In yet another reminder of the uncertainties involving the taxability of computer-related services, the Department of Taxation and Finance has ruled that “hosted marketing services” constitute the sale of prewritten software and are subject to sales and use tax to the extent accessed by clients in New York. Advisory Opinion, TSB-A-11(17)S (N.Y.S. Dep’t of Taxation & Fin., June 1, 2011).
The taxpayer, a California-based service provider (“Host Marketer”), offers marketing services to clients that use email, direct mail, and other marketing channels to reach potential customers. Under the taxpayer’s “Hosted Offering” program, clients acquire information about their own customers (e.g., email address, demographic data, and web browsing history) and load that information, via the Internet, onto the Host Marketer’s servers in California. Using the Host Marketer’s software, a client can derive a list of targeted recipients for messages the client wants to send based on the client’s criteria that it also enters. Messages are then sent from the Host Provider’s servers to the targeted recipients, usually via email. Clients are able to monitor activity on their email campaigns by logging onto the Host Marketer’s website.
As a condition of the service, the Host Marketer licenses to clients the right to use its proprietary software for a specified number of users. The software cannot, however, be downloaded onto the client’s computers. The Host Marketer does not charge a software license fee. Instead, clients pay an initial set-up fee to establish connectivity to the Host Marketer’s data centers. There is a separate charge based on the number of marketing messages that the client has the Host Marketer send to customers, typically via email.
The Department ruled in its Advisory Opinion that the host marketing services constitute the sale of pre-written software and are taxable to the extent they are used by clients in New York State. Noting that a sale includes a “license to use” tangible personal property, the Department pointed to the fact that the Host Marketer grants clients a license to use the software. Although there are no designated software licensing fees, the Department ruled that the set-up fee and messaging charges were payments for the right to use the Host Marketer’s pre-written software.
As for how to determine where the charges are taxable, the Department concluded this should be based on the location of the client’s employees who access the website. Where the client has employees both within and outside the State who access the website, sales tax should be collected based on non-estimated information as to usage location provided by the client.
Additional Insights. The Advisory Opinion reflects the Department’s increasing tendency to find that there has been a taxable sale of pre-written software in order to tax computertype services that are not enumerated taxable services under the Tax Law, and to do so through the Advisory Opinion process. Advisory Opinions are binding only on the Department, and apply only to the party requesting the opinion. Moreover, neither the Tribunal nor the New York courts have addressed whether, applying the “primary function” test, what is being furnished in these situations is indeed a taxable sale of pre-written software. It also remains an open question whether there is truly a transfer of actual or constructive possession of software where the software is not downloaded onto the customer’s computers.