Is Your Software Subject to New York Sales Tax?

Companies are increasingly paying for Software as a Service (“SaaS”), whereby a software provider licenses an application to its customers for use as a service on demand.  Under this model of software deployment, a company receives the license to access and use a provider’s software (typically housed on the provider’s servers) for the company’s own business purposes in exchange for a fee. Companies that provide or make use of SaaS in New York should be aware of a recent line of tax opinions finding that licensing fees are subject to New York State sales tax.

Most recently, the New York Commissioner of Taxation and Finance (“Commissioner”) issued an “advisory opinion” stating that the sale of computer software to the NFL was subject to sales tax under New York’s Tax Law. The Commissioner issued the advisory opinion in response to a request by the NFL.

Background
According to the opinion, the NFL paid a software provider a $6000 monthly fee to license specified computer software applications and to process payroll checks and track payroll data. NFL entered its data into NFL computers in New York. The data was transmitted to the software provider’s secure website, and then to the provider’s computers in Michigan. The provider then prepared NFL employee paychecks, pay statements, and management reports – for a fixed fee per document — and transmitted them to the NFL’s corporate offices in New York. The provider also filed payroll tax returns for the NFL. The software applications were hosted on the provider’s Michigan-based computers. The question presented by the NFL was whether the monthly licensing fees were subject to New York State sales tax.

Commissioner’s Advisory Opinion
The Commissioner applied New York tax law to the facts above and ruled that the charges for the license to use the application programs were “receipts from the sale of prewritten computer software” subject to New York State sales tax. The Commissioner noted that “prewritten computer software” is specifically included in the definition of “tangible personal property” subject to sales tax. The opinion said that the location of the software code was “irrelevant,” since the software can be used just as effectively by the NFL even though it didn’t receive the code. The Commissioner added that had the software been custom software – software designed “to the specifications of a specific purchaser” – it would have been exempt from sales tax.

The Commissioner’s opinion follows other recent New York State Tax opinions finding that software licensing fees were subject to sales tax.