The New York Tax Appeals Tribunal has upheld an earlier ruling by an administrative law judge (ALJ) that fees charged by a taxpayer for their vendor management system (VMS), provided through a software-as-a-service (SaaS) model, are subject to taxation as software licensing.
The taxpayer was audited for sales and use tax by the State of New York for a period covering 2010-2016. The audit resulted in the State Audit Division determining that the taxpayer sold licenses to use pre-written software, which is the vendor management system (VMS). The State Audit Division also determined that the taxpayer sold nontaxable professional services, which are referred to as managed supplier program (MSP). The taxpayer’s books and records reflected that they accounted for receipts from the sale of VMS separately from the receipts from the sale of MSP. The audit concluded with a Notice of Determination issued by the State Audit Division that concluded that the taxpayer owed sales tax on the sale of the VMS but not the MSP. The taxpayer engaged in a conciliation conference resulting in an order which the taxpayer petitioned to the Division of Tax Appeals.
The ALJ review of the tax law provisions pertaining to retail sales indicated that pre-written software is included within the definition of tangible personal property for sales tax purposes. The ALJ also determined that the taxpayer’s contracts grant customers and the suppliers of contract labor with access to and a license to use the taxpayer’s VMS over the internet and therefore results in a sale of pre-written software. The ALJ concluded that the primary function analysis is not applicable in this case since the taxpayer’s software is bundled and sold with services as one product. He found that the software license to access and use the VMS software is a primary purpose of the taxpayer’s contracts.
The Tribunal’s decision clarifies that the core element of the taxpayer’s business is the taxable prewritten software, which is bundled with their services. This integrated “service” includes software that customers use to manage temporary employment needs, making the software the central aspect of the transactions. The Tribunal emphasized that this software is not incidental to the provided services but is a significant component of the sales.
The ruling highlights that treating these transactions as non-taxable would create an unwarranted exemption for sales of tangible personal property, contrary to existing laws. Taxpayers need to evaluate the state definitions, classification, and core function of what is being sold to determine taxability. This becomes particularly important when dealing with digital goods, services incorporating software, and bundled transactions. (New York Tax Appeals Tribunal, DTA No. 829516, May 2, 2024)