What did the New York Court of Appeals decide about VMS fees?

The Court of Appeals held that fees charged for access to vendor management software are taxable because they constitute licenses to use prewritten software under New York sales tax law.

Why were VMS access fees considered taxable in New York?

The court agreed with tax authorities that providing customers with access to the VMS amounted to licensing prewritten software, which New York treats as a taxable sale even when the software is accessed remotely.

Did the company argue that it was providing services rather than software?

Yes, the company argued that its primary business was matchmaking between buyers and suppliers of temporary labor and that the software merely supported those services, but the court rejected that characterization.

How did the court apply the “true object” or primary function test?

The court found that the Tax Appeals Tribunal correctly applied the true object test and concluded that the software licenses were a central component of the transaction, not incidental to non-taxable services.

What role did customer contracts play in the court’s decision?

The court relied heavily on contract language and website disclosures showing that customers were explicitly granted a limited license to access and use the VMS, supporting the conclusion that software licensing was being sold.

What does this ruling mean for other businesses using VMS or similar platforms?

Businesses with similar models should review their New York sales and use tax obligations carefully, as fees for access to proprietary platforms may be treated as taxable software sales rather than non-taxable services.

NY Court Confirms Sales Tax on Vendor Management Software

The New York Court of Appeals issued a decision in a case questioning whether fees for access to vendor management software (VMS) are subject to sales tax when the software itself is a core component of the customer's purchase. The taxable person involved in this dispute operated a proprietary technology platform that matched clients with suppliers of temporary and contingent labor and supported those relationships with services such as workforce management, retention, and invoicing.

Background of the Case and the Court's Ruling

In 2016, the Department of Taxation and Finance (DTF) conducted a tax audit and determined that fees charged for access to VMS constitute a license to use prewritten software, which New York law treats as a taxable sale, even when the software is accessed remotely. As a result, the DTF issued an audit assessment for unpaid sales and use tax.

The taxable person challenged the assessment before the Division of Tax Appeals, arguing that its VMS was neither prewritten software nor the true object of its sales, and that its real business was providing a matchmaking service between buyers and suppliers of temporary and contingent labor.

The Division of Tax Appeals concluded that the taxable person sold licenses for prewritten software and that those licenses were a central, not incidental, part of its business. Therefore, it rejected the appeal. This was also confirmed by the Tax Appeals Tribunal, which emphasized that access to the VMS was a core element of the taxable person’s offering.

Ultimately, the dispute reached the Court of Appeals, where the taxable person continued to frame its activities as non-taxable services delivered through technology. After carefully examining the document provided by the taxable person, including client contracts that explicitly granted customers a limited license to use and access the VMS, as well as similar language on the company’s website, the Court rejected the argument that the VMS was not prewritten software.

The taxable person also contended that New York law required application of the primary function, or true object, test because its transactions bundled software with otherwise non-taxable services. On those matters, the Court of Appeals acknowledged that the true object test is commonly used in New York when transactions involve multiple services. Still, it concluded that the Tax Appeals Tribunal had applied that analysis correctly, finding that the software licenses were not incidental to the services provided.

Conclusion

The Court affirmed that the fees charged for VMS licenses constituted taxable sales of tangible personal property under New York law, rejecting all arguments by the taxable person. Taxable persons engaged in similar transactions and business operations should carefully consider the interpretation of applicable New York sales and use tax rules provided in the ruling, and assess how and to what extent this ruling applies to them.

Source: Beeline.com, Inc. v. State of New York Tax Appeals Tribunal