Potential Tax Breaks for Web Designers and Software Developers

The New York State Department of Taxation and Finance issued a press release on September 26, reminding website designers and software developers of a sales tax exemption and warning them not to “miss out.”  According to the press release, no state or local sales tax will be charged on the purchase of computer system hardware when it’s used more than 50% of the time to:

• Design and develop computer software for sale;
• Provide website design and development services for sale; or
• Provide a combination of the two uses described above.

Designing and developing services include system analysis, program design, coding, testing, debugging, and documentation activities.  Potentially exempt computer system hardware includes:

The use of computer system hardware for administration, production, or distribution activities isn’t eligible for this exemption. The Tax Department’s website provides additional information about the exemption.

According to the Bureau of Labor Statistics, there are nearly 65,000 software developers in New York State and more than 10,000 website designers.

Despite these significant numbers, however, the Tax Department decided not to remind taxpayers in the technology industry of a similar exemption that can be even more valuable.  New York also offers a sales and use tax exemption for property and equipment used in an “internet data center.”  An operator of an Internet data center is a person who:

• Operates a data center specifically designed and constructed as a high security environment for the location of servers and similar equipment that hosts Internet Web sites; and
• Provides uninterrupted Internet access to customers’ Web pages (i.e., 24 hours a day, 7 days a week, 365 days a year) and continuous management of Internet traffic for customers’ Web sites.

An operator of an Internet data center doesn’t have to pay sales tax on the purchase or use of machinery, equipment, and certain other tangible personal property. Property eligible for the exemption includes:

• Computer system hardware, such as servers and routers;
• Pre-written computer software;
• Storage racks and cages for computer equipment;
• Property necessary to maintain the appropriate climate-controlled environment, such as air-filtration equipment, air-conditioning equipment, and vapor barriers;
• Power generators and power conditioners;
• Property that will constitute raised flooring when installed; and
• Other similar equipment.

The exemption also includes property related to:

• Building systems that are designed for an Internet data center, such as interior fiberoptic and copper cables;
• Fire control, such as fire suppression equipment and alarms; and
• Maintaining a secure environment, such as protective barriers.

Finally, the exempt property must be placed or installed in the Internet data center for use there, and required for and directly related to providing Internet Web site services for sale.  The exemption can also be used to exempt the purchase of otherwise taxable services such as:

• Installing, maintaining, servicing, and repairing qualified tangible personal property;
• Maintaining, servicing, and repairing qualified real property; and
• Protective and detective services.

The Tax Department’s website provides additional details for this exemption.

This exemption for hosting a customer’s website and data has broad implications since most businesses now use some sort of website interface to access their data.  Many service providers who do not think of themselves as traditional “internet data centers,” because they web host a customer’s confidential or internal data and make it available via a secure website, qualify under the broad language of the statute. 

For more information please contact me at jendres@hodgsonruss.com or 716.848.1504.

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