Is a computer company's point-of-sale system maintenance agreement -- covering both hardware repairs and software support -- taxable, and what about travel charges and order-cancellation fees?

Plain-English summary

STS Systems sells, installs, and maintains point-of-sale ("POS") computer systems -- equipment, software, and telecommunications gear -- and offers customers an annual maintenance agreement covering hardware repair, software upgrades, and phone-in technical support ("hardware help desk"). STS asked the Department several linked questions about how sales tax applies to this bundle, plus separate questions about travel-expense billing and equipment-order restocking fees.

The Department worked through each piece:

• The maintenance agreement itself is a bundled, mostly taxable package. New York exempts services performed on computer software under § 1115(o) (consulting, diagnostics, training, troubleshooting), but that exemption only survives when the software-support charge is reasonable and separately stated from taxable elements. STS's agreement bundled nontaxable software services with taxable prewritten-software upgrades and hardware maintenance. Because STS separately stated its hardware-maintenance charge from its software/upgrade charge (with limited exceptions for one specific equipment line), the software-services portion could qualify as exempt where properly broken out -- but the § 1115(o) software exemption never covers hardware support, so hardware maintenance charges stay taxable regardless of how they're stated.
• "Reasonable charge" has no fixed formula. The Department said charges comparable to standard industry rates for similar services (and, for any tangible property sold alongside, comparable rates for that property) will be treated as reasonable for § 1115(o) purposes.
• "Hardware help desk" phone support is fully taxable, whether billed inside the annual maintenance fee or as a separate hourly charge outside the coverage period, because it's part of the overall hardware-maintenance charge and the software-services exemption doesn't reach hardware.
• Reimbursed travel expenses (airfare, hotel, meals) follow the taxability of the underlying service. If STS's underlying charge is taxable, the reimbursed expenses billed along with it are taxable too (they're part of the "receipt"); if the underlying sale is nontaxable, the reimbursed expenses aren't taxed either.
• Restocking charges for canceled equipment orders are not taxable, since the equipment never entered New York or was transferred to the customer -- there's no sale to tax.

What this means for you

Computer hardware and software vendors offering maintenance agreements

If your maintenance or support contract bundles taxable hardware service with exempt software service (consulting, training, diagnostics, troubleshooting on software), make sure your contract and every invoice separately state a reasonable charge for the software-services portion. Otherwise, the entire bundled charge -- including the parts that would otherwise be exempt -- becomes taxable. And remember: no amount of careful itemizing turns hardware support into an exempt service; only software-support charges can qualify under § 1115(o).

Businesses billing customers for reimbursed travel and out-of-pocket expenses

Reimbursed expenses you pass through to a customer (travel, meals, lodging) are folded into the taxable "receipt" and follow the taxability of your underlying charge -- they don't get their own separate tax treatment. If the underlying service is nontaxable, don't tax the reimbursed expenses either.

Accountants and tax professionals advising IT/technology vendors

This ruling is a clean worked example of the "reasonable and separately stated" rule from TSB-M-93(3)S applied to a real contract with exhibits (D-1, D-2, G for standard maintenance; K, N for extended/after-hours rates). It also confirms that restocking fees on undelivered, canceled orders fall outside the definition of a taxable "sale" entirely, since no transfer of title or possession ever occurs.

Common questions

Q: Is a computer maintenance agreement covering both hardware and software taxable?
A: The hardware-maintenance portion is always taxable. The software-support portion (consulting, diagnostics, training, troubleshooting) can be exempt, but only if it's reasonable and separately stated from the taxable elements on both the agreement and the invoice; otherwise the whole charge is taxable.

Q: Are reimbursed travel expenses billed to a customer taxable?
A: They follow the taxability of the underlying charge -- taxable if the underlying sale/service is taxable, exempt if it isn't.

Q: Is a restocking fee for a canceled equipment order subject to sales tax?
A: No, because the equipment was never shipped or transferred to the customer, so there's no taxable sale to which the fee attaches.

Q: Can another computer vendor rely on this ruling for its own maintenance contracts?
A: Not automatically. This advisory opinion binds the Department only as to the petitioner and the specific contract terms and billing practices described.

