Is a computer systems-integration consulting firm's charges for hardware, software, and support services subject to New York sales tax?

Plain-English summary

Virtual Systems Group is a professional technical-services firm that helps customers pick and integrate computer systems for their specific business needs. It specializes in "systems integration" -- linking multiple computer systems together through design, development, testing, implementation, and support -- and sometimes sells and installs computer hardware as part of that work. It also offers project management, consulting, technology planning, and installation/maintenance/training/support for popular software packages (MS Office 97, Lotus Notes, cc:Mail, MS Exchange, NT Client), either separately or bundled into a "total solutions package." Virtual Systems asked how sales tax applies across this range of services.

The Department broke the analysis into pieces, since New York taxes services based on enumerated categories rather than taxing "systems integration" as one thing:

• Pure consulting, project management, systems management, and technology planning (with no hardware or software sale involved) are not taxable -- they're not among the services enumerated in § 1105(c).
• Selling and installing computer hardware is taxable (as a sale of tangible personal property, plus the installation service).
• Systems integration that consists of physical connectivity or hardware sale/installation is taxable for the same reason.
• Systems integration that involves selecting and selling additional software, updates, or enhancements is treated as a sale of that software for tax purposes -- taxable if the software is prewritten, exempt if it's genuinely custom-designed to the specific purchaser's specifications (and the custom-development charge is reasonable and separately stated).
• Software installation, maintenance, training, and end-user support are, by default, taxable installation/maintenance services under § 1105(c)(3) -- but § 1115(o) exempts them specifically when performed on computer software, as long as the charge is reasonable and separately stated from any taxable hardware or software sold in the same transaction.
• The bottom-line rule for bundled invoices: if nontaxable services (consulting, training, support) are billed as one lump sum together with a taxable service or taxable property, the entire charge becomes taxable. Only itemizing the nontaxable pieces, at a reasonable price, on the invoice preserves their exempt treatment.

What this means for you

IT consulting and systems-integration firms

Structure your contracts and invoices to separately state each type of charge: pure consulting/planning (never taxable), hardware sales (taxable), software sales (taxable if prewritten, exempt if genuinely custom), and installation/training/support work (exempt only if separately stated and reasonable). Bundling everything into one lump-sum "total solutions" fee makes the whole amount taxable, even the parts that would otherwise be exempt.

Software resellers offering configuration and integration services

"Designing" a personalized software package by selecting and combining pre-written modules is still treated as a sale of software for tax purposes, even though you're doing selection/configuration work rather than writing new code. Only genuinely custom-developed software (designed and developed to a specific customer's specifications) can qualify as exempt, and only with a reasonable, separately stated charge.

Accountants and tax professionals

This ruling is a comprehensive, multi-scenario worked example of New York's bundled-transaction rules for IT service providers, citing a long line of prior opinions (Salomon & Leitgeb, David Zucker, Neuromedical Systems, Moore Business Forms, Astrogamma, State Tax Resources Group) on consulting exemptions, hardware/software distinctions, and the "reasonable and separately stated" requirement. Useful as a master reference for any client offering a mix of IT consulting, hardware, software, and support services.

Common questions

Q: Is pure IT consulting and planning work taxable in New York?
A: No, as long as it's not performed in conjunction with a sale of tangible personal property and doesn't include any other taxable service -- consulting, project management, and technology planning aren't enumerated taxable services.

Q: Is selling and installing computer hardware taxable?
A: Yes, both the hardware sale and the installation charge are generally taxable.

Q: Are software installation, training, and support charges taxable?
A: They're taxable by default under § 1105(c)(3), but exempt under § 1115(o) specifically when performed on computer software, provided the charge is reasonable and separately stated from any taxable hardware or software sold alongside.

Q: What happens if a company bills everything as one lump sum?
A: The entire lump-sum charge becomes taxable, even portions that would be exempt on their own, unless the nontaxable elements are itemized separately at a reasonable price.

