New York Discusses the Taxability of Software Licenses and Services

The New York Commissioner recently determined that a taxpayer’s sale of software licenses are subject to New York sales and use tax. The taxpayer licenses software that is further customized to meet the needs of the customer. The separately-stated customizations charges are billed to the customer as performed instead of spread out over the licensing period. Since, prewritten computer software is included within the definition of tangible personal property, the Taxpayer’s sale of the license to use its basic software is subject to sales tax to the extent the software is used in New York. If the locations in which the customer will use the software are both in and out of New York, the Taxpayer should collect tax based on the portion of the taxable receipts attributable to the customer’s use in New York.

The Taxpayer’s license of the software remains taxable, regardless of any modifications or customizations made by the Taxpayer. If there is a reasonable, separately-stated charge for customization of the basic program, the charge for the modification will not constitute a receipt from the sale of prewritten software and will not be subject to tax when performed for and sold to the customer who initially requested the custom modification. However, subsequent sales of the modified software to other purchasers would be subject to tax as the sale of prewritten software.

The Taxpayer also provides software support, which includes defect fixes, software updates, training and helpdesk support. Fees for software updates and patches to fix defects are subject to sales tax as the sale of prewritten software. Training and support fees are exempt from tax as long as they are separately-stated and reasonable. On the other hand, if a lump sum charge is made to a customer that includes training and support, or if the separate charge for training and support does not reasonably reflect the value of these items, then the entire charge will be taxable. Other software-related services are also discussed. (TSB-A-09(41)S, New York Commissioner of Taxation and Finance, September 22, 2009)

Posted on November 8, 2009