Over the past few years, New York State tax authorities have taken increasingly aggressive positions in subjecting to sales tax charges for nontaxable services delivered to customers through a seller’s proprietary software. In what may be the most troublesome application of that position, the New York State Appellate Division has upheld the imposition of sales tax on charges for furnishing temporary labor services that the seller provides through its proprietary computer platform that uses pre-written computer software. Matter of Beeline.com, Inc. v. N.Y.S. Tax App. Trib., CV-24-1494 (3rd Dep't, Jan. 15, 2026).
The Facts: Beeline.com, Inc. (“Beeline”) matches its client businesses with suppliers of contingent and temporary labor and related services. The matching services are furnished to clients through Beeline’s proprietary technological platform, access to which was subject to written agreements with each client and labor supplier. Beeline’s written agreements with its clients referenced various services in connection with what it asserted was in essence a consulting or “matching” service. In exchange for those services, Beeline billed its clients a single “vendor management service” (“VMS”) fee. Client invoices did not break down the fee between the matching service and what the agreements often termed a “limited, nonexclusive, nontransferable license to use and access” Beeline’s platform. Beeline’s website touted what it was providing as “the software that automates the hiring process of contract workers.” Beeline did not collect sales tax on any part of its VMS fees.
Following a sales tax audit, the Department of Taxation and Finance (“Department”) assessed sales tax on the entire VMS fee charged to each client. Beeline protested the assessment. Following an evidentiary hearing, both an Administrative Law Judge and later the New York State Tax Appeals Tribunal upheld the tax assessment, concluding that the software for Beeline’s proprietary platform was not merely incidental to Beeline’s business, but was the “core element” of that business.
Beeline appealed to the New York courts, claiming that under the long-standing “primary function” or true object test, it was primarily providing a nontaxable consulting service, which it merely delivered through its platform.
The Decision: The Appellate Division upheld the Tribunal’s decision, holding that Beeline’s software license “was the core function of the transactions at issue.” Applying a deferential standard of review to the Tribunal’s factual findings, the Court was persuaded that the written agreements themselves constituted substantial evidence that the software licenses were essential to the provision of those services, with some agreements referring to the platform as the provision of “software-as-a-service.” According to the Court, the Tribunal’s decision was rational and supported by substantial evidence, meriting confirmation.
In response to Beeline’s assertion that the Tribunal should have applied the “primary function” test for taxability, the Court first noted that much of the New York precedent applying the test involved the taxable classification of certain services, not mixed bundles of services and property. The Court then concluded that the Tribunal had applied a “functional equivalent” of that test when it found that the software licenses were far more than incidental to the services being provided by Beeline.
Observation: The Appellate Division’s decision in Beeline is troubling in that it converts an otherwise nontaxable service into a taxable service by recasting it as the sale of tangible personal property because computer software is used to deliver that service. Rather than seeking to amend the Tax Law to expand the types of services subject to sales tax, or to specifically subject to tax the furnishing of “software as a service,” the Department has instead relied on the ever-increasing use of computer software to efficiently deliver services to customers—accompanied by software licenses—as a basis to impose sales tax on the entire charge to the customer.
Arguably, one positive element of the Beeline decision is the Court’s apparent unwillingness to accept the Department’s position that the “primary function” test does not apply to a “mixed bundle” of services and “tangible personal property” (i.e., software). Unfortunately, the Court found that the Tribunal had performed the “functional equivalent” of the primary function test by determining that the software was “essential” to the services provided rather than being merely “incidental” to those services.
If the Court is correct that what Beeline was providing was a “mixed bundle” of services and property, rather than a single integrated transaction, sellers should be able to separately state the reasonable charges for the taxable software and for the nontaxable services to avoid subjecting the entire charge to sales tax.
This update is one in a series of updates written for the February 2026 edition of The BR State + Local Tax Spotlight.
© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.