Q: Can another systems-integration firm rely on this ruling directly?
A: Not automatically. This advisory opinion binds the Department only as to the petitioner and the specific service mix and billing practices described.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(5) (definition of sale, selling or purchase)
• Tax Law § 1101(b)(6) (definition of tangible personal property)
• Tax Law § 1101(b)(14) (definition of prewritten computer software)
• Tax Law § 1105(a), (c)(3) (tax on tangible personal property; installing/maintaining/repairing services)
• Tax Law § 1110(a) (compensating use tax)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• 20 NYCRR § 527.5 (installing, maintaining, servicing, repairing tangible personal property)
• TSB-M-93(3)S, State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software (Mar. 1, 1993)
• Salomon & Leitgeb CPA's, LLP, Adv Op Comm T&F, July 23, 1997, TSB-A-97(44)S
• David Zucker, Adv Op Comm T&F, Sept. 5, 1996, TSB-A-96(53)S
• Neuromedical Systems, Inc., Adv Op Comm T&F, June 14, 1993, TSB-A-93(36)S
• Moore Business Forms, Inc., Adv Op Comm T&F, Feb. 15, 1995, TSB-A-95(6)S
• Astrogamma Inc., Adv Op Comm T&F, June 22, 1992, TSB-A-92(50)S
• State Tax Resources Group, Adv Op Comm T&F, July 11, 1996, TSB-A-96(44)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_71s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(71)S
Sales Tax
October 9, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S970625A

On June 25, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Virtual Systems Group, LLC, 6337 Dean Parkway,
Ontario, NY 14519.
The issue raised by Petitioner, Virtual Systems Group, LLC, is whether the
charges for certain high-end technology services it provides are subject to sales
and/or use tax.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner is a professional technical services company which selects
computer systems solutions for its customers based on their specific business
needs. Petitioner provides insight into computer technology to its customers
while focusing on practical business solutions for them. Petitioner specializes
in systems integration and provides distributed (multiple) systems life cycle
management, i.e., it takes whatever steps are necessary to link computer systems
together through the process of design, development, testing, implementation and
support. Petitioner may sell and install computer hardware in conjunction with
these services. Using key inputs from customers, Petitioner provides project
management, consulting and technology planning services for technology
implementation, as well as installation, maintenance and end-user training and
support in the latest software packages, including MS Office 97, Lotus Notes,
CCMail, MS Exchange and NT Client. Petitioner offers all of these services
either separately or as part of a total solutions package.
Applicable Law and Regulations
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:
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(5) Sale, selling or purchase.
Any transfer of title or
possession or both, exchange or barter, rental, lease or license to
use or consume (including, with respect to computer software, merely
the right to reproduce), conditional or otherwise, in any manner or
by any means whatsoever for a consideration . . .
(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

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component, or otherwise, and regardless of the medium by means of
which such software is conveyed to a purchaser. . . .
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(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 of the Tax Law provides, 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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(c) The receipts from every sale, except for resale, of the
following services:
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(3) Installing tangible personal property . . . or
maintaining, servicing or repairing tangible personal property . .
. not held for sale in the regular course of business, whether or
not the services are performed directly or by means of coin-operated
equipment or by any other means, and whether or not any tangible
personal property is transferred in conjunction therewith. . . .
Section 1110(a) of the Tax Law provides, in part:

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Except to the extent that property or services have already
been or will be subject to the sales tax under this article, there
is hereby imposed on every person a use tax for the use within this
state on and after June first, nineteen hundred seventy-one except
as otherwise exempted under this article, (A) of any tangible
personal property purchased at retail . . . (D) of any tangible
personal property, however acquired, where not acquired for purposes
of resale, upon which any of the services described in paragraphs
(2), (3) and (7) of subdivision (c) of section eleven hundred five
have been performed . . . and (F) of any computer software written
or otherwise created by the user if the user offers software of a
similar kind for sale as such or as a component part of other
property in the regular course of business.
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
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.
Section 527.5 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. (1) The tax is imposed on receipts from every
sale of the services of installing, maintaining, servicing or
repairing tangible personal property . . . .
(2) Installing means setting up tangible personal property or
putting it in place for use.
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(3) Maintaining, servicing and repairing are terms used to
cover all activities that relate to keeping tangible personal
property in a condition of fitness, efficiency, readiness or safety
or restoring it to such condition.
Technical Services Bureau Memorandum TSB-M-93(3)S, dated March 1, 1993,
entitled State and Local Sales and Compensating Use Taxes Imposed on Certain
Sales of Computer Software, 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.