Citations and references

Statutes and rules:

• Tax Law § 1101(b)(3) (definition of receipt)
• 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(a)(35) (computer hardware used to design/develop software for sale)
• Tax Law § 1115(o) (exemption for services performed on computer software)
• 20 NYCRR § 526.5(e) (non-deductibility of vendor expenses from receipts)
• 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)

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_73s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(73)S
Sales Tax
November 5, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S980428A

On April 28, 1998, the Department of Taxation and Finance received a
Petition for Advisory Opinion from STS Systems, Ltd., 2800 Trans-Canada Highway,
Pointe-Claire, Quebec, Canada H9R 1B1.
The issues raised by Petitioner, STS Systems, Ltd., are:
(1)

Whether the sales of its point of sale ("POS") system maintenance
agreements
to
provide
computer
hardware
and
software
maintenance/support services qualify for exemption from New York
State sales tax under Section 1115(o) of the Tax Law.

(2)

What criteria are used to determine whether or not computer software
service charges are reasonable.

(3)

Whether the "hardware help desk" telephone support services
Petitioner provides relating to its customers’ computer hardware
purchases are subject to New York State sales tax.

(4)

Whether charges made by Petitioner to its customers for travel
expenses incurred in the performance of its services are subject to
sales tax.

(5)

Whether restocking charges made by Petitioner to its customers for
the cancellation of equipment orders are subject to sales tax.

Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner is a computer sales and consulting firm which sells, installs
and maintains computer hardware and software and provides customer support.
Petitioner’s software service billings encompass several different activities
such as initial review meetings, consultations and software modifications. The
activities, with the exception of travel expenses which are reimbursed by the
customer, are not itemized separately on the customer’s invoice. However, they
are itemized on the back-up documentation which is used to create the invoice.
Both the invoice and the back-up documentation are sent to the customer.
As part of its petition, Petitioner submitted copies of a sample contract
and several invoices including their back-up documentation for review.
The
sample contract covers the customer’s hardware purchase, software license and
point of sale ("POS") system maintenance agreement. The point of sale system is
described in the agreement as, collectively, the integrated system consisting of
equipment, software and all associated telecommunications equipment purchased,
licensed or sublicensed from Petitioner. Under Section 4.4 of the contract, if
a customer cancels an equipment order less than thirty days prior to its
scheduled delivery date, Petitioner charges a 20% restocking charge for which the
customer is liable.
The "POS" system maintenance agreement entitles the customer to hardware
and software maintenance, user support including call-in for technical assistance
and any upgrades and enhancements (installable by the customer) provided during

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specific coverage periods. The maintenance fee for these services and upgrades
is billed separately on an annual basis and is applicable to equipment and
software installed during the one-year period.
As part of the agreement,
extended maintenance and support services of the same nature are also available
to the customer outside the contracted period of coverage, e.g., on one of the
ten U.S. holidays published in the agreement, or outside the scope of the
agreement, e.g., repairs needed due to accident or misuse of equipment.
These
extended services are separately billable to the customer at prevailing published
time and materials hourly rates pursuant to Exhibits K and N of the agreement.
Section 11.1 of Petitioner’s "POS" system maintenance agreement provides
for the sale of consulting and diagnostic, troubleshooting and on-site
maintenance services related to computer software, pre-written software
upgrades/enhancements and hardware maintenance including call-in for technical
assistance and replacement of unserviceable parts.
Petitioner’s charge for
annual maintenance service is separately stated from the charges for computer
software and hardware in Exhibits D-1, D-2 and G. The portion of the annual
maintenance fee which is allocable to hardware maintenance is also separately
stated. However, with the exception of Fujitsu Atrium unit releases, all pre­
written software upgrades, enhancements and the updated manuals relative to such
releases are also included in the annual maintenance charge.
The invoices submitted with the petition include maintenance and support
services performed both during the contract coverage period, for which there is
no charge, and outside the scope of the contract coverage period/agreement, which
are billed at the prevailing published time and materials rates. Several of the
software service invoices include Petitioner’s travel expenses which are billable
to the customer and are separately stated.
Applicable Authority
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:
*

*

*

(3) Receipt. The amount of the sale price of any property and
the charge for any service taxable under this article, valued in
money, whether received in money or otherwise, including any amount
for which credit is allowed by the vendor to the purchaser, without
any deduction for expenses or early payment discounts and also
including any charges by the vendor to the purchaser for shipping or
delivery regardless of whether such charges are separately stated in
the written contract, if any, or on the bill rendered to such
purchaser and regardless of whether such shipping or delivery is
provided by such vendor or a third party. . . . (Emphasis added)
*

*

*

(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 . . .

