumerated taxable service and are untaxed, regardless of whether the information is delivered by phone, in writing, in person, or online.

Common questions

Q: Is website design and development taxable in New York?
A: Not when the site is built from scratch for one particular client -- that puts it outside both the enumerated taxable services and the definition of taxable "prewritten computer software."

Q: Are online advertising and ad-network services taxed?
A: Generally not, as long as no tangible personal property is sold or transferred to the client as part of the service. Advertising transactions still need to be reviewed case by case, since some do involve a taxable transfer of property.

Q: Is site-visitor "tracking" consulting taxable?
A: No -- it's not among New York's enumerated taxable services.

Q: Does this ruling still reflect how custom software and web development are taxed today?
A: This 1997 Advisory Opinion reflects the law, regulations, and Department policy in effect at the time; the underlying rules distinguishing custom from prewritten software may have evolved since, and an Advisory Opinion binds the Department only for the taxpayer and facts it was issued to. It can't be relied on by anyone else.

Citations and references

• Tax Law § 1101(b)(6) (tangible personal property, including prewritten software); § 1101(b)(14) (prewritten computer software defined)
• Tax Law § 1105(a) (tax on tangible personal property); § 1105(c) (enumerated services)
• Tax Law § 1110(a) (compensating use tax)
• Ski Soft, Inc., Adv Op Comm T&F, June 25, 1997, TSB-A-97(35)S
• Hudson Sheraton Corporation, Tax App Trib, September 29, 1988, TSB-D-88(27)S
• Technical Services Bureau Memorandum, June 10, 1983, TSB-M-83(16)S (advertising agencies)
• Enid Hoffman, Gary Kahn & Co., Adv Op Comm T&F, March 31, 1993, TSB-A-93(23)S
• Mike Levy, Adv Op Comm T&F, August 14, 1995, TSB-A-95(33)S
• Paul R. Comeau, Adv Op Comm T&F, March 14, 1990, TSB-A-90(10)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_43s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(43)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S961101B

On November 1, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from K2 Design Incorporated, c/o Ratafia & Co.,
CPA’s, PC, 440 Park Avenue South, New York, New York 10016.
Petitioner, K2
Design Incorporated, provided additional information pertaining to the Petition
on January 7, 1997.
The issues raised by Petitioner concern the applicability of sales and
compensating use taxes to its "Web Site Development" and certain peripheral
services.
Petitioner submitted the following facts as the basis for this Advisory
Opinion. Petitioner also provided Web addresses (URL’s) as examples of the Web
sites and networks at issue.
Petitioner’s business focuses on the creation and design of Web sites for
commercial organizations for placement on that part of the Internet known as the
World Wide Web.
Web sites are increasingly being used as a new medium for
advertisement, promotion and technical support of organizations’ products and
services.
Web sites can provide commercial organizations with benefits in
addition to those available through conventional media, including the ability to
engage and entertain consumers, provide in-depth information, reduce selling and
operating costs, expand distribution channels, promote major sporting and
entertainment events, monitor popularity of content and make timely changes in
response to real-time feedback. Web sites also offer businesses the ability to
obtain certain information about visitors to their sites.
Petitioner categorizes itself as an "Interactive Advertising Agency." In
addition to the creation and design of Web sites, Petitioner is also engaged in
a variety of peripheral services. Petitioner’s clients may purchase any of the
following services separately.
Web Site Development
Web site development is the creation of a Web site, from start to finish,
for a particular client. Each Web site varies in complexity and can contain from
one to hundreds of Web pages. The client is billed for this service on an hourly
or project basis, plus reimbursables such as photocopying, messengers, etc.
Creation of the Web site takes place in two stages: (1) designing the
appearance of the Web site, and (2) computer programming to allow the site to
work on-line. Designing the appearance of a Web site encompasses creating the
visual appearance/image of the site including text, colors, logos, etc. It also
includes audio for the site. Once this is completed, the site must be programmed
so it can be accessed and used on the World Wide Web.

