A taxpayer’s sale of a cloud collaboration service product is subject to New York state and local sales taxes because it constitutes prewritten software. The taxpayer’s purchase of hardware that it uses to provide the product will not be subject to sales or use tax if it is not delivered or used in New York. If the taxpayer purchases software in New York that is intended exclusively for resale to its customers, such purchases would be exempt from sales tax. The essence of the taxpayer’s product is software. The product facilitates the operation of a customer’s telecommunications system by allowing the customer to remotely access its software. This software then “instructs” the customer’s own equipment to perform various functions, such as instructing the customer’s switching apparatus on how to route a telephone call or to direct a call to voice mail if the user does not answer. The taxpayer’s receipts from the product constitute receipts from the sale of prewritten computer software because its customers have the right to use, control, and direct the use of, the taxpayer’s software to facilitate the operation of the customers’ telecommunication systems. A customer contracts with the taxpayer to modify the taxpayer’s software to allow it to interact with the customer’s telecommunication system and to instruct the customer’s telecommunication equipment to perform various functions. By contracting with the taxpayer to purchase a license to use the product, the customer is directing the use of the taxpayer’s software to interact with its telecommunications system. Thus, the customer obtains constructive possession of the software. The situs of a software license for purposes of determining the proper local tax rate and jurisdiction is the location associated with the license to use. The taxpayer should collect tax based on the portion of the receipts attributable to its customers’ telecommunications systems located in New York. For this purpose, the taxpayer may rely on information received from its customers about the location of their telecommunication systems.
In addition, the taxpayer’s start-up charges are separate from the charges for the license to use its software. Because these charges are for modifying the taxpayer’s software to enable it to interact with and direct the customer’s telecommunication system, they constitute receipts from custom software and are not subject to sales tax, as long as the charge for the customization is reasonable and separately stated on the invoice or billing statement provided to the customer. Further, the taxpayer is the retail purchaser of the hardware that it uses to provide the product. The taxpayer will not owe sales or use tax on its purchases of such hardware if the hardware is not delivered to or used by the taxpayer within New York. To the extent that the taxpayer purchases software in New York that is intended exclusively for resale to its customer, those purchases would be exempt from sales tax as long as the taxpayer is registered for sales tax purposes and timely furnishes the vendor with a properly completed resale certificate.
TSB-A-17(9)S, New York Commissioner of Taxation and Finance, July 6, 2017, ¶409-076