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(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 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.
*

*

*

(c) The receipts from every sale, except for resale, of the
following services:
*

*

*

(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:
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

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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 of the Tax Law provides, in part:
(a) Receipts from the following shall be exempt from the tax
on retail sales imposed under subdivision (a) of section eleven
hundred five and the compensating use tax imposed under section
eleven hundred ten:
*

*

*

(35) Computer system hardware used or consumed directly and
predominantly in designing and developing computer software for
sale.
*

*

*

(o) 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.
(Emphasis added)
Section 526.5(e) of the Sales and Use Tax Regulations provides:
All expenses . . . incurred by a vendor in making a sale,
regardless of their taxable status and regardless of whether they
are billed to a customer are not deductible from receipts.

Example 1:

A photographer contracts with a customer to
furnish photographs at $50 each in addition to
expenses.
The customer is billed as follows:
Photographs(2)
Model fees
Meals
Travel
Props(Flowers)
Total due
Receipt subject to tax is $200

$100
60
10
25
5
$200

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Example 2:

An appliance repairman charges $10 per hour plus
expenses when on a service call. The customer is
billed as follows:
3 hrs. at $10
Travel
Parts
Meals
Total due
Receipt subject to tax is $70

$30
15
20
5
$70

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.
*

*

*

(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.
*

*

*

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.
*

*

*

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. . . .
*

*

*

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.
*

*

*

Customer Support and Related Services
Services taxable under section 1105(c) of the Tax Law are
exempt from tax under section 1115(o) of the Tax Law where performed
on any computer software.
However, where such services to be
performed on software are sold in conjunction with the sale of
tangible personal property, such as prewritten software, the charge
for such services is exempt only if it is reasonable and separately
stated on the invoice or billing statement given to the customer.
(Emphasis added)
Thus, 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. Of
course, any charges for the above described services sold in
connection with custom software are exempt from tax.
*

*

*

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. (Emphasis added)
Example 3:

Opinion

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

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Petitioner sells computer hardware, software and related services. The
sample contract provided by Petitioner covers the customer’s hardware purchase,
software license and point of sale ("POS") system maintenance agreement. The
point of sale system consists of equipment, software and all associated
telecommunications equipment purchased, licensed or sublicensed from Petitioner.
The contract includes a fee schedule and description of the items and services
provided in the package.
Under the terms of the sample contract submitted with the petition, the
customer is entitled to, with the exception of Fujitsu Atrium unit releases, any
upgrades and enhancements (installable by the customer) provided during a
specific coverage period. Petitioner’s software upgrades and enhancements would
be considered pre-written software, unless they are designed and developed to the
specifications of a specific user.
To the extent that such upgrades and
enhancements are tangible personal property, Petitioner’s sales, including
licenses to use such software, would be subject to sales and compensating use
taxes (see ALLTEL Financial Information Services, Inc., Adv Op Comm T&F, May 2,
1996, TSB-A-96(27)S; TSB-M-93(3)S, supra).
The maintenance fee is billed separately on an annual basis and is
applicable to equipment and software installed during the one-year period.
Section 11.1 of Petitioner’s "POS" system maintenance agreement provides for the
sale
of
both
nontaxable
elements
(e.g.,
consulting
and
diagnostic,
troubleshooting and on-site maintenance services related to computer software)
and taxable elements (e.g., pre-written software upgrades and enhancements and
hardware maintenance which includes replacement of unserviceable parts and
call-in technical assistance for the computer hardware).
If a software
maintenance agreement provides for the sale of both taxable elements and
nontaxable elements, 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 (TSB-M-93(3)S, supra).
In the sample contract, Petitioner’s charge for annual maintenance service is
separately stated from the charges for computer software and hardware in Exhibits
D-1, D-2 and G. The portion of the annual maintenance fee which is allocable to
hardware maintenance is also separately stated. However, with the exception of
Fujitsu Atrium unit releases, all pre-written software upgrades, enhancements and
the updated manuals relative to such releases are also included in the annual
maintenance charge. Accordingly, the receipts from the entire annual maintenance
charge as stated in Exhibits D-1, D-2 and G of Petitioner’s agreement, with the
exception of fees allocable to the Fujitsu Atrium unit software support, are
subject to tax (see SAP America, Inc., Adv Op Comm T&F, March 24, 1998,
TSB-A-98(20)S; Moore Business Forms, Inc., Adv Op Comm T&F, February 15, 1995,
TSB-A-95(6)S; ALLTEL Financial Information Services, Inc., supra). Provided
charges for the Fujitsu Atrium unit software support are separately itemized on
the invoice or statement of price given to the customer, such charges are not
subject to tax. The sample back-up documentation submitted with the petition
qualifies as a "statement of price given to the customer," provided it is
furnished with the invoice in conjunction with the provision of the service.
It is noted that effective June 1, 1998, sales of computer system hardware
that is used or consumed by the purchaser directly and predominantly in designing
and developing computer software for sale are exempt from sales and use taxes.
See Section 1115(a)(35) of the Tax Law.
Extended maintenance and support services are also available to the
customer for additional fees. The customer is entitled to extended hardware and
software maintenance and support services pursuant to section 11.2 of the "POS"

