Ruling fails to consider true object of transaction
On April 29, 2016, the New York State Department of Taxation and Finance released TSB-A-16(8)S, a March 15, 2016, ruling in which the department advised a petitioner that the sale of a tablet-based fee-for-access health monitoring product to persons other than exempt organizations is characterized as the sale of canned software and is subject to sales tax.
The petitioner sells a tablet-based monitoring product that helps people with chronic health conditions monitor their health status. In separately charged for transactions, the petitioner sells purchasers a tablet, tablet-enabled monitoring devices, and software that the petitioner installs on the tablet that (1) causes the tablet to function solely as a monitoring device, (2) communicates the purchaser’s health status automatically to the petitioner’s systems, and (3) allows the tablet to access the purchaser’s care plan, which the purchaser’s caregiver entered into the petitioner’s system as part of set up, in order to obtain reminders regarding when to take tests and medicines. The purchaser’s caregiver can then access this data on the petitioner’s systems via a web portal. When a purchaser terminates use of the petitioner's products, the petitioner remotely removes the monitoring software from the tablet, and the tablet becomes an ordinary tablet. The purchaser retains ownership of the tablet and monitoring devices.
In its ruling request, the petitioner asked the department whether its sales of access to monitoring software are subject to sales tax when the purchaser is not an exempt organization. In response, the department advised the petitioner that its sales of fee-for-access web-enabled software were subject to sales tax because the petitioner gives caregivers access to its web portal, where they remotely use the petitioner's software to create care plans for the purchasers, which constitutes the taxable sale of canned software. In reaching this decision, the department relied heavily upon other rulings in which the department previously advised that canned software is included within the definition of tangible personal property regardless of the means of transfer, and that obtaining the right to access canned software constitutes a transfer of possession of the software, because the purchaser gains constructive possession of the software. See, e.g., TSB-A-08(62)S.
Sellers of remote access to software and other variations of software delivered as a service to New York customers should be aware of the state’s “constructive possession” approach to classifying these transactions as sales of tangible personal property, and should review the underlying facts and circumstances surrounding these New York transactions to properly determine characterization and taxability. Furthermore, it is important to note that New York failed to address the possibility that the true object of the transaction addressed in this ruling was an information service rather than the sale of software. The state has issued numerous advisory opinions finding that the true object of a transaction was a service even though software was utilized when providing the service. For example, see TSB-A-15(1)S and TSB-A-15(28)S. This approach is further supported by the New York State Division of Tax Appeals 2014 decision in Sungard Securities Finance. Sellers and purchasers engaged in these types of transactions should carefully review the specific facts and circumstances involved when determining the true object of the transaction and whether the state’s “constructive possession” approach applies.