Is custom bank-interface software still taxable as "prewritten" if the developer reuses some prewritten subroutines, like a standard print routine, inside an otherwise custom program?

Plain-English summary

Software Dynamics, Inc. develops "Platform Plus" and "Teller Plus" software that lets a bank's PC-based teller and platform terminals talk to its unique mainframe system. Because every bank's hardware and mainframe configuration is different, Software Dynamics writes each installation's program from start to finish for that specific customer -- it's never sold off-the-shelf. But to save time, its programmers reuse some prewritten subroutines (like a standard "Print" routine) inside the otherwise-custom program. None of these routines works on its own or can be sold separately; each needs a customer-specific mainframe interface to function at all. Software Dynamics asked whether using these prewritten building blocks turns its custom software into taxable "prewritten computer software."

New York taxes "prewritten" software (software not designed to a specific purchaser's specifications) but not genuinely custom software written to one customer's specifications. The Department's own prior guidance (TSB-M-93(3)S) says the "incidental" use of a programming language or of prewritten function libraries inside a custom program doesn't, by itself, make the whole program taxable -- the custom program has to be looked at as a whole. Based on that standard, the Department said that if Software Dynamics' prewritten subroutines really are just simple, incidental building blocks (like a basic print routine) used inside an otherwise custom-written program, the software isn't taxable prewritten software.

But the Department drew a firm line on the other side too: if what Software Dynamics is really doing is selecting and enhancing an existing prewritten program for each customer, or assembling a personalized system by configuring a combination of prewritten modules, the result remains taxable prewritten software no matter how much customization goes into it -- unless a reasonable charge for the custom modification is separately stated on the invoice, in which case only that separately stated modification charge escapes tax. The Department couldn't decide, on the facts submitted, which side of that line Software Dynamics' actual programs fall on -- that's a factual determination left open by this Opinion. The Department also flagged that a software maintenance agreement bundling taxable elements (like prewritten upgrades) with nontaxable ones (training, consulting, diagnostic support) is entirely taxable unless the nontaxable portion is reasonable and separately stated.

What this means for you

Custom software developers who reuse code libraries or subroutines

Using a handful of simple, generic subroutines (a print function, a basic UI widget) inside an otherwise custom-built program doesn't automatically make your software taxable -- but assembling a system mainly by combining and configuring prewritten modules does, regardless of how much you tailor it to the client.

Software vendors billing for both licenses and customization

If you sell software that includes both prewritten and custom-modified elements, separately state and reasonably price the custom modification or enhancement charge on the invoice -- that's the only way to keep the customization charge itself out of the tax base when the underlying software is otherwise taxable.

Software maintenance and support providers

A maintenance agreement that bundles taxable software upgrades with nontaxable services (training, consulting, troubleshooting) is fully taxable unless the nontaxable portion is reasonable and separately stated on the agreement and billed separately.

Common questions

Q: Does using any prewritten code make my software taxable?
A: Not necessarily. The "incidental use" of a programming language or prewritten function libraries within a genuinely custom program, examined as a whole, doesn't turn it into taxable prewritten software.

Q: What if I'm really just customizing an existing program for each client?
A: That's different -- selecting and enhancing a particular prewritten program, or configuring a personalized system from prewritten modules, keeps the software's character as taxable prewritten software regardless of the customization.

Q: How do I make sure my customization charges aren't taxed?
A: Separately state a reasonable charge for the custom modification or enhancement on the invoice or billing statement; only the separately stated custom charge can escape tax when the underlying software is prewritten.

Q: Does this ruling resolve whether my own software is taxable?
A: Not fully -- the Department expressly declined to decide, on the facts here, whether Software Dynamics' prewritten subroutines are merely "incidental." That's a fact question. An Advisory Opinion also binds the Department only for the taxpayer and facts it was issued to, and can't be relied on by anyone else.

Citations and references

• Tax Law § 1105 (sales tax on tangible personal property and enumerated services)
• Tax Law § 1101(b)(6) (tangible personal property, including prewritten software); § 1101(b)(14) (prewritten computer software defined)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• TSB-M-93(3)S, March 1, 1993 (taxability of computer software and related services, including the "incidental use" standard and Example 1)
• State Tax Resources Group, Adv Op Comm T&F, July 11, 1996, TSB-A-96(44)S
• Arthur Andersen and Co., Adv Op Comm T&F, November 8, 1991, TSB-A-91(70)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_45s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(45)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S970214A

On February 14, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Software Dynamics, Inc., 9400 Topanga Canyon
Boulevard, Suite 200, Chatsworth, CA 91311. Petitioner, Software Dynamics, Inc.,
provided additional information pertaining to the Petition on April 28, 1997.
The issue raised by Petitioner is whether its computer software development
activities constitute custom programming.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner develops, licenses and supports software for banks and financial
institutions. This software allows microcomputers on the bank platform or
tellers’ windows to interface with the bank’s mainframe computer, linking the
institution’s unique mainframe computer system into PC-based bank platform and
teller lines. The software is described as "platform Plus" or "teller Plus"
depending on whether the software will be used on the platform or at the teller's
window.
Because each bank has differing requirements (both hardware and
presentation), the software is not licensed in an "off the shelf" form. It is
not offered to the public in general as it requires significant programming to
customize it to each client’s unique system configuration and needs.
The software programs are created from start to finish for each customer's
particular needs. To write these unique software programs, Petitioner uses some
pre-written subroutines within the unique software specifications of its clients.
For example, a program may contain a standard "Print" routine, but the rest of
the program would be unique. These prewritten functions or routines are not
programs but do become part of the custom programs that are written for each
specific customer. None of these routines will work or perform any function on
their own, nor can they be separately sold. They require a mainframe interface
and "hooks" which, by necessity, are specific to each customer.
A customer is required to pay an annual license fee in order to continue
to use the software. There is also an optional maintenance fee, which allows the
user to receive customer support and updates.
Applicable Law and Regulations
Section 1105 of the Tax Law states, in part:
Imposition of sales tax.-- . . . there is hereby imposed and
there shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal property,
except as otherwise provided in this article.

