New York State ALJ Determines Vendor Management Services Provided in Conjunction with Software are Subject to Sales Tax as the Sale of Prewritten Software

The BR State + Local Tax Spotlight

By Kara M. Kraman

An Administrative Law Judge (“ALJ”) recently found that a taxpayer’s vendor and labor management services, which were provided in conjunction with the grant of a software license, were subject to sales tax as the sale of prewritten software. Matter of, Inc., DTA Nos. 829516 (N.Y.S. Div. of Tax App., Feb. 9, 2023).

The Facts:, Inc. (“Beeline”) provided a “matching” service to match large national and global customers that desired to purchase the services of temporary workers with suppliers of temporary labor. Beeline provided its services by obtaining significant amounts of information from the customers about their needs and processes which it then matched with available suppliers. Hundreds of Beeline employees spent hundreds or thousands of hours gathering customer information in connection with these services. Beeline also provided legal compliance services to its customers and had employees dedicated to researching labor, tax, and other laws that affect contingent labor on a global basis. Each of Beeline’s individual customers also had employees and teams that were dedicated to managing that customer’s contingent labor program.

As part of the services it provided, Beeline granted customers a license to use its pre-written software program. Beeline’s website described the software as “automat[ing] the hiring process of contract workers,” and “help[ing] to manage and procure staffing services from requisition through billing.” None of the services provided by Beeline were separately billed and invoices sent to customers did not contain a separate software license fee.

On audit, the auditor determined that Beeline sold licenses to use pre-written software and that such sales were subject to sales tax. The auditor issued a Notice of Determination on that basis.

The Decision: The ALJ noted that while sales of pre-written software are subject to sales tax, the services Beeline provided were generally not subject to sales tax. The ALJ further noted that in Beeline’s case, the sale of taxable pre-written software was bundled together with nontaxable services and sold as one product. While the ALJ acknowledged the existence of the primary function test, under which sales of bundled taxable and nontaxable services are taxed based on their primary function, he noted that the Tax Appeals Tribunal “has reserved judgement” on whether the primary function test applies to mixed bundles of services and tangible personal property. Although the ALJ did not explicitly apply the primary function test, he found that the software was “anything but incidental” to what was sold and was “completely intertwined” with the services sold. The ALJ determined that what was being sold was taxable pre-written software and upheld the Notice of Determination.

This case is in sharp contrast to Matter of Yesware, et al., DTA Nos. 829638, 829639 & 829640 (N.Y.S. Div. of Tax App., Sep. 29, 2022), in which the ALJ held that the sale of bundled nontaxable services and software was not taxable as the sale of pre-written software. In Matter of Yesware, the ALJ applied the “primary function test” to software bundled with a nontaxable information service and found that the primary function of what was being sold was a nontaxable information service. The Division did not appeal Matter of Yesware so that case remains nonprecedential. It remains to be seen if Beeline will appeal the ALJ’s determination in this case.

This article is one in a series of articles written for the March 2023 edition of The BR State + Local Tax Spotlight.

© 2023 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.