Portion of Price Attributed to New York Users of Prewritten Software is Subject to State Sales Taxes, Tax Dept Rules

In this Petition for Advisory Opinion, the Department of Taxation and Finance (“Department”), Petition asked whether any portion of the price it paid for prewritten software is subject to New York State sales and use taxes.

The Department concluded that the portion of the price attributable to users located in New York is subject to sales and use tax.

By way of background, Petitioner’s parent, GL, is a global provider of assurance, consulting and classification services to the maritime and energy industries and is headquartered in Hamburg, Foreign Country 1. GL has approximately 6,700 employees in 80 countries. Most of GL’s employees are located in Foreign Country 1 and the Foreign Country 2.

Petitioner has entered into a three-year license agreement with a software company located in Nevada (Company X). The license agreement provides for approximately 3,000 copies of Company X’s prewritten software to be used by GL, Petitioner, and other subsidiaries of GL worldwide.

Petitioner will not charge its affiliates for the right to use the prewritten software provided by Company X.

The employees of GL, Petitioner, and other subsidiaries of GL located worldwide will be able to access the software as needed, using a code or key provided to them over the internet by the administrators in Foreign Country 1. GL’s administrators will be able to track usage according to the license agreement, and GL will be able to provide data, if required, to show that users in Foreign Country 1 or the Foreign Country 2 are in fact physically located in Foreign Country 1 or the Foreign Country 2.

Company X believes it is obligated to bill Petitioner New York sales tax on the total number of licenses provided for in the agreement based on Petitioner’s New York address in the license agreement and as the “invoice to,” “bill to,” and “ship to” address.

According to the Department, prewritten software is considered tangible personal property “regardless of the means by which it conveyed to a purchaser” (Tax Law section 1101(b)(6)).

The Department explained that retail sales of tangible personal property are subject to sales tax (Tax Law section 1105[a]). A sale includes “[a]ny transfer of title or possession or both” and includes a “license to use.”

Sales Tax Regulation section 526.7(e) provides that, in general, “a sale is taxable at the place where the tangible personal property or service is delivered or the point at which possession is transferred by the vendor to the purchaser or his designee.”

Sales Tax Regulation section 526.7(e)(4) further provides that, with respect to a “license to use,” a transfer of possession has occurred if the customer obtains actual or constructive possession, or if there has been “a transfer of the right to use, or control or direct the use of tangible personal property.”

Accordingly, Company X should situs its sales of prewritten software to Petitioner based on the location of the employees who use the software. Because the employees of Petitioner and its affiliates who use the software are located both in and outside of New York State, Company X should collect tax based on the portion of the receipt attributable to the employee users located in New York.

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