The New York Tax Appeals Ruling on Sales Tax and SaaS

The New York State Appeals Tribunal and Division of Tax Appeals, collectively known as the Tax Appeal, have issued two significant sales tax rulings. In the cases of Beeline.com, Inc. and FacilitySource, these rulings were made on May 2, 2024, and May 9, 2024, respectively.

Both Beeline.com and FacilitySource, as taxpayers, were involved in bundled transactions. These transactions included the licensing of software and the provision of nontaxable services. With the Tax Appeal rulings, businesses involved in these transactions must be aware of the sales tax collection.

Facts of the Matter

Beeline.com is a Florida-based company offering a vendor management system (VMS) software platform that allows customers to source, procure, track, and pay for contingent labor and a managed supplier program (MSP) to oversee and coordinate the VMS process for customers. 

The Division of Taxation (DTA) assessed sales and use tax and determined that the VMS was a taxable license of electronic pre-written software. Beeline.com challenged this assessment, but the Administrative Law Judge (ALJ) denied the appeal, finding that the VMS license was a sale of standardized prewritten software. The taxpayer appealed to the Tax Appeals Tribunal, which upheld the ALJ ruling.

FacilitySource is a company that offers facility management services, including 24/7 call-in transaction center access, web-based portal access, work order management, vendor management, electronic invoicing, and data analytics. During the audit, the DTA concluded that the taxpayer “clearly” sold a “bundle of prewritten computer software and services for one charge,” which was later upheld by the ALJ. 

Impact on Bundled Sales of Software and SaaS Services

The Tax Appeal decisions state that the sale of software-as-a-service (SaaS) and managed services is taxable as the sale of prewritten software. In these cases, the Tax Appeal concluded that prewritten software, which is sold together with the companies' services, is the core business for both companies. Therefore, the software is a significant element of the services provided to the customers.

This means businesses should pay close attention to how they market, sell, and price their services. Businesses offering services along with software to New York customers should consider unbundling, that is, charging separately for otherwise nontaxable services and software licensing to avoid similar tax exposure. 

Conclusion

As the sixth anniversary of the historical Wayfair ruling passes, it is clear that US states and taxpayers need help finding common ground regarding interpreting the ruling's rules. More and more US states are making these rulings to clarify applicable regulations, which vary from one state to another. Businesses should monitor these topics to comply with rules and avoid any penalties.

Source: Decision No. 829516, Administrative Law Judge Determinations