An administrative law judge at the New York Division of Tax Appeals found that a company’s vendor management fees were taxable as the sale of pre-written software. The company offers a web-based application that helps to manage and procure staffing services from requisition through billing. The company argued that its fees are not taxable because “the primary purpose of its service was to act as a “matching” agent for suppliers of temporary labor and customers needing such labor and not the license of software.” The Department countered that the primary function test does not apply because they are licensing tangible personal property.  While the company also provided certain customization services, such charges were not assessed by the Department.

The ALJ found the company used the same software for all of its customers; thus, the product was pre-written software – a type of tangible personal property and the primary function test should not apply. Nonetheless, even if the primary function did apply, the ALJ noted that the primary function of the sale was a license of software. In particular, “the software technology and license appear to be completely intertwined with all the services petitioner offers in the contract” and “the ultimate goal was to provide customers a seamless, automated and efficient system of fulfilling and monitoring their temporary employment needs, and that required, as the contract reflects, utilization of the software technology license.”

In the Matter of the Petition of, Inc., DTA No. 829516, (N.Y. Div. Tax App. Feb. 9, 2023).