Is Software as a Service Taxable in New York?
Decipher New York's sales tax treatment for cloud software. Gain crucial insights into state regulations and your business's compliance duties.
Software as a Service (SaaS) delivers applications online, creating sales tax complexities due to outdated laws. Its taxability varies by jurisdiction, making compliance challenging. Understanding New York’s specific regulations is crucial.
Understanding SaaS for New York Sales Tax
The New York Department of Taxation and Finance (NYDTF) considers prewritten computer software as tangible personal property. This applies regardless of transfer method, including physical disk, electronic download, or remote access. SaaS falls under this definition, providing remote access to prewritten software functionality.
New York law distinguishes between prewritten and custom software. Custom software, developed for a specific purchaser, is not taxable. If later sold to another party, it becomes taxable as prewritten software. Modifications to prewritten software do not change its taxable status, but separately stated charges for them may be exempt.
When SaaS includes related services like maintenance, support, or upgrades, their taxability depends on presentation and integration with software use. Training, consulting, installation, and repairs are generally exempt. If bundled with prewritten software, the entire charge may be taxable unless non-taxable services are reasonable and separately stated. New York often treats the entire bundle as taxable if the software component is not incidental.
The distinction between taxable prewritten software and non-taxable “computing power” is important. New York clarifies that providing computing power (processors, memory, storage) is not taxable. Infrastructure as a Service (IaaS) or Platform as a Service (PaaS) models, offering raw computing resources, may be treated differently from SaaS. Software use within these services, like an operating system, might be incidental to non-taxable computing power.
New York Sales Tax Rules for SaaS
New York applies a state sales tax rate of 4% to taxable goods and services, including SaaS. Local sales taxes are imposed by counties and cities, increasing the total tax. Combined state and local rates typically range from 7% to 8.875%, depending on customer location. The customer’s location of use determines the local sales tax rate.
New York Tax Law Article 28 governs sales and use taxes, including software. The Department of Taxation and Finance issues guidance (Tax Bulletins, Advisory Opinions) to clarify how these laws apply to cloud computing and SaaS. Advisories consistently indicate remotely accessed software, including SaaS, is taxable.
Certain exemptions may apply to SaaS. Prewritten software used in tangible personal property production for sale, or in research and development, can be exempt. Purchasers claim this exemption with Form ST-121.
Exemptions also apply to certain purchasers. Governmental entities and qualifying non-profits are exempt. Sellers must obtain exemption certificates. Custom software designed for specific purchaser requirements is exempt, as it is not prewritten.
Provider Responsibilities and Compliance
Businesses providing taxable SaaS in New York must understand their responsibilities, starting with sales tax nexus determination. Nexus is the legal connection obligating a business to collect and remit sales tax. New York establishes nexus via physical presence (office, employees, inventory). Economic nexus rules require out-of-state sellers to collect tax if thresholds are met.
The economic nexus threshold in New York is met if, in the preceding four sales tax quarters, a remote seller has gross receipts from sales into New York exceeding $500,000 AND over 100 separate transactions. Both conditions must be met. Once nexus is established, businesses must register with the New York State Department of Taxation and Finance.
Registration for a sales tax Certificate of Authority is online via the New York Business Express website. Businesses provide their Federal Employer Identification Number (EIN), business entity structure, and estimated yearly tax liability. There is no fee, and the certificate is typically received within 7-10 business days. Businesses cannot legally make taxable sales until receiving their Certificate of Authority.
Once registered, SaaS providers must calculate and collect sales tax. The tax rate is determined by the customer’s location where the software is used. This means applying the combined state and local rate for that address. After collection, businesses file sales tax returns and remit taxes to New York State.
Filing frequency (monthly, quarterly, annually) is assigned by the NYDTF based on sales volume or estimated tax liability. Returns are due by the 20th day of the month following the reporting period.