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TSB-A-97(43)S
Sales Tax

After the Web site is designed and programmed, it is ready to "go live."
That is, the site is reviewed by the client and made accessible to the world by
Petitioner directly placing it on a third party server of the client’s choice
(e.g., a computer that stores information for access by users of the World Wide
Web). Petitioner does not give the client a disk of its completed work, rather
the Web site goes directly on-line. Nor does Petitioner maintain servers or host
Web sites for fees.
As part of Petitioner’s "Web Site Development," Petitioner also performs
traditional advertising and promotional services for the client in order to
create awareness of the Web site in the marketplace.
These services are
essentially the same as those described below under "Media Placement Services,"
but are performed for Web sites that Petitioner creates for particular clients.
Media Placement Services
Petitioner’s "Net Media" sales division performs traditional advertising
services for commercial organizations.
In general, Petitioner analyzes a
client’s needs and the market upon which the client wishes to focus. Petitioner
then creates an advertising campaign that is within the client’s budget.
Petitioner uses all forms of media, including print, television, radio and the
World Wide Web. Petitioner charges the client an hourly fee for the strategic
design of the advertising campaign, plus a commission for its media placement
services. Petitioner does not sell any tangible personal property to its clients
as part of these services.
Web Site Networks
Petitioner’s "Cliqnow" division develops Web site networks for specific
industries. A Web site network is one site that has individually selected Web
sites linked to it. These sites have a common quality that appeals to certain
advertisers. Petitioner represents these sites (collectively the network) to
advertisers and sells advertising space on each site. That is, Petitioner finds
individual businesses that already have Web sites in a particular industry and
encourages them to become members of a given network. These businesses do not
pay Petitioner to become members nor does Petitioner maintain any of the
businesses’ sites.
Petitioner then locates advertisers who would like to
advertise on the Web sites that make up this network. Petitioner collects 100%
of the advertising fees and remits 50% of these fees to the individual members
who carry the ads on their Web sites. The advertisements take many forms from
text links to banners.
For example, a small golfing company with its own Web site may be trying
to sell golfing attire. The company decides to join the "Golf Network" developed
by Petitioner. Petitioner then attracts a high-end automobile manufacturer to
advertise on the Web sites that make up the "Golf Network." The manufacturer
wants to advertise to a high income audience and determines that the golfing
industry is such an audience.
It pays Petitioner all advertising fees.
Petitioner then remits 50% of the advertising fees to the Web site members,
including the small golfing company, that carried this ad.

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TSB-A-97(43)S
Sales Tax

Consulting Services
Petitioner offers consulting services for commercial organizations that
desire detailed information about visitors to Web sites. This is commonly known
as "tracking." This information is generally requested when a client is trying
to analyze the marketplace for, among other things, demographics of those who
visit its site. Information is given to the client in many forms (e.g., in
person, via the telephone, written, on-line, etc.) and varies in complexity
depending upon the individual client.
Petitioner’s consulting services are
charged at hourly rates per professional consultant.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides in part:
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:
*

*

*

(6) Tangible personal property. Corporeal personal property
Such term shall also include pre-written
of any nature ....
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) Pre-written 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
pre-written 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.

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TSB-A-97(43)S
Sales Tax

Section 1105(a) of the Tax Law imposes sales tax upon receipts from the
retail sales of tangible personal property in New York, except as otherwise
provided in the Tax Law. Subdivision (c) of Section 1105 imposes sales tax upon
receipts from the sales, except sales for resale, of certain enumerated services.
Section 1110(a) of the Tax Law imposes compensating use tax, in part, on the use
within this State of tangible personal property purchased at retail and certain
enumerated services, except to the extent that the property or service has
already been or will be subject to the sales tax.
Opinion
The "Web Site Development" service that is provided by Petitioner to its
clients, which involves designing, computer programming and placing of Web sites
on the World Wide Web, is not included among the enumerated services that are
subject to New York State and local sales and compensating use taxes. This is
so, regardless of whether the Web sites are created for purposes of advertising
or promoting the products and services of commercial organizations or are created
for other purposes, such as engaging and entertaining consumers or providing
in-depth information. (See, Ski Soft, Inc., Adv Op Comm T&F, June 25, 1997,
TSB-A-97(35)S.) In addition, each of the Web sites at issue is created "from
start to finish" for a particular client of the Petitioner and is therefore
distinguishable from "pre-written computer software" and "tangible personal
property" as defined in Sections 1101(b)(6) and (14) of the Tax Law.
Accordingly, Petitioner’s receipts from the sale of its "Web Site Development"
service are not subject to sales and compensating use taxes.
The services of advertising are excluded from tax.
Petitioner has
indicated that it performs traditional advertising services for commercial
organizations and that it does not sell any tangible personal property to its
clients as part of these services. Because traditional advertising services
include a range of transactions between advertisers and their clients, it is
necessary to analyze and evaluate the facts and circumstances of each transaction
in order to determine its taxable status. (See, Hudson Sheraton Corporation, Tax
App Trib, September 29, 1988, TSB-D-88(27)S.) In general, receipts from the sale
of Petitioner’s "Media Placement Services" and "Web Site Networks" will not be
subject to State or local sales and compensating use taxes provided Petitioner
does not sell or otherwise transfer any tangible personal property to its clients
in conjunction with these activities or perform any services otherwise taxable
under Section 1105(c) of the Tax Law in conjunction with these activities. (See,
Advertising Agencies, Technical Services Bureau Memorandum, June 10, 1983,
TSB-M-83(16)S; Enid Hoffman, Gary Kahn & Co., Adv Op Comm T&F, March 31, 1993,
TSB-A-93(23)S; Mike Levy, Adv Op Comm T&F, August 14, 1995, TSB-A-95(33)S.)

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Sales Tax

Receipts from the sale of Petitioner’s "Consulting Services" that are
performed for clients who request detailed information regarding visitors to
their own particular Web sites are not subject to State or local sales and
compensating use taxes. (See, Paul R. Comeau, Adv Op Comm T&F, March 14, 1990,
TSB-A-90(10)S.)

DATED: July 23, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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