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NYS Tax Appeals Tribunal Finds SaaS Fees Are Subject to Sales Tax
Thursday, June 20, 2024

The New York State Tax Appeals Tribunal recently upheld a sales tax assessment issued to a company that provided services to customers mostly through what the company described as a software-as-a-service (“SaaS”) model. In the Matter of the Petition of Beeline.com, Inc., DTA No. 829516 (May 2, 2024). The company, Beeline.com, Inc., charged vendor management service (“VMS”) fees for a solution that included consulting services as well as a license to access the company’s proprietary software technology. Significantly, in finding that the VMS fees were subject to sales tax, the Tribunal declined to apply the primary function or true object test to determine whether the company was selling nontaxable services or taxable prewritten computer software. Instead, the Tribunal concluded that when a single fee is charged for taxable tangible property and nontaxable services, the entire fee is subject to sales tax unless the taxable tangible property is merely ancillary or incidental to the sale of the nontaxable services. This case is a reminder that, in mixed transactions involving sales of both taxable tangible property and nontaxable services, to the extent possible, the different items being sold should be broken out and separately stated on customer invoices.

The Company provided services to large businesses assisting them with gathering, organizing, assembling, and managing their contingent labor force. The Company’s chief operating officer testified that essentially what the company sold was a “matching” service to match customers that desired to purchase the services of temporary workers with the suppliers of temporary contingent labor. None of the consulting services that the Company provided were separately billed, there were no separate charges for any of the consulting services provided, and invoices sent to customers did not include a charge for a software license. The only charge was the single fee for the VMS bundled package of services.

After finding that the VMS software was taxable prewritten computer software, the Tribunal explained that the primary function or true object test is only used when considering integrated services that include both taxable services (e.g., taxable information services) and nontaxable services. However, the test is not applicable “when considering the taxability of mixed bundles of tangible personal property and services in consideration of the fact that retail sales of tangible personal property are taxable unless specifically exempt, whereas services are taxable only if specifically enumerated in the Tax Law.”

With respect to the taxability of a mixed bundle of tangible property and services, the Tribunal has instead considered whether the tangible property was “a significant part of the transaction, not merely a trivial element of a contract for services.” The Tribunal concluded here that the VMS software “is the core element of [the Company’s] business and is anything but incidental or ancillary to [the Company’s] services.” Finally, while the Company may have provided otherwise nontaxable services, the Company “failed to substantiate that claim by providing reasonable and separately stated charges for those services.”

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