“Primary Function” Test Propels Yet Another Service Provider to Victory in New York Sales Tax Case

An administrative law judge in the New York State Division of Tax Appeals rejected the state’s position that a taxpayer providing a web-based service which allowed clients to identify effective and ineffective messaging through information, analysis, and reports was selling taxable software.  Following the rationale applied in a series of recent sales tax cases, including Matter of 1Life Healthcare, Inc., DTA No. 829434, and Matter of Breakdown Services, Ltd., DTA No. 829396, the judge concluded in her September 29, 2022 determination that the taxpayer’s service was nontaxable because its primary function was an information service that was personal or individual in nature.

The taxpayer, Yesware, Inc., sold a subscription service that helped clients’ sales teams sell and engage with their prospective customers more efficiently.  Yesware offered different service tiers and charged flat, per-user fees that did not vary based on the features the client actually used.  Clients downloaded a browser extension that integrated with the client’s preexisting email platform.  The extension, which Yesware licensed to its clients, used proprietary microapplications to perform tracking, analysis, and reporting that generated individualized reports detailing the client’s customer engagements.  Yesware also provided e-mail template storage, mail merge, touchpoint campaigns, and click-to-call services, as well as integration with Salesforce that required clients to install a software plugin.

The New York State Division of Taxation audited Yesware and assessed sales tax on the theory Yesware was selling taxable prewritten software.  The Division noted Yesware licensed the browser extension to its clients, the extension constituted software, and the extension allowed users to access and use Yesware’s service.  The Division contended that clients gained “constructive possession” of software when they used Yesware’s software plugin and website for their intended purposes.  It also contended that the primary function test, long used in New York to determine the taxability of a service with taxable and nontaxable components (i.e., an integrated service), did not apply because Yesware was not selling an integrated service at all; rather, it was selling software.

The administrative law judge rejected the Division’s position.  The judge disagreed with the Division’s argument that Yesware was selling software to its clients, observing that clients could not use, did not have access to, and could not control the software in question.  The judge confirmed that integrated services are taxed according to their primary function, even when they have software elements.  The judge found the primary function of Yesware’s service was the reports detailing clients’ customer engagement efforts, i.e., information.  Although information services are generally subject to sales tax under N.Y. Tax Law § 1105(c), an exception exists for information services that are personal or individual in nature.  The judge found Yesware’s service was personal and individual in nature because the reports contained only the clients’ own data and were not furnished to other clients.  On that basis, the judge canceled the Division’s assessment.

The case is Matter of Yesware, Inc., DTA No. 829638 (Sept. 29, 2022).  The determination is available here.