New York Businesses: Call-Handling Software is Subject to Sales Tax

Energy power of future big city concept, neon cyber light skyscraper building of business area architecture simulation technology digital fly over view, blue theme

By: Jeff Glickman, SALT Partner-in-Charge

At a glance:

  • The main takeaway: A recent tax ruling out of New York sheds light on the distinction between taxable software and nontaxable services.
  • Impact on your business: Depending on the type of software your business provides to customers, it could be treated as either taxable or nontaxable, which will impact your sales tax compliance obligations.
  • Next steps: Aprio’s State and Local Tax (SALT) team is well-versed in the sales taxability of transactions involving software and services and can help address your sales tax needs.

Schedule a free consultation today

The full story:

A recent New York State Advisory Opinion provides some insight into how the state analyzes transactions involving software to determine if a sale is subject to sales tax as software as a service (SaaS) or should instead be treated as a nontaxable service.

Here, we provide an overview of the Opinion, plus important facts New York business owners should know.

The case in question

The taxpayer in this Advisory Opinion owns proprietary software that it markets to customers seeking to better handle incoming customer service phone calls. The software, which resides on the taxpayer’s servers, is used to determine the callers’ intent.

Initially, the taxpayer consults with a customer to determine their needs and develops technical specifications and call scripts so that the software can be configured to determine the intent.  Customers are charged separately for these software modification and installation services.

Next, the appropriate technology must be procured to enable the taxpayer’s services, including all telephony and network connectivity equipment, as well as a circuit to forward calls to one of the taxpayer’s data center locations. The customer is generally responsible for obtaining this equipment; however, in certain instances, the taxpayer will supply the circuit. When that occurs, the taxpayer pays sales tax at the time of purchase and then may pass through these charges as a “circuit fee” or may not charge the customer separately.

When a customer’s caller contacts the customer’s call center, the circuit routes the call to one of the taxpayer’s data centers (none of which are in New York). The caller’s intent is determined by the software and by “intent analysts.” These analysts are live employees of the taxpayer who listen to the calls and enter callers’ intent into a computer that interfaces with the software. Intent analysts do not speak to callers; as the software has developed, it is now capable of handling more calls without any intervention from analysts.

Most calls are resolved and terminated at the data center. In other cases, calls will be routed back to the customer either because the caller’s intent could not be determined, or the caller’s intent was successfully determined and the call script sends the call back to the customer. The taxpayer bills its customers based on successful calls.

Determining sales taxability

In New York, the sale of prewritten software is taxable “regardless of the medium by which such software is conveyed to the purchaser.”[1] Prewritten software remains so even if modified or enhanced to the specifications of the specific purchaser, except in cases where there is a reasonable, separately stated charge for such modification or enhancement.[2]

In this case, the state determined that the taxpayer provides taxable prewritten software that is designed to facilitate the efficient handling of its customer’s handling of phone calls. The customer is directing the use of the software and therefore obtains constructive possession of the software.

The taxpayer argued that its intent analysts made the offering more like a service than a software.  However, the state disagreed, noting that the analysts are there only to ensure the proper functioning of the software and do not interface with callers.

The ruling also concluded that:

  1. The situs of the sale for purposes of determining the appropriate jurisdiction and tax rate is the location from which the customer uses or directs the use of the software — which, in this case, is the customer’s call center.
  2. Any separately stated circuit fees are subject to sales tax because they are an incidental element of the sale of the software.
  3. Reasonable and separately stated charges for initial consultations, script development and software configurations are exempt.

The bottom line

This ruling highlights the type of analysis that a state applies when trying to determine whether a business is providing taxable software or a nontaxable service. Here are some significant questions: “Who” or “what” is actually providing the customer with the desired result? Is it the software itself or is it a person who may use the software (and who is that person — the vendor or the customer)? Sometimes, like in this case, there is a mix of the two, which makes the analysis more difficult; thus, the taxpayer requested the ruling.

Aprio’s SALT team is experienced with addressing the sales tax implications of transactions involving software and services. Our team can assist your business with determining whether your transactions should be treated as taxable software or a nontaxable service, and we can draft ruling requests in cases where more clarity is recommended. This analysis is a crucial step to ensuring that your business is compliant with its sales tax obligations and does not incur unexpected liabilities and 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  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] N.Y. Tax Law §§ 1105(a) and 1101(b)(6).

[2] N.Y. Tax Law § 1101(b)(14).

Disclosure

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.

X