The New York State Department of Taxation and Finance (Department) issued a pair of advisory opinions regarding the sales taxability of consulting services and software. New York’s Tax Law generally imposes sales and use tax on receipts for furnishing information services. N.Y. Tax Law § 1105(c)(1). However, in both advisory opinions, the primary transactions were not subject to New York sales tax because they were within the exception for personalized information services and information services provided orally. See 20 NYCRR § 527.3(b)(2) & (3).
On August 29, 2012, the Department issued an advisory opinion, TSB-A-12(22)S, in which it concluded that access to software and a directory of consultants used to facilitate Petitioner’s oral consultation service were not subject to sales tax. The Petitioner’s primary business was offering oral consultation services through its group of independent contractor consultants. Petitioner offered its internally developed software and directory of consultants, without additional charge, to its customers in order to assist its customers in identifying particular consultants and scheduling a consultation. The Department also determined that written reports provided to Petitioner’s customers as supplements to the consultation service were not taxable as an information service as long as the primary function of the service is obtaining advice from the consultants, the information provided is not derived from any common data source, and that information is not substantially incorporated into reports given to others.
One month later, on September 27, 2012, the Department released another advisory opinion, TSB-A-12(24)S, dealing with a similar transaction, and concluded that a customer’s limited use of the Petitioner’s specialized software did not cause its otherwise exempt information services to become taxable. The Petitioner gathered, mapped, and stored the customer’s data, and created customized reports through its proprietary software based on that data. The customer was able to customize the report using the Petitioner’s software; however, that use was limited to parameters set by the Petitioner. Under these facts, the Department determined the access to the software and directories was not subject to sales tax because the access was integrally related to the overall services provided by the Petitioners, which were not subject to sales tax.
These advisory opinions are important because they establish that the use of software bundled with other services will not automatically cause a transaction to become taxable. While this is generally a business-friendly position, taxpayers still must be careful when evaluating transactions involving the use of, or access to, software. They must engage in a fact-intensive inquiry into whether the object of the transaction is truly the sale of taxable software or whether the transaction remains nontaxable because the software is merely incidental to the transaction, or the transaction qualifies for another statutory exemption.