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system maintenance agreement. This applies to services delivered outside the
contracted period of coverage or outside the scope of the maintenance and support
services provided under Section 11.1 of the agreement. Rates for the extended
maintenance and support services are separately stated in Exhibits K and N of the
contract, between hardware and software support.
The exemption in Section
1115(o) of the Tax Law does not apply to charges for computer hardware support
(TSB-M-93(3)S, supra). Provided charges for software support are reasonable and
separately stated on the invoice or attachment to the invoice given to the
customer, Petitioner’s receipts from extended maintenance and repair services
performed on computer software are exempt from sales and use taxes (Xecu-Track
Accounting Services, Inc., Adv Op Comm T&F, April 14, 1998, TSB-A-98(27)S).
Concerning issue "2," the term "reasonable charge" is not defined by
statute or regulation. Neither is there any set formula to establish whether a
charge for software support is reasonable. The extended maintenance and support
rates in Petitioner’s sample contract vary from $110/hour on weekdays to
$250/hour on Sundays and holidays. If Petitioner’s charges are comparable to
standard industry rates for similar services, and the balance of the charge for
tangible personal property sold in conjunction with the software support is
comparable to standard industry rates for such tangible personal property, the
maintenance charges will be considered reasonable for purposes of Section 1115(o)
of the Tax Law.
With regard to issue "3," charges for Petitioner’s "hardware help desk"
telephone support are included in the annual maintenance fee when performed
during the coverage period and in the billable hourly rate for hardware support
when performed outside the coverage period or scope of Section 11.1 of the
agreement. In either case, charges for hardware help desk telephone support are
part of the overall contract maintenance charges established for hardware
support, which also include preventative and remedial computer equipment repair.
For purposes of sales and use tax, computers and peripheral devices commonly
described as "hardware" constitute tangible personal property as defined in
Section 1101(b)(6) of the Tax Law (Xecu-Track Accounting Services, Inc., supra).
The tax treatment of Petitioner’s computer hardware telephone support service,
provided for as part of the hardware support charges in the maintenance
agreement, follows the tax treatment of other maintenance or service contracts
to service tangible personal property. Pursuant to Section 527.5(c) of the Sales
and Use Tax Regulations, the purchase of a maintenance or service contract is a
taxable transaction. Accordingly, the total receipts Petitioner receives from
its "hardware help desk" service are subject to tax (TSB-M-93(3)S, supra).
Concerning issue "4," all reimbursed expenses including air fare, hotel and
meals, incurred by Petitioner and included in its charges to its customers are
included in the definition of "receipt" provided in Section 1101(b)(3) of the Tax
Law and Section 526.5(e) of the Sales and Use Tax Regulations. Therefore, the
charge to a customer for such reimbursed expenses is subject to tax, provided
that the receipts from Petitioner’s sale are subject to tax. When Petitioner
makes a nontaxable sale, the amount charged to its customers, including such
reimbursed expenses, is not subject to tax (see Salomon & Leitgeb, CPA’s, LLP,
Adv Op Comm T&F, July 23, 1997, TSB-A-97(44)S). For additional information on
the taxability of sales of computer software and related services, Petitioner
should refer to Technical Services Bureau Memorandum TSB-M-93(3)S.
With respect to issue "5," if a customer cancels an equipment order less
than thirty days prior to its scheduled delivery date, Petitioner charges a 20%
restocking charge for which the customer is liable according to the terms of the
contract. Restocking charges are not subject to sales tax. Since the equipment
on order does not enter New York State and is not transferred by Petitioner to

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its customer within the meaning of Section 1101(b)(5) of the Tax Law, no
incidence of tax arises. Thus, when Petitioner charges its customers for a
cancellation of an order for property which has not been shipped, it need not
collect sales tax on such charge.

DATED:

November 5, 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.