The complexity of taxing sales of information services

Proper taxation of “information services” under New York sales tax law can raise complex and costly issues resulting in difficult audits and even litigation. Three recent tax cases in New York illustrate the painstaking and painstaking burden a company must bear once selected for review. A review of these issues can provide taxpayers and their advisors with useful information that can help them properly comply with sales tax as well as develop effective audit defense strategies.

Information Services Basics

As a general rule, sales of tangible personal property are highly taxable, unless specifically exempted. The reverse is true for services, which must be specifically designated (ie listed) as taxable. Several states, including New York, impose a tax on revenue from the sale of what is called an information service. Therefore, it is essential to determine whether a service is properly classified as an information service.

New York tax law generally defines an information service as the provision of printed information, including the services of collecting, compiling, or analyzing information of any kind or nature and the provision of reports thereon. . [Tax Law section 1105(c)(1),(9)]. Examples include sales of a credit report, a stock market analysis and advisory report, and a product and marketing survey (20 NYCRR 527.3). In addition, the law contains a significant exclusion from tax for information that is personal and individual in nature, and that is not or cannot be substantially incorporated into reports provided to other persons. In practice, both the definition and the exclusion may prove difficult to apply.

Non-taxable advice or information service?

There have been significant disputes over the taxation of information services. On the one hand, consulting services, such as accounting and legal services, are clearly not subject to tax; on the other hand, since many other types of service businesses dabble in the transmission of information, drawing a clear line of demarcation is a challenge.

The courts have explained that an information service is “the sale of the service of providing information by a business whose function is to collect and disseminate taxable information under tax law 1105(c)(1) and not the mere sale of information” [In re SSOV’81 Ltd., DTA 810966 (Tax App. Trib. 1995)]. The main function of a service controls whether it is subject to sales tax. The survey should focus on the service as a whole, rather than just looking at its various components or means of delivery [e.g., Telecheck Services, Inc., DTA 822275 (DTA 2009)]. If the primary function of a service is the collection and dissemination of information, the service may be taxable.

In the real world, this analysis requires a patient, methodical, and detailed breakdown of the underlying facts. Is it a company that sells compiled information, similar to raw data, or does it sell another service that communicates information? Three recent New York tax cases explore these issues in detail and shed more light on how these disputes, in three very different industries, can evolve into litigation. Each case will only be briefly summarized, but all merit further consideration.

Environmental Risk Assessment Reports

On December 2, 2021, the New York Division of Tax Appeals issued an opinion examining the taxability of certain environmental risk assessment reports [In re Lender Consulting Services Inc., DTA 829198 (DTA 12/02/2021)]. Taxpayer is an environmental, valuation and real estate consulting firm that provides various environmental risk assessment services for banks and financial institutions. Its reports are designed to advise lenders on environmental risk management, including, among others, risks of regulatory and environmental contamination.

Taxpayer provides various levels of service, including certain “EAQuick Reports”. After a review (beginning in 2018 of periods from 2014 to 2017), the auditor agreed that most of the services were non-taxable consulting services, but focused on those reporting EAQuick as subject to tax. The auditor concluded that these reports were “entry level” reports consisting of a compilation of third party data and a general summary. Reports typically consisted of several hundred pages of public source documents along with a one- or two-page summary analysis. Therefore, the auditor concluded that the primary function of the sale of these reports was the sale of compiled information, a taxable information service.

At trial, the taxpayer meticulously explained his business and the significance of environmental risks to lenders. A company official testified regarding the professional nature of the advice he provided, and evidence was presented showing that the lenders engage the taxpayer to obtain the professional opinion and assessment of a professional qualified environment regarding environmental risk. Ultimately, the court found that the one- or two-page analysis section of the EAQuick report constituted a non-taxable professional recommendation (i.e., advice) regarding environmental risk. The taxpayer’s inclusion of the voluminous supporting documentation used to render his opinion did not alter the primary function of the report itself.

