If you are selling or purchasing services on the web, unexpected sales and use taxes may be imposed in New York State ("NYS") and other jurisdictions. Here are some of the common questions and answers you may have, as well as what taxes to watch out for.
When does this apply to my company?
Companies having a “physical presence” (nexus) in a state may have an obligation to register, collect and remit sales and use tax on taxable transactions. Physical presence typically includes having an employee, independent representative or property in the state.
I’m the buyer, not the seller, so I owe nothing, right?
Wrong! Although remote sellers that do not have physical presence in a state and are therefore not required to collect and remit tax from its customer, the buyer may have a use tax payment obligation. For example, your company is in NYS and buys taxable prewritten computer software from a company in California. While the California company may not have an obligation to collect and remit NYS sales tax, you are required to accrue and pay NYS use tax. If you don’t, you will be subject to tax, interest and potential penalty.
How about using or accessing services or software? That can’t be taxable, can it?
Sometimes. Here are some general rules regarding services provided over the web subject to sales and use tax when computer software is “accessed” or “used.”
• The sale or purchase of “canned” pre-written software is subject to tax when transferred in a tangible form (i.e. a CD). When transferred electronically (downloaded over the web), the treatment differs by state (i.e., California non-taxable, New York taxable).
• The sale or purchase of a taxable item (i.e., canned software) “bundled” with a non-taxable service (i.e., support or consulting) generally makes the entire sales price taxable.
• If the “primary purpose, object or function” is to provide a nontaxable service, the charge for such service (i.e., a subscription) should usually be nontaxable.
So, no transfer, no access, no tax?
If software is not transferred to nor accessed by the customer that provides the service, it appears the transaction will be treated as a non-taxable service in NYS.
How about use but no transfer?
Recent NYS guidance advised that the charge for access to a software product that allowed the customer to upload an image onto the seller’s servers and manipulate the images was subject to NYS sales and use tax since there was a use of taxable pre-written computer software even though there was no transfer of such software.
To the contrary, the sale of automated voice message services were not subject to NYS sales and use tax although the seller used specialized software to provide such services since such software was not transferred to nor accessed (used) by the customer.
In another recent Advisory Opinion, NYS considered sales and use tax on two computer software products provided by a financial institution. Information and edits concerning the first product could only be inputted by the seller and therefore the charge was a non taxable service since the customer did not have access to nor use of the software. The charge for the second product however, was taxable computer software because customers were permitted to enter information and edit documents on-line.
Do these rules apply to e-learning?
In NYS, charges for on on-line web based training and educational services were subject to tax as the sale of pre-written computer software because contrary to prior guidance, the software at issue did not include any significant non-electronic academic support. NYS did not consider that the primary purpose of the software was arguably a nontaxable service to train and educate users that would receive a certification upon completing the course.
In a recent NYS Opinion, the sale of an educational program that had academic support aspects was taxable as pre-written computer software, whereas the charges for live interactive “virtual classrooms” were deemed a nontaxable service. Unfortunately, NYS again did not address the primary purpose of such services, that is job and professional technical certifications. Moreover, the academic support provided apparently was not significant in comparison to the pre-written software.
What is the bottom line?
Understand these rules in your jurisdictions and how to apply them. Implement a process and method to comply by registering, collecting and remitting sales tax or accruing and paying use tax. If you discover your company has been delinquent, consider “coming clean” via a state voluntary disclosure or amnesty program to limit the “look back” period and avoid potential penalties.
David Schmutter, CPA, JD, LLM is a State and Local Tax Partner at Weiser LLP in NYC. He can be reached at 212-375-6854 or firstname.lastname@example.org