New York State ALJ Determines Vendor Administration Companies Supplied in Conjunction with Software program are Topic to Gross sales Tax because the Sale of Prewritten Software program | Clean Rome LLP

An Administrative Legislation Decide (“ALJ”) lately discovered {that a} taxpayer’s vendor and labor administration companies, which have been offered along with the grant of a software program license, have been topic to gross sales tax because the sale of prewritten software program. Matter of, Inc., DTA Nos. 829516 (N.Y.S. Div. of Tax App., Feb. 9, 2023).

The Details:, Inc. (“Beeline”) offered a “matching” service to match massive nationwide and international prospects that desired to buy the companies of momentary employees with suppliers of momentary labor. Beeline offered its companies by acquiring vital quantities of data from the purchasers about their wants and processes which it then matched with accessible suppliers. Lots of of Beeline staff spent a whole lot or 1000’s of hours gathering buyer data in reference to these companies. Beeline additionally offered authorized compliance companies to its prospects and had staff devoted to researching labor, tax, and different legal guidelines that have an effect on contingent labor on a worldwide foundation. Every of Beeline’s particular person prospects additionally had staff and groups that have been devoted to managing that buyer’s contingent labor program.

As a part of the companies it offered, Beeline granted prospects a license to make use of its pre-written software program program. Beeline’s web site described the software program as “automat[ing] the hiring strategy of contract employees,” and “assist[ing] to handle and procure staffing companies from requisition by way of billing.” Not one of the companies offered by Beeline have been individually billed and invoices despatched to prospects didn’t comprise a separate software program license payment.

On audit, the auditor decided that Beeline offered licenses to make use of pre-written software program and that such gross sales have been topic to gross sales tax. The auditor issued a Discover of Willpower on that foundation.

The Resolution: The ALJ famous that whereas gross sales of pre-written software program are topic to gross sales tax, the companies Beeline offered have been usually not topic to gross sales tax. The ALJ additional famous that in Beeline’s case, the sale of taxable pre-written software program was bundled along with nontaxable companies and offered as one product. Whereas the ALJ acknowledged the existence of the first operate check, underneath which gross sales of bundled taxable and nontaxable companies are taxed based mostly on their main operate, he famous that the Tax Appeals Tribunal “has reserved judgement” on whether or not the first operate check applies to combined bundles of companies and tangible private property. Though the ALJ didn’t explicitly apply the first operate check, he discovered that the software program was “something however incidental” to what was offered and was “utterly intertwined” with the companies offered. The ALJ decided that what was being offered was taxable pre-written software program and upheld the Discover of Willpower.

This case is in sharp distinction to Matter of Yesware, et al., DTA Nos. 829638, 829639 & 829640 (N.Y.S. Div. of Tax App., Sep. 29, 2022), wherein the ALJ held that the sale of bundled nontaxable companies and software program was not taxable because the sale of pre-written software program. In Matter of Yesware, the ALJ utilized the “main operate check” to software program bundled with a nontaxable data service and located that the first operate of what was being offered was a nontaxable data service. The Division didn’t attraction Matter of Yesware in order that case stays nonprecedential. It stays to be seen if Beeline will attraction the ALJ’s willpower on this case.

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