Is a custom software developer's work for clients subject to New York sales tax, and does it matter whether the software, artwork, or a web site is delivered on disk or transmitted electronically?

Plain-English summary

An accountant asked the Department to sort out New York sales tax for a software-development client ("Developer") across four related questions: custom software, custom computer artwork, web site design, and whether the delivery method (shipped disk vs. electronic transmission) changes any of the answers.

Custom software. New York taxes "prewritten" software (software not designed to one specific purchaser's specifications) as tangible personal property, no matter how it's delivered. Developer often starts from an off-the-shelf program and modifies it for a client. Under the statute, prewritten software that's been modified or enhanced for a specific customer is still prewritten software -- and therefore taxable -- unless the invoice separately states a reasonable charge just for the custom modification, in which case only that separately stated piece escapes tax. If the off-the-shelf code Developer uses is merely an incidental library of routines within an otherwise genuinely custom program, the whole program can stay exempt. There's also a wrinkle when Developer reuses one client's custom code for a different client: code built to Client A's specifications becomes "prewritten" the moment it's resold to Client B, so that reuse is taxable too (again, subject to the same separately stated modification-charge exception). Software shipped to an out-of-state client for use outside New York isn't subject to New York sales tax at all.

Custom computer artwork. This turns entirely on delivery method: artwork delivered in a tangible form (a disk) is taxable tangible personal property; the identical artwork sent by electronic transmission is an intangible and not taxed. Artwork shipped out of state for out-of-state use is exempt regardless.

Web site design and development. Not taxable at all -- New York's sales tax only reaches services specifically listed in the statute, and web design/development isn't one of them, following the Department's own earlier Stone Soup Multimedia opinion.

Delivery method generally. For software, delivery method never changes the answer -- prewritten software is taxed whether it arrives on disk, tape, or wire, and true custom software is exempt in any format. For artwork, delivery method is the whole ballgame, as described above.

What this means for you

Software developers and IT consulting firms

If you build on off-the-shelf frameworks or reuse prior clients' code, most of your invoice is likely taxable prewritten software unless you separately state a reasonable charge for the truly custom modification work -- that separate line item is the only piece that escapes tax. Genuinely bespoke code with no resold off-the-shelf or reused-client component is fully exempt.

Graphic designers delivering digital artwork

The same artwork can be taxable or exempt purely based on how you hand it over -- a disk is tangible personal property (taxed), an emailed or downloaded file is not. If cost matters to a client, delivery method is a real lever.

Web designers

Web site design and development services are outside New York's sales tax entirely, regardless of delivery method or how the work is billed.

Accountants and tax professionals

This opinion is a compact roadmap through several of the trickiest software-taxability distinctions: prewritten vs. custom, the separately-stated-modification carve-out, code reuse across clients, and the tangible-vs-electronic delivery line for artwork specifically (which does NOT apply the same way to software).

Common questions

Q: If a developer starts from a template and heavily customizes it, is that taxable?
A: Generally yes -- modified prewritten software remains prewritten software and is taxable, unless the invoice separately states a reasonable charge for just the customization, in which case only that stated charge is exempt.

Q: Does emailing software instead of shipping a disk make it tax-exempt?
A: No. Prewritten software is taxed regardless of delivery method, and genuinely custom software is exempt regardless of delivery method -- delivery method doesn't matter for software.

Q: Does emailing artwork instead of shipping a disk make it tax-exempt?
A: Yes -- for computer artwork specifically, tangible delivery (disk) is taxable and pure electronic transmission is not.

Q: Is building a client's web site taxable?
A: No. Web site design and development services aren't among the services New York's sales tax law lists as taxable.

Citations and references

Statutes, regulations, and prior guidance:

• Tax Law § 1101(b)(5) (sale, selling or purchase)
• Tax Law § 1101(b)(6) (tangible personal property, includes prewritten software)
• Tax Law § 1101(b)(14) (definition of prewritten computer software)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1105(c) (enumerated taxable services)
• TSB-M-93(3)S (State and Local Sales and Compensating Use Taxes Imposed on Certain Sales of Computer Software)
• CAV CORP dba Stone Soup Multimedia, TSB-A-97(87)S (Internet design/development services not taxable)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(31)S
Sales Tax
June 7, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S981027B

On October 27, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from David H. Posmantier, E.A., 414 Maple Avenue, Westbury, New York
11590.
The issues raised by Petitioner, David H. Posmantier, are the following:

