In today’s increasingly online world, the taxability of web services remains an important issue. In this article you will find a summary of how New York State (NYS) generally treats these services – as well as recent updates from other states.
Generally speaking, “Operators of Internet Data Centers (Web Hosting)” are exempt from sales and use tax in NYS according to tax memo TSB-M-00(7)S published on August 15, 2000. Specifically, that tax memo clarifies that operators of internet data centers are entitled to an exemption from sales and use tax on purchases of tangible personal property directly related to “the provision of Internet Web site services for sale by the operator of the center.” In NYS, sales and purchases of tangible personal property would generally be subject to sales and use tax, but operators of web hosting services may fill out Form ST-121.5 to claim their exemption from those taxes. Examples of applicable tangible personal property are: computer system hardware, pre-written computer software, storage racks for computer equipment, fiber optic cables, and air filtration or air-conditioning equipment. Additionally, contractors or repairmen performing services for internet data centers may purchase qualifying tangible personal property tax-exempt by filing Form ST-120.1.
Recently, NYS has also come out with an advisory opinion related to web hosting services that allow customers to host presentations and events. This is especially relevant after the increased use of these services during the COVID-19 pandemic. NYS Advisory Opinion TSB-A-20(45)S, addresses these issues. The Petitioner in this case provides a “‘cloud-based solution’ for webcasting and virtual communications.” The petitioner’s customers pay an annual fee that allows its customers to host and maintain events as well as gain access to digital storage of their events. Because that service requires no hardware or software to be provided by the petitioner, it is non-taxable. However, the petitioner also offers additional services that can be subject to sales tax (if separately stated as charges on the customer’s bill). These services include:
- delivery of data to customers about their viewers,
- creative services like branding,
- recording of events,
- professional services like event management and support,
- rental of production equipment, and
- other standard reports on the customer’s event
The services relating to digital storage and technical support are not subject to tax. However, some of the event support activities – creating event web pages and the ability to incorporate webinar features – are taxable, because they fit the definition of pre-written software (which is taxable in NYS).
If you, or your clients are concerned about how any similar services that they provide might be taxed, please reach out to the EFPR SALT Team for a free consultation.