ALJ Determines E-Mail Tracking and Analytics Services Not Subject to New York Sales Tax

The BR State + Local Tax Spotlight

By Kara M. Kraman

An Administrative Law Judge (“ALJ”) recently issued a determination cancelling the notices of determination issues by the New York State Department of Taxation and Finance and finding that the taxpayer’s e-mail tracking and analytics services were not subject to sales tax as the sale of prewritten software. In re Yesware, Inc. et al., DTA Nos. 829638, 829639 & 829640 (N.Y. Div. of Tax App., Sep. 29, 2022).

The Facts: Yesware, Inc. (“Yesware”) provided an analytics service which it described in its promotional materials as permitting customers to “make smarter decisions, faster, with detailed analytics on emails sent, opens, and response rates across your entire sales team.” Yesware’s customers were required to download a browser extension in order to enable Yesware to perform its services. The browser extension, which was software, was licensed by Yesware to its customers. Yesware’s customers generally paid a flat fee for Yesware’s services and did not separately pay a fee for the browser extension.

Yesware analyzed the information it received from its customers with more than 60 proprietary software applications, each of which performed a unique function. Yesware’s customers did not have access to the proprietary software applications; did not license the proprietary software; and could not use, modify, or manipulate the proprietary software. Yesware provided the reports it created through the data it collected to its customers through Yesware’s website or through the browser extension.

On audit, the auditor determined that the service sold by Yesware was a bundled service, and that the software was not incidental to that service. Therefore, Yesware was selling a taxable license to use software.

The Decision: After analyzing all the facets of the service provided by Yesware, the ALJ determined that Yesware’s service was a bundled non-taxable information service. In reaching her conclusion, the ALJ applied the “primary function test,” which states that when the service being offered is an integrated service, it should be taxed according to its primary function. In this case, the ALJ found that the primary function of Yesware’s services was to provide its customers with custom reports regarding what activity occurred with the e-mails they sent to prospective clients. The ALJ also noted that Yesware’s customers did not have use of the software that does the analysis and tracking.

The question of whether bundled services that include a software license are subject to sales tax has been the subject of several ALJ and Tribunal decisions and usually turns on the specific facts of the case. In general, however, for there to be a taxable sale or license of prewritten software (whether or not it is part of a bundled transaction), the customer must receive the right to use and control the software. While this decision is a favorable one for taxpayers, it should be remembered that ALJ determinations are not precedential. As of November 14, 2022, the Department had not yet filed an appeal.

This article is one in a series of articles written for the November 2022 edition of The BR State + Local Tax Spotlight.

© 2022 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.