Magazine article The CPA Journal

The Computer Services Sales Tax Quandary

Magazine article The CPA Journal

The Computer Services Sales Tax Quandary

Article excerpt

As the impact of computers on society expands, it is essential that businesses and consumers understand the implications of sales tax on computer services. Although the application of sales tax for computer services may seem well defined on the surface, the statutory language is more ambiguous. Advisory opinions issued by the New York State Commissioner of Taxation and Finance are necessary to adequately interpret the statutory law.

To determine the taxability of computer services, the purchaser must make a distinction between hardware and software services. Under section 1105(c) of the New York Tax Law, the state imposes a tax on the receipt from every sale (except resale) of certain services, including the maintenance, service, or repair of tangible personal property. As such, New York State taxes services directly related to computer hardware. While hardware services are subject to sales tax, software services are generally exempt under Technical Service Bulletin M-93(3)S and New York State Law section 1115(o). If services related to software are provided to a customer in conjunction with taxable property or services, the exempt charges must be reasonable and separately stated on the invoice. If these services are not separately stated, the entire invoice will be subject to sales tax.

Practitioners may find it difficult to distinguish between tax-exempt software services and taxable hardware services. For example, will New York State classify services provided in the installation of a computer as tax-exempt? To answer this question, the meaning of "hardware services" must be interpreted.

New York's position on distinguishing between hardware and software services comes primarily from TSB advisory opinions. Although these opinions provide the Department of Finance's interpretation, they relate only to the taxpayer requesting the opinion. The Department of Finance has issued two key advisory opinions relating to this area: David Zucker in TSB-A-96(53)S and Xecu-Track Accounting Services, Inc., in TSB-A98(27)S. Under Xecu-Track, the department gave its interpretation of hardware sales based on different scenarios. Let's analyze two of these scenarios.

Scenario 1. A computer consultant is called to service a computer. The consultant determines that the computer has a defective network card. …

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