Multi-Level Marketer’s Web-Based Platform Not Subject to Sales Tax in New York

March 1, 2022

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By: Aspen Fairchild, SALT Senior Associate

At a glance

  • The main takeaway: Businesses are continuously trying to keep up with today’s evolving technology. One of the growing trends is the provision of services through a web-based platform. The struggle for many business owners is that there may be different sales tax obligations applied to a service transaction versus a software transaction.
  • Assess the impact: The lack of clarity and uniformity among states blurs the distinction between software and services for sales tax compliance.
  • Take the next step: Aprio’s State and Local Tax (SALT) Team has experience navigating these issues and can help your business determine whether its transactions may be subject to sales tax.

Schedule a free consultation today to learn more!

The full story:

In today’s high-technology environment, one of the most difficult sales tax questions to answer remains: “Is your business generating revenue from providing taxable software or a nontaxable service?” Given that a lot of services these days are provided via a web-based platform, it is not always clear whether the customer is using software or is receiving a service. This was the issue in a recent New York Division of Tax Appeals Determination (the Determination).[1]

The taxpayer is a multi-level marketing company that sells health and beauty products to its customers through a network of distributors and/or independent agents (DIAs). DIAs receive compensation and other incentives based on the direct sales that they make, recruiting other DIAs (referred to as downline DIAs) and for the sales activity of those downline DIAs, which can go down many generations. DIAs can achieve different rankings based on their own activity as well as the downline activity, which then unlocks increased benefits.

To assist the DIAs with promoting product sales as well as managing and growing the downline sales force, the taxpayer offers two versions (free and paid) of a web-based service called “eSuite.” The free version of eSuite provides access to a web page where DIAs can place and move orders and redeem rebate credits. They can also view news, product and/or promotional updates, and a snapshot of their volumes and limited performance overview.

The paid version includes the same features as the free version, plus it allows DIAs to enroll new customers and other DIAs while providing access to the following:

  • Personalized commission reports, tailored reports detailing the DIA’s downline transactions (including volume and geography) and the open items necessary to reach elevated rankings – There are 30 different detailed reports that can be generated to enable DIAs to make informed business decisions to grow and enhance their business. One set of reports is specific to a DIA, is confidential and cannot be shared. Another set of reports incorporates very limited information about downline DIA activity.
  • A replicated website – Each DIA is provided a replicated website that is basically an additional webpage on the taxpayer’s website where the DIA can add a photo and brief statement about themselves. There is no other functionality.
  • Training videos – These are intended for beginning DIAs to use in their first month of business. The training videos are free and available outside of eSuite.
  • Limited messaging and calendar features – These features were discontinued due to lack of use.
  • Access to a mobile application – It is free to download, but its use is restricted to paid eSuite subscribers. The mobile application does not provide any functionality that is not available through the website.

The first issue addressed in the Determination was whether revenues from paid eSuite subscribers were subject to sales tax. In New York, pre-written software is included in the definition of tangible personal property that is subject to sales tax, regardless how that customer receives or accesses that software (i.e., Software-as-a-Service).[2] However, when an integrated service is provided (i.e., one that contains several different components), it is taxed according to its primary function. After reviewing the features described above, the Administrative Law Judge (ALJ) determined that the primary function of eSuite was to generate the reports, which did not constitute the sale of pre-written software. The other features were viewed as incidental.

The second issue addressed in the Determination was whether eSuite could be viewed as a taxable information service, which is defined as “[t]he furnishing of information by printed, mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner, including the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports

thereof to other persons.”[3] However, as the ALJ notes, there is an exclusion from tax for the sale of “information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons.”[4] Ultimately, the ALJ concluded that the reports are mainly personal in nature to each DIA, and that any limited overlap in the information regarding downline DIAs was not substantial enough to negate the exception. Therefore, eSuite was not considered taxable as an information service.

The bottom line

The distinction between software and services for sales tax purposes is not always clear, and it is certainly possible that different states could view the same set of facts and reach different conclusions.  The lack of clarity and uniformity among the states makes sales tax compliance so difficult. Aprio’s SALT Team has experience navigating these issues and can assist your business to determine whether it is generating taxable or nontaxable revenues, so that you comply with applicable sales tax rules and do not incur unexpected liabilities or penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Aspen Fairchild, SALT Senior Associate, State & Local Tax Services at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the February 2022 SALT Newsletter.

[1] In the Matter of the Petition of IT Works Marketing, Inc., NY Division of Tax Appeals, ALJ Unit, Determination DTA No. 829134, 12/30/2021.

[2] N.Y. Tax Law §§ 1101(b)(6), (b)(14), 1105(a).

[3] N.Y. Tax Law § 1105(c)(1).

[4] Id.


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.

(770) 353-4791