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. . . certain software previously considered "custom" may now be
considered prewritten computer software and subject to such taxes.
. . . The only software that is exempt from sales and use taxes
under the new law is software designed and developed to the
specifications of a specific purchaser. (Emphasis added)
Prewritten computer software is any computer software that is
not designed and developed by the author or other creator to the
specifications of a specific purchaser.
The sale of prewritten software includes any transfer of title
or possession, any exchange, barter, rental, lease or license to
use, including merely the right to reproduce, for consideration....
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Prewritten software is subject to tax whether sold as part of
a package or separately. Software created by combining two or more
prewritten programs or portions of a prewritten program is still
prewritten software subject to tax. The medium by which the software
is transferred to the purchaser has no effect on the software’s
taxability. Thus, prewritten software is taxable whether sold, for
example, on a disk, tape or by electronic transmission over
telephone lines.
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.
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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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Sale of Software Upgrades
Generally, the sale of a revision or upgrade of prewritten
software is subject to tax as the sale of prewritten software. If,
however, the software upgrade is designed and developed to the

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specifications of a specific purchaser, its sale to that specific
purchaser would be exempt as custom software.
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Customer Support and Related Services
. . . charges for customer (user) support or for information
services provided by a vendor to a customer, either in person or by
some type of telecommunications arrangement (e.g., telephone, modem,
facsimile machine, etc.), in the nature of training, consulting,
instructing or other diagnostic or troubleshooting services related
to prewritten software are exempt from sales and use taxes where the
charges are reasonable and separately stated.
Charges for the
service of installing, repairing, maintaining or servicing
prewritten software are also exempt from sales and use taxes where
the charges are reasonable and separately stated on the invoice.
(Emphasis added) Of course, any charges for the above described
services sold in connection with custom software are exempt from
tax.
Programming and systems analysis are also exempt services.
However, where these services are rendered in conjunction with the
sale of prewritten software, the charge for the service is exempt
from tax only when the charge for the service is reasonable and
separately stated on the invoice or billing statement given to the
customer.
Example 2:

A computer vendor sells an “off-the-shelf” software
program to a customer. The vendor charges additional
fees for installing the software, on-site training, and
diagnostic and trouble-shooting customer support. The
sale of the software is taxable since it is pre-written.
However, the charges for installation, on-site training
and customer support services are not taxable if
reasonable and separately stated on an invoice or
billing statement given to the customer.

Software Maintenance Agreements
If a software maintenance agreement provides for the sale of
both taxable elements (e.g., prewritten software upgrades) and
nontaxable elements (e.g., training, consulting, diagnostic and
troubleshooting support, etc.), the charge for the entire
maintenance agreement is subject to tax unless the charge for the
nontaxable elements is reasonable and separately stated in the
maintenance agreement and separately billed on the invoice or other
document of sale given to the purchaser.
Example 3:

A vendor of computer systems sells a maintenance
agreement to provide on-site training, repairs, software

