The New York Tax Appeals Tribunal held that a company’s fees related to sales of its labor procurement system were taxable sales of pre-written software.
Taxpayer, Beeline.com Inc., provides services to assist customers in gathering, organizing, managing and assembling their contingent labor force. As part of its service contracts, taxpayer grants its customers license to use its web-based application that automates many processes associated with labor management. The Department assessed the company under the theory that it was selling licenses to use pre-written software, which is taxed as a sale of tangible personal property.
In its analysis, the Tribunal first found that the taxpayer’s system constituted pre-written software. The Tribunal made such determination despite claims by petitioner that the platform could be customized for each particular customer’s needs and preferences, finding that in most circumstances there was limited or no customization. Further, the Tribunal found that, because the taxpayer’s customer agreements provided for licenses to use the software, the consideration paid to the taxpayer was for sales of software.
The Tribunal acknowledged that the primary function test should be applied when determining the taxability of services consisting of both taxable and non-taxable components. But, based on its determination that the transactions in question involved sales of pre-written software, the Tribunal declined to apply the true object test noting that it has “declined to apply a primary function analysis when considering the taxability of mixed bundles of tangible personal property and services.” In drawing this distinction, the Tribunal relied on the fact that retail sales of services are taxable only if enumerated, but sales of tangible personal property are taxable unless exempt.
Ultimately, the Tribunal found that vendor management software technology was the core element of the taxpayer’s business, and was neither ancillary nor incidental to the taxpayer’s services. And, as a result, the taxpayer was engaged in sales of taxable tangible personal property that is subject to sales tax.