Another installment in the bundled sales and services saga. The Third Department recently released its opinion in the Matter of Beeline.com v. New York Tax Appeals Tribunal, and we have distilled it down for your enjoyment here.
Beeline is a Florida company that matches clients with temporary labor sources. To provide these matches, Beeline uses a technological platform accessible online, called the “vendor management system” or “VMS.” In 2016, the Department commenced a sales and use tax audit for the tax years 2010-2016. At the end of the audit, the Department issued an assessment of about $1 million for unpaid sales tax and interest. This assessment was based on the Department’s belief that Beeline was licensing prewritten computer software, the VMS. The Tribunal agreed and affirmed the assessment.
In its appeal to the Appellate Division, Beeline made two arguments. First, that it does not sell prewritten computer software, and that the “primary function” was to provide nontaxable services, albeit through a technological platform. The court, just as the Tribunal had, looked at Beeline’s client agreements. And in those agreements, Beeline expressly granted “a limited nonexclusive, nontransferable license to use and access the Beeline VMS solutions” to its clients, in return for consideration. Essentially, the plain language of these agreements ruled the day.
Beeline’s second argument was that the Tribunal must apply a primary function test, or a true object test, for sales of bundled tangible personal property and nontaxable services. Either of these two tests look to determine whether the services or the tangible personal property control the transaction and apply the tax accordingly. Although the court did note that it is the Tribunal’s practice to only apply the primary function test in cases regarding bundled taxable and nontaxable services, it also didn’t affirmatively bless that approach. Instead, the court addressed the argument more directly, essentially holding that Beeline would’ve lost the primary function argument anyway: “However, despite [Beeline]’s insistence that the Tribunal eschewed a primary function analysis, it is clear from its determination that it engaged in its functional equivalent by thoroughly assessing whether the license provided to [Beeline]’s clients to use the VMS ‘is incidental to the services rendered.’” Therefore, the Tribunal’s ultimate decision that the license to use the VMS was the “core function” of the transaction was upheld.
That sure looks like a “primary function” test! So maybe the Tribunal’s attempt to gut the “primary function” test in the bundled property/services context in Beeline (and in its more recent decision in Matter of FacilitySource, LLC) won’t withstand judicial review. Indeed, the court in Beeline seemed to go out of its way to uphold the Tribunal’s decision not on the absence of a primary function test but instead by using it. But we’ll have to wait for the next installment in the saga of the bundled transaction to find out. So stay tuned, maybe the primary function test is not dead yet!
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