New York Ruling Addresses Sales Tax on Single Charge for Software and Services
When a business provides multiple products/services, each one must be separately analyzed to determine taxability for sales tax purposes. If any one of those products/services are taxable, bundling them into one charge with the nontaxable services could make the entire amount taxable.
By: Jess Johannesen, SALT Senior Manager
For sales tax purposes, states vary in their treatment of software, digital goods, and related services. Even within a single software platform, there may be two or more different sales tax classifications for the various products or modules within the platform. In those cases, pricing and invoicing structure can significantly impact the business’s sales tax obligations. A recent New York Advisory Opinion addresses the sales tax treatment the taxpayer’s digital advertising campaign management platform and illustrates the implications of a single invoice charge for multiple products/services.
The taxpayer provides digital advertising products to customers using an advertising campaign management platform, which customers access remotely (i.e., SaaS). The platform enables customers to access a package of software tools to create, deliver, and manage their own digital advertising. Specifically, the platform contains 11 different products for customers to create different types of digital advertisements. In addition, the taxpayer provides consulting services to help optimize the customers’ digital advertising campaigns, and the taxpayer’s personnel approve and place digital advertisements using its network of publishers.
Invoice charges are primarily based on the number of impressions/views of ads by visiting users on a publisher’s website. Certain digital advertising products within the 11 products available through the platform charge customers at a percentage of an advertising budget or on an hourly basis. Each customer receives an invoice with a single total charge for the billing period, regardless of the type of service provided. Specifically, there is no specified charge for access to the SaaS platform itself.
When New York analyzed the taxpayer’s products and services, the state determined that access to the platform itself constitutes the sale of taxable prewritten software. Although the taxpayer’s agreement refers to the products as “services,” the state viewed them as software that allowed customers to create and deliver their own advertisements and to track the placement and exposure of those advertisements. New York did note that the consulting services and advertisement placement services provided by the taxpayer were not taxable services. However, since the taxpayer invoiced a single amount for each billing period, the entire charge is taxable since the taxable software platform is bundled with the nontaxable services.
The ruling notes that if instead the taxpayer charged separate fees for its software platform, consulting services, and advertisement placement services each period, then only the software fee would be subject to tax while the separately stated services would maintain their nontaxable classifications. By making this simple change, the taxpayer, if audited, would have limited its exposure to the software revenues.
This ruling highlights the importance of analyzing the various products/services to determine the separate sales tax treatment of each, as well as the importance of separately stating the charge for each on the invoice when there are taxable and nontaxable products/services. Aprio’s SALT team has experience researching and analyzing these types of state tax issues, and we can help your business determine the appropriate sales tax practices so that you do not incur unexpected sales tax exposure 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.
This article was featured in the November/December 2020 SALT Newsletter.
 New York Advisory Opinion TSB-A-20(22)S, 06/30/2020.