On September 29, 2022, the New York State Division of Tax Appeals determined that services involving the creation of customer engagement reports based on email tracking and email template usage data are nontaxable information services—particularly when use of software is only incidental to the performance of such services. The taxpayer sold “customer engagement services” to sales organizations or sales teams. A sales team could use software provided by the taxpayer to embed software in template emails that were then sent to the sales team’s prospective clients. The embedded software would transmit client engagement data back to the taxpayer to report how clients engaged with the template email. The taxpayer would analyze the data and issue a report to the sales team regarding the effectiveness of their template or sales campaign. The taxpayer sold different packages of these services, some that allowed for sharing of the template emails and reports across teams and others that permitted the integration of the information provided by the reports into customer engagement platforms.
The Division of Taxation of the New York Department of Taxation and Finance (Department) argued that the taxpayer’s services were subject to sales tax because they constituted the sale of a license to use software. The Department also argued that the taxpayer sold services that were bundled, and the prewritten software element of the bundle was not incidental, thereby subjecting the entire bundle to sales tax. The taxpayer contended that it was selling nontaxable information and data storage services, that any sale of prewritten software was incidental in the transaction, and that it did not receive payments for the license to use such software.
The Division of Tax Appeals determined that: (1) under New York Law, when a service is bundled, the primary function test should be used to determine whether the services are taxable; (2) the primary function of the taxpayer’s services lay in its provision of information reports; (3) although each level of service sold by the taxpayer increased the range of services provided to its customers, the primary purpose of the services remained the same and use of prewritten software by the taxpayer’s customers was incidental to this purpose; and (4) the services provided by the taxpayer to its customers were personal or individual in nature, since the taxpayer’s reports did not comingle data from various customers. As a result, the Division of Tax Appeals found that the entire bundle of services was nontaxable.
In the Matter of the Petition of Yesware Inc., DTA No. 829638, (N.Y. Div. Tax. App. Sept. 29, 2022); In the Matter of the Petition of Matthew Bellows, DTA No. 829639 N.Y. Div. Tax. App. Sept. 29, 2022); In the Matter of the Petition of P. Cashman Andrus, DTA No. 829640 N.Y. Div. Tax. App. Sept. 29, 2022).