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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(b) of the Tax Law states, 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 of
any nature. . . . 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) 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.
Section 1105(c) of the Tax Law imposes tax on the receipts from every sale,
except for resale, of certain enumerated services.
Section 1115(o) of the Tax Law provides:
Services otherwise taxable under subdivision (c) of section
eleven hundred five or under section eleven hundred ten shall be
exempt from tax under this article where performed on computer
software of any nature; provided, however, that where such services
are provided to a customer in conjunction with the sale of tangible

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personal property any charge for such services shall be exempt only
when such charge is reasonable and separately stated on an invoice
or other statement of the price given to the purchaser.
Technical Services Bureau Memorandum, TSB-M-93(3)S, March 1, 1993,
pertaining to the taxability of computer software and certain related services
provides, in part:
Effective September 1, 1991, State and local sales and
compensating use taxes are imposed on the sale or use of prewritten
computer software and certain related services.
The effect of this change in the Tax Law is to broaden the
types of computer software that are subject to sales and use taxes
. . . certain software previously considered "custom" may now be
considered prewritten computer software and subject to such taxes.
*

*

*

Prewritten software, even though modified or enhanced to the
specifications of a specific purchaser, remains prewritten software
subject to tax. However, if a charge for the custom modification or
enhancement is reasonable and separately stated on the invoice or
billing statement, then the separately stated charge for the custom
modification or enhancement is not subject to tax.
Example 1.

A software developer creates an accounting system using
prewritten software modules for general ledger, accounts
receivable,
accounts
payable,
payroll,
inventory
management, etc.
The developer may also sell the
modules separately or bundled in other packages. Even
though the modules may be modified to the specific
requirements of the client’s business, the sale of the
modules is subject to sales or use tax as prewritten
software.
An additional charge for modification or
"custom" programming by the developer would not be
subject to sales or use tax if the developer’s charge
for the modification is reasonable and is separately
stated on the billing statement.

The incidental use of a development language (e.g., COBOL,
BASIC, C, etc.) or of libraries of "prewritten" functions or
routines in designing and developing a "custom" software program to
the specifications of a specific purchaser will not, in and of
itself, make the sale of an otherwise custom program taxable. The
"custom" program must be examined as a whole to determine whether it
is exempt from tax.
If the prewritten components of a custom
program are sold separately, their sale is subject to tax.

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Opinion
Petitioner writes software which is not retail merchandise, is not sold in
stores to the general public, and is not readily transferable from one computer
to another. Each program is written separately for each customer and is tailored
to the specific requirements of the end user.
In this case, Petitioner contends that the software it sells does not fall
within the definition of pre-written software as described in Tax Law Section
1101(b)(14) because the pre-written subroutines it uses in software development
meet the criteria for "incidental use" described in TSB-M-93(3)S, supra.
Petitioner states that it uses some pre-written subroutines within the unique
software specifications of each customer. The use of these routines, if they are
simply pre-written lines of code, e.g., a "Print" routine, would not turn
Petitioner’s software program into a pre-written program, provided they are used
only incidentally in the design and development of the custom program (see
TSB-M-93(3)S, supra).
Under these circumstances, the sale of Petitioner's
software would not be subject to sales tax.
However, if Petitioner is merely selecting and enhancing a particular pre­
written program for each customer, or is designing a personalized computer
program by configuring the proper combination of software modules (some of which
are pre-written), the modifications would not affect the software’s overall
character as pre-written software. Accordingly, Petitioner’s receipts from the
sale of its software and any charges to modify such software would be subject to
sales and use taxes, unless charges for the pre-written portion and the
modifications are separately stated on an invoice or other statement given to the
purchaser. If separately stated, the modifications would not constitute pre­
written computer software and these fees would not be subject to sales tax (see
State Tax Resources Group, Adv Op Comm T&F, July 11, 1996, TSB-A-96(44)S).
Moreover, pursuant to Section 1115(o) of the Tax Law, the entire charge for
services performed under a software maintenance agreement which provides for the
sale of both taxable elements (e.g., pre-written software upgrades) and
nontaxable elements (e.g., training, consulting, diagnostic and troubleshooting
support) is subject to tax, unless the charge for the nontaxable elements is
reasonable and separately stated in the agreement and separately billed to the
purchaser (see Arthur Andersen and Co., Adv Op Comm T&F, November 8, 1991,
TSB-A-91(70)S and State Tax Resources Group, supra).

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It is not within the scope of this Advisory Opinion, based on the
information submitted, to determine questions of fact such as whether the pre­
written subroutines Petitioner uses are in each case merely incidental to its
development of custom software.

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.