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upgrades, and customer support by telephone for a customer’s
computer system (hardware and prewritten software). The
portion of the cost of the agreement allocated to prewritten
software upgrades and for repair or maintenance of the
computer system hardware is taxable. However, the portion of
the cost allocated for on-site training, repairs and
maintenance of the prewritten software and telephone support
is exempt if the cost is reasonable and separately stated in
the written agreement and the customer invoice.
Opinion
Petitioner provides professional technical services relating to the
selection of computer systems solutions for its customers, focusing on meeting
the specific needs of each business. Section 1105(c) of the Tax Law imposes
sales tax on certain enumerated services.
Petitioner provides consulting,
project management, systems management and complete planning services for
technology implementation. These services are not among the enumerated services
subject to sales or use tax. Therefore, in those instances where Petitioner
enters into a contract to perform consulting, project management, systems
management or technology planning, or any combination thereof, without the
performance of any other service, and provided that they are not performed for
a customer in conjunction with the sale of tangible personal property, the
receipts from charges for performing these services will not be subject to sales
tax (see Salomon & Leitgeb CPA’s, LLP, Adv Op Comm T&F, July 23, 1997,
TSB-A-97(44)S).
Petitioner specializes in systems integration, taking whatever steps are
necessary and requested by each individual customer to link computer systems
together in order for them to function effectively as one. Petitioner may sell
and install computer hardware as part of systems integration. Sales of computer
hardware are taxable under Section 1105(a) of the Tax Law.
The services of
installing, maintaining, servicing or repairing tangible personal property are
taxable under Section 1105(c)(3) of the Tax Law.
If Petitioner’s systems
integration consists of physical connectivity or the sale and installation of
computer hardware, its charges for systems integration are subject to the tax
imposed under Section 1105 or Section 1110 of the Tax Law (see David Zucker, Adv
Op Comm T&F, September 5, 1996, TSB-A-96(53)S; Neuromedical Systems, Inc., Adv
Op Comm T&F, June 14, 1993, TSB-A-93(36)S). If systems integration includes
Petitioner’s selection and sale of additional software, updates, new products or
enhancements in order to accomplish the integration of software packages,
Petitioner’s charges for such systems integration would be treated as charges for
the software, for sales tax purposes (see Moore Business Forms, Inc., Adv Op Comm
T&F, February 15, 1995, TSB-A-95(6)S). The taxability of receipts from sales of
computer software is explained in TSB-M-93(3)S, supra.
To the extent that
Petitioner merely selects and sells particular pre-written software programs for
its customers, or “designs” a personalized computer software package by
configuring the proper combination of software modules (some of which are pre­
written), Petitioner’s receipts from its customers for the sale of such software
and of pre-written updates to such software are considered receipts from sales

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of tangible personal property and are subject to the taxes imposed by Section
1105 or Section 1110 of the Tax Law. However, Petitioner’s receipts from sales
of software designed and developed to the specifications of a specific purchaser,
including custom modifications, enhancements and updates, would not be subject
to tax provided that Petitioner’s charges for them are separately stated on an
invoice or other statement given to the customer and the charges are reasonable
(see Astrogamma Inc., Adv Op Comm T&F, June 22, 1992, TSB-A-92(50)S; State Tax
Resources Group, Adv Op Comm T&F, July 11, 1996, TSB-A-96(44)S).
It is noted that any nontaxable consulting or system engineering services
provided by Petitioner in addition to the systems integration will not be subject
to tax provided that the charges for the nontaxable services are reasonable and
separately billed on the invoice or other document of sale given to the customer
(Moore Business Forms, Inc., supra).
Petitioner also offers the services of software installation, maintenance,
training and end-user support for various software packages. The services of
installing, maintaining, servicing and repairing tangible personal property
(other than installing tangible personal property which when installed
constitutes a capital improvement) are taxable under Section 1105(c)(3) of the
Tax Law.
However, such services are exempt from tax when performed on any
computer software, pursuant to Section 1115(o) of the Tax Law. If these services
are provided to the customer in conjunction with the sale of tangible personal
property, the charge for such services will be taxable, unless Petitioner
separately states the charges for the non-taxable services from the charges for
the tangible personal property, and the charges are reasonable. Charges for
training and customer (user) support related to pre-written or custom software
are exempt from sales and use taxes where the charges are reasonable and
separately stated on the invoice (see TSB-M-93(3)S, supra). Accordingly, if
Petitioner's charges for software installation, maintenance, training and end­
user support are reasonable and separately stated on an invoice from the charges
for any additional taxable services or tangible personal property Petitioner
concurrently sells to its customer, receipts from such charges are not subject
to sales or use tax. Contrarily, if the fees charged for nontaxable services
performed in conjunction with the performance of a taxable service and/or the
sale of taxable tangible personal property are billed to the customer as a lump
sum, the entire receipts from the sale are subject to tax (Software Dynamics,
supra; David Zucker, supra).

DATED:

October 9, 1998

NOTE:

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

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