The New York State Department of Taxation and Finance has issued an Advisory Opinion ruling that four different online and remote access computer offerings are not subject to New York sales tax or telecommunication excise tax. Advisory Opinion, TSB-A-15(28)S (N.Y.S. Dep’t of Taxation & Fin., July 9, 2015).
The Advisory Opinion examined four different products (the “Products”). The first product, an “Online Meeting Product,” allows subscribers to conduct multiparty conferences over the Internet for a monthly or annual fee. A user of the Online Meeting Product must download a Java applet that permits a secure connection between the user and the Online Meeting Product provider. However, the applet has no functionality without being connected to the Online Meeting Product provider’s proprietary system over the Internet. Fees for usage of the Online Meeting Product are paid solely by the subscriber organizing an online meeting, and there is no charge for downloading the applet. A subscriber must pay other providers for telecommunication or Internet access service to the Online Meeting Product provider’s service.
The second product, a “Web Seminar Product,” allows a subscriber to organize and hold seminars on the Internet with up to 1,000 attendees. The Web Seminar Product provider transfers data using end-to-end encryption with the aid of free-of-charge applets similar to those used to access the Online Meeting Product.
The third product, an “Online Remote Support Product,” enables shared screen, mouse, text chat and keyboard control between computers, so that a subscriber’s technicians may provide remote computer technical support over the Internet. In order to use the Online Remote Support Product, the subscriber’s technicians and the computer user in need of remote support must download a free-of-charge applet similar to those required for the other Products. Subscribers are charged for the Online Remote Support Product on a monthly per-user basis or on a day-pass basis.
The final product, a “Remote Computer Access Product,” provides remote computer access capability via the Internet. Using free-of-charge applets similar to those required for the other Products, a subscriber can access and use a host computer remotely from another computer.
Tax Law § 1105 imposes sales tax on retail sales of tangible personal property, including prewritten computer software and certain enumerated services, and specifically imposes sales tax on sales of intra-state “telephony and telegraphy and telephone and telegraph service[s].” The terms “telephony and telegraphy” are defined by regulation to include the “use or operation of any apparatus for transmission of sound, sound reproduction or coded or other signals.” 20 NYCRR § 527.2(d)(2). Separately, Tax Law §186-e imposes an excise tax on certain telecommunication services by a telecommunication services provider. According to the Department, the sales tax and telecommunication excise tax “are to be construed together, given the overlap in their subject matter.”
In the Advisory Opinion, the Department determined that none of the Products are telephone or telecommunication services for purposes of the sales tax or the telecommunications excise tax laws, and therefore are not subject to either tax. The Department described the Products as making a mere connection or “bridge” on the Product provider’s communication server because the users of the Products must provide their own Internet connections to the Product provider’s server, and relied on prior Advisory Opinions ruling that “bridging” services are not telephone or telecommunication services for sales tax or telecommunication excise tax purposes. Further, the Department concluded that none of the Products constituted the sale of prewritten software, which would be subject to sales tax, despite the provision of the applets, deciding that the applets provide “limited functionality” in the overall context of the services provided by the Products.
Finally, the Advisory Opinion identified three previously released Advisory Opinions classifying the following services as telephony or telegraphy services subject to sales tax and/or telecommunications excise tax: (1) a consulting service that routed a customer’s calls through a switch to gather information for purposes of optimizing the customer’s use of long distance communications (Advisory Opinion, TSB-A-82(31)S (N.Y.S. Dep’t of Taxation & Fin., Sept. 1, 1982)); (2) a voice messaging service for subscribing physicians to record messages for retrieval by patients via telephone (Advisory Opinion, TSB-A-04(16)S (N.Y.S. Dep’t of Taxation & Fin., June 16, 2004)); and (3) a video switching service allowing customers to send video programming transmissions to one another (Advisory Opinion, TSB-A-10(41)S (N.Y.S. Dep’t of Taxation & Fin., Sept. 22, 2010)). The Advisory Opinion stated that, to the extent that the determinations in those previously released Advisory Opinions are inconsistent with the current Advisory Opinion, those prior Advisory Opinions no longer reflect Department policy.
The Tax Law classifies “pre-written computer software” as tangible personal property subject to sales tax “regardless of the medium by means of which such software is conveyed to a purchaser.” Tax Law § 1101(b)(6). The Department has concluded in other Advisory Opinions that online services may constitute a transfer of pre-written software subject to sales tax, even when the purchaser of the service never downloaded or possessed any software from the service provider. Here, the Department implicitly accepted the provider’s representation that it alone was the user of “proprietary software used to provide” the Products and that customers were charged for the Products, but not for the use of software. In concluding that the Products were not taxable, the Department implicitly accepted the provider’s representation. A company providing services over the Internet to New York customers should consider whether it could similarly support a position that any software used in providing its online services was used solely by the company, rather than its customers, in order to demonstrate that no sales tax should apply.
Further, it is notable that the Products analyzed in the Advisory Opinion required users to download a Java applet in order to be functional. The Department classified the applets as “software,” but nonetheless determined that the Products themselves are not prewritten software subject to sales tax because the applets had “limited functionality.”