The New York Supreme Court, Appellate Division upheld the New York Tax Appeals Tribunal decision finding that a taxpayer’s bundled transaction of nontaxable services and software is subject to New York sales tax as prewritten computer software, which New York treats as the sale of tangible personal property. Beeline.com sells services that help businesses hire and manage temporary workers, which are performed through Beeline.com’s vendor management system (VMS).
The court addressed three points in confirming the tribunal’s decision. First, Beeline.com argued that the tribunal failed to conduct a primary purpose analysis. The court disagreed, concluding that the tribunal engaged in a “functional equivalent” of a primary purpose analysis by “thoroughly assessing whether the license provided [to Beeline.com’s] clients to use the VMS is incidental to the services rendered.”
The court agreed with the tribunal’s determination that the VMS was central to Beeline.com’s services and that the company’s clients were ultimately paying for the VMS, rather than nontaxable services, because the VMS was the primary means by which clients could request labor, select candidates for consideration, and bill for labor. In doing so, the court salvaged the primary purpose test as applied to software-as-a-service (SaaS) and effectively rejected the Department of Taxation and Finance’s argument that the test does not apply because SaaS is a bundled transaction including software as tangible personal property and services.
Second, the court agreed with the tribunal’s decision to rely on the plain language of Beeline.com’s sample client agreements and the descriptions of Beeline.com’s products on its website, and to reject the testimony provided by Beeline.com. The court reasoned that the company’s contract and website language constituted “substantial evidence” for concluding that Beeline.com was providing prewritten computer software.
Finally, the court dismissed Beeline.com’s argument that its software was custom and therefore not taxable. Although the company argued that its software was tailored to each client’s needs, the court rejected Beeline.com’s position because the company’s contracts provided that the VMS software code was not amended or customized for each client.
If you have any questions, or would like additional information, please contact one of the attorneys on our State & Local Tax team.
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