CCH Tax Day Report
A taxpayer’s sales of three different online file-sharing applications for corporate boards of directors are subject to New York sales and use tax because the applications are prewritten software. The first application gives its corporate customers access to prewritten software on its portal. The customers use this software to upload board of director materials to the portal, with the ability to reserve access to specified materials to identified directors or other persons. Using the taxpayer’s software, the board members then can annotate, bookmark, approve, and share the materials with other members. The board members can also download the materials to an encrypted file on their laptops or tablet computers. By giving its customers access to prewritten software for their use, the taxpayer is making taxable sales of tangible personal property in New York to the extent that the customer’s employees or board members are using the prewritten software in New York. The taxpayer may accept a letter from the customer as to the proportion of its employees and board members authorized to use the software who are in New York, and collect tax based on that proportion of its subscription charge for the software. Because the other two applications give the customer more software-driven functionality, sales of these services also are subject to tax as prewritten software.
In addition, the Internet Tax Freedom Act (ITFA) precludes states from taxing Internet access. Email is included in the definition of Internet access. Here, the taxpayer is not selling email as a separate service, but rather includes it as part of its service, for which it makes a single charge. Under ITFA, “[i]f charges for Internet access are aggregated with and not separately stated from charges for telecommunications or other charges that are subject to taxation, then the charges for Internet access may be subject to taxation unless the Internet access provider can reasonably identify the charges for Internet access from its books and records kept in the regular course of business.” For charges to be “reasonably identifiable” as Internet access, the provider must be able to show that it used an objective and verifiable standard in determining those charges and the charges must be reasonable in relation to the total charge. Accordingly, the taxpayer may exclude from tax a portion of its charge for its applications that, based on its books and records, reasonably can be identified as attributable to its email service.
TSB-A-17(2)S, New York Commissioner of Taxation and Finance, February 27, 2017, ¶409-014