1. Whether the development of custom computer software is subject to sales tax.
2. Whether the development of custom computer artwork is subject to sales tax.
3. Whether the development of Internet Web sites is subject to sales tax.
4. Whether the method of delivery of software to a client affects whether the software is
   subject to sales tax.
   Petitioner submitted the following facts as the basis of this Advisory Opinion.
   Petitioner’s client ("Developer") is in the business of developing computer software for its
   clients. The software is developed exclusively for a particular client and is not marketed to other
   clients. However, Developer may use parts of software developed for Client A in developing
   software for Client B. Commonly, an off-the-shelf software program is modified or is used in
   writing the custom designed software. Developer pays sales tax for all off-the-shelf software
   purchased. The software developed may include extensive amounts of artwork designed and
   developed exclusively for each client. In rare cases, the end product is solely computerized artwork.
   Developer also designs and develops Internet Web sites for clients. In producing a Web site,
   Developer may use artwork provided by the client or may design and develop the artwork. A Web
   site is a specific type of software program designed to interact with the Internet.
   Software is delivered to clients in one of two ways: (1) disks shipped by Federal Express or,
   (2) transmitted over telephone wires. Many clients are out of state.
   Applicable Law and Regulations
   Section 1101(b) of the Tax Law provides, in part:
   (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

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TSB-A-99(31)S
Sales Tax
June 7, 1999

manner or by any means whatsoever for a consideration, or any agreement therefor,
including the rendering of any service, taxable under this article, for a consideration
or any agreement therefor.
(6) Tangible personal property. Corporeal personal property of any nature.
However, except for purposes of the tax imposed by subdivision (b) of section eleven
hundred five, such term shall not include gas, electricity, refrigeration and steam.
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(a) of the Tax Law imposes a tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided.
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.

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TSB-A-99(31)S
Sales Tax
June 7, 1999

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 . . . . 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.
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 . . . .
*

*

*

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 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.
*

*

*

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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TSB-A-99(31)S
Sales Tax
June 7, 1999

Opinion
Issue 1
Petitioner’s client, Developer, is designing computer software for its customers. Developer
uses "off the shelf" software and makes modifications to customize the software for its clients, or
may use components of software developed for Client A to develop Client B’s software.
When Developer uses prewritten "off-the-shelf" software to develop software for its clients,
the software developed for its clients is subject to tax. Prewritten software is tangible personal
property subject to tax under Section 1105(a) of the Tax Law. Prewritten software includes
prewritten software that is modified or enhanced to the specifications of a specific purchaser.
Accordingly, when Developer makes modifications to "off the shelf" software to produce software
for its clients, the entire charge for the software is subject to tax as prewritten software unless the
billing statement or invoice shows reasonable, separately stated charges for the modifications. In that
instance, only the charges attributable to the prewritten portion are subject to sales tax. If, however,
the prewritten "off the shelf" software used by Developer is merely a library of routines or functions
that is incidental to custom software designed by Developer to the specifications of a particular
client, such custom software is not subject to tax.
When Petitioner uses Client A’s software, or portions thereof, to develop software for Client
B, the software is subject to tax. Software that was originally designed and developed to the
specifications of a specific purchaser becomes prewritten software when sold to someone other than
the person for whom it was specifically designed. Software created by combining two or more
prewritten programs or portions of a prewritten program are subject to tax. (See Section
1101(b)(14) of the Tax Law.) If Petitioner combines prewritten software programs and makes
custom modifications or enhancements for which a reasonable and separately stated charge is made
on the invoice, then the separate charge for the modification is not subject to tax. Petitioner must
still collect sales tax on the charge for the prewritten portion of the software.
If the software is shipped to clients out of New York for use outside New York, then the
charges for this software are not subject to sales tax.
Issue 2
Developer may develop computerized artwork for a client. Such custom computer artwork
is taxable artwork when delivered in a tangible form such as a disk. If the artwork is transmitted
electronically, it is intangible property not subject to sales tax.
If Developer ships the artwork to clients outside New York for use outside New York, the
artwork is not subject to sales tax.

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TSB-A-99(31)S
Sales Tax
June 7, 1999

Issue 3
Developer’s Internet design and development services are not subject to sales tax. Internet
design and development services are not among the enumerated services subject to sales tax under
Section 1105(c) of the Tax Law. (See CAV CORP dba Stone Soup Multimedia, Adv Op Comm
T & F, December 29, 1997, TSB-A-97(87)S.)
Issue 4
The method of delivery of the computer software does not change its taxability. Prewritten
software is taxable whether sold on a disk, tape or by electronic transmission over telephone lines.
Custom software designed and developed to the specifications of a specific purchaser, sold in any
format, is not subject to sales tax.
The method of delivery of artwork does affect its taxability. Artwork sold in a tangible form
such as a disk or tape is tangible personal property subject to sales tax. However, artwork
transmitted electronically is not subject to sales tax, as discussed in Issue 2 above.

DATED: June 7, 1999

NOTE:

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

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