New York Rules that Online Video Creation is Taxable
July 3, 2017
Online video generating services were deemed prewritten computer software because customers had the right to direct the software’s use and utilized the same underlying software, regardless of customization.
Online services have been exploding in recent years. One type of service that has become popular is photo editing and/or creating videos with personal photos. On March 1, 2017, New York issued an advisory opinion that addressed the sales taxability of this service. 
The taxpayer, a California-based corporation with an office in New York City, offers its customers an online product in which customers can “turn their photos and video clips into professional videos.” Customers have to create an online account and can also link their accounts to social media, if they so choose. The taxpayer offers five different account levels, the lowest of which is free. Different features are available based upon the type of account selected, such as length of video, video quality and access to audio, logos and other style and hosting options.
To create the video, the customer uploads pictures and videos through a web-based interface to the taxpayer’s server. At that point, and depending on the type of account, customers are able to select the order of the pictures, any music, text and logos, as well as other customization options. Once the customers have finished making their selections, software that is hosted on the taxpayer’s website incorporates the customers’ selections and creates the videos. The videos are hosted primarily on the taxpayer’s server and can be viewed online; sometimes, the videos can be electronically downloaded. However, no tangible property is ever sold (the taxpayer used to sell the videos on DVD, but discontinued the practice). Each generated video is unique in some way because of the customer-selected content, as well as algorithms contained in the software.
The advisory opinion concluded that the taxpayer’s sale of online video generating services was taxable as the sale of prewritten computer software (i.e., SaaS). New York defines a sale to include any “transfer of possession . . . lease or license to use or consume (including, with respect to computer software, merely the right to reproduce). . . .”  Further, with regard to a “license to use,” a transfer of possession has occurred if there is actual or constructive possession, or if there has been a transfer of “the right to use, or control, or direct the use of tangible personal property.” 
In this case, the customers are given remote access to an online interface which enables them to upload content and then choose what they want to include in their videos, including any music and other customization options. Thus, the taxpayer provides its customers with constructive possession of its video generation software, because they have the “right to use, or control, or direct the use” of the software. While the customers’ videos will each be unique in some way, the same underlying software is used no matter what customization is chosen. Therefore, the software is considered pre-written computer software (as opposed to customized software), which is included within New York’s definition of tangible personal property, and the taxpayer’s online video generation services are subject to sales tax as the sale of remote access prewritten computer software, or SaaS.
This ruling illustrates the way that technology changes how services are provided, and therefore, the need to re-analyze the taxability of those services for sales/use tax purposes. Another business could provide the exact same video generation services, but instead of offering the services through a technology platform, it could require customers to come to a store, bring their photos on a flash drive and pick the music and other customization options. Then the business creates the video and sends the video via email to the customer. In that case, the customer is not provided access to use software, and therefore the state would likely not view the transaction as taxable under SaaS. It is worth noting that the state may or may not otherwise view the transaction as taxable depending on whether it specifically taxes video generation services or views the emailed video as a taxable digital good. Nevertheless, the takeaway is that two businesses may be providing a consumer with the same product or service in the end (e.g., the video), but the manner in which it is provided can create different sales/use tax consequences.
Aprio’s SALT team is experienced in understanding how to navigate these distinctions and the resulting sales and use tax consequences, thereby ensuring that your business remains in compliance and does not incur unexpected tax exposures. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the June 2017 SALT Newsletter. You can view the full newsletter here.
 New York Advisory Opinion, TSB-A-17(4)S, March 1, 2017.
 N.Y. Tax Law § 1105(b)(5).
 20 NYCRR § 526.7(e)(4).
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