United States

New York: Web-based Video Customization Product Subject to Sales Tax

May 22, 2017
From KPMG TaxWatch

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The New York Department of Taxation and Finance recently ruled that a taxpayer’s online product that allowed customers to create customized videos was subject to sales tax. Specifically, the taxpayer’s product allowed customers to turn their photos and video clips into professional videos. Using the taxpayer’s web-based interface, customers uploaded photographs and videos to the taxpayer’s server and then used the taxpayer’s online interface to specify various “customization options” such as dictating the order of uploaded content, selecting music, text, or logos, and generally determining the video “style.” After customization, the taxpayer’s proprietary software created a video to the customer’s chosen specifications. The videos were either hosted on the taxpayer’s server or downloaded by the customer.

Under New York law, sales tax applies to the sale, lease, or license of tangible personal property. Prewritten computer software is considered tangible personal property. The Department first determined that the taxpayer’s product constituted prewritten computer software because there was no indication that any aspect of the software was designed for or developed to the specifications of a particular customer. Next, the Department determined that taxpayer was licensing the prewritten computer software because the taxpayer’s customers had the right to use, control, or direct the software. While the customers did not directly interact with the software, they had access to the online interface, which gave them control over the software’s capabilities. Notably, customers could specify the order in which the uploaded content appeared in the video, pick out the accompanying music, and set the style of the video. In other words, customers had constructive possession of the video generating software. The fact that each video created was unique to the particular customer due to the software's algorithms was irrelevant. Charges for the taxpayer’s product were therefore subject to New York sales tax if the customer or its employees (if applicable) were in New York. For more information on this Advisory Opinion, please contact Judy Cheng at 212-872-3530.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.