Sales Tax State Activity Update - March 2009

Airline Software Soars on New York Ruling of Apportioned Tax

An advisory opinion by the New York State Department of Taxation and Finance has been issued explaining that a company's licensing of software used by airlines for transporting mail constitutes prewritten software subject to sales and use tax and that the tax may be apportioned based on where the customer will use the software.

Background

The Petitioner develops customized software for airlines.

The customized software is licensed to various airlines and is nonexclusive and nontransferable. The airlines using the Petitioner's software transport mail for the United States Postal Service (USPS) and foreign postal authorities. The customized software is transmitted electronically to the Petitioner's airline customer and is then disseminated by the airlines to their various locations. The Petitioner is not involved in the determing where the software is utilized.

The software is tied to the airlines systems that include scanners devices. Employees of the airline use the scanners to scan sacks of mail being transported by the airline; the sacks are scanned at the point of departure and at the point of destination. Some of the points of departure and destination are located at airports in New York. Subsequently, the Petitioner determined there would be a broader market for this software, and the software was then made available for use by other airlines transporting mail in the United States and other foreign countries.

Petitioner states that the software created for the airline in the Caribbean was used as the basis for the software currently being marketed throughout the United States and other foreign countries. The Petitioner charges a per kilo/pound amount for scanning the transported mail and providing the documentation in support of the fee charged by an airline to USPS. In the future the Petitioner's invoices will indicate the charge for prewritten software and for customized software.

Opinion

Prewritten software for purposes of section 1101(b) (14) of the Tax Law includes software designed and developed to the specifications of a specific purchaser when it is sold to a person other than such purchaser. Therefore, the portion of the Petitioner’s software that is used as the basis for the software currently being marketed to various airlines is prewritten software as described in section 1101(b) (14). Prewritten software is subject to sales and use tax under section 1105(a) of the Tax Law as tangible personal property when delivered to purchasers in New York State. See section 1101(b) (6) of the Tax Law. Though The Petitioner is modifying its software, the modifications do not affect the software's overall character as prewritten software. The Petitioner's receipts from the sale of its software and any charges to modify such software will be subject to sales and use taxes, unless charges for the prewritten portion and the modifications are reasonable and separately stated on an invoice or other statement given to the purchaser. If reasonable and separately stated, the fees for modification of the software to the specifications of the individual airline customer will not be subject to sales and use taxes. See sections 1101(b) (6) and 1115(o) of the Tax Law.

This opinion may be viewed at the NY Dept. of Taxation and Finance.

(NY Dept. of Taxation and Finance, Advisory Opinion, TSB-A-09(6)(S), 1/30/09)

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