Digital Advertising Effectiveness Surveys

On January 20, 2022, the New York Tax Appeals Tribunal issued an opinion considering the taxation of certain digital advertising effectiveness reports [In re Dynamic Logic, Inc., DTA 828619 (Tax App. Trib. 01/20/2022)]. Taxpayer is an advertising consultancy that helps clients measure the effectiveness of their digital advertising campaigns. In summary, Taxpayer monitors Internet user activity through the use of proprietary tracking technology; then it compiles and analyzes this data to provide recommendations as to the effectiveness of an advertising campaign.

Taxpayer provides various service offerings, including certain AdIndex and CrossMedia services, which include the development of survey questions followed by the collection of data through surveys. Once the data has been cleaned, weighted and evaluated, a research analyst prepares a PowerPoint report. The report does not present the underlying data itself; rather, it presents selected data considered important for evaluating the effectiveness of the advertising campaign. The report contains various charts, tables and graphs, as well as some recommendations and ideas.

After a review (beginning in 2014 of the periods between 2011 and 2014), the auditor concluded that the main function of these services was the compilation and analysis of the data itself; a taxable information service. In November 2019, the taxpayer argued these issues before an administrative law judge. The taxpayer argued that its primary function was to provide advice on how to improve a future advertising campaign and not to provide the underlying survey data. The court, however, agreed with the auditor that the taxpayer’s expertise was to do the market research themselves and that the various recommendations were subordinate to the service’s assessment function and of little value without the data itself. .

In August 2021, the taxpayer appealed this decision to the Tax Appeals Tribunal. In the end, the court agreed that the services were taxable information services, but found that one of the services – CrossMedia – nevertheless qualified for the statutory exclusion because the information was individual in nature and not provided in reports provided to third parties. In effect, the taxpayer was unable to create a usable database from which to provide this information to third parties. Accordingly, the court held that the possibility that such information may be provided to third parties in the future if a service provider develops a means of doing so does not preclude the application of the exclusion.

Actor Casting Facilitation Service

On January 27, 2022, the New York Tax Appeals Division issued an opinion examining the imposition of an internet-based actor casting facilitation service that connects casting directors seeking actors for theatre/film/television productions with talent reps looking for acting roles for their clients. [In re Breakdown Services, Ltd., DTA 829396 (DTA 01/27/2022)]. Here, The Taxpayer provides an online forum that makes it easy to connect casting directors with actors seeking employment.

After a lengthy review (beginning in 2012 of periods from 2007 to 2015), the auditor finally concluded in March 2018 that the taxpayer had sold acting role descriptions (i.e. breakdowns) to agents of talent in exchange for a monthly subscription; a taxable information service. It appears that the auditor did not rigorously analyze the main function of the service, believing that the taxpayer was content to provide a forum selling descriptions of acting roles.

At trial, the taxpayer demonstrated the many steps of its actor casting service. Among other things, it starts with a casting director submitting a breakdown for an acting role. The taxpayer reviews the breakdown and posts it. The Talent Representative is able to search and visualize outages; the actor profile can be tailored as needed and then submitted for a role. The casting director evaluates the actor profiles received and can then schedule auditions through the taxpayer. The artistic director can confirm, postpone or refuse an audition. After an actor auditions, the casting director uploads the recorded audition to the platform and presents hiring recommendations to the network/studio, all through the taxpayer’s website.

Based on these facts, the court concluded that the primary function of the taxpayer service is much more than simply selling acting role descriptions. The main function is to facilitate the casting of actors for roles – a non-taxable (advisory) service.

practice pointers

As these recent New York cases demonstrate, the proper classification and taxation of a news service can present significant challenges. What is the nature of the service in question? Is the primary function selling compiled information or selling advice or another service? It can be difficult to untangle. Additionally, from audit to litigation, these disputes can take years to resolve, requiring the dedication of company resources, while generating potential interest.

CPAs should be proactive in helping taxpayers assess their business operations and sources of income in light of these issues. Deciding to record, collect, and remit sales tax on a given service or having a well-reasoned and measured basis for treating a service as non-taxable could save significant resources in the event of an audit.

Corey L. Rosenthal, JD, is Director and Head of State and Local Tax Practice at CohnReznick LLP, New York, NY

Lance E. Rothenberg, JD, LLM, is National and Local Tax Director and Practice Leader of Tax Controversy Services at CohnReznick LLP, in New York, NY and Parsippany, NJ

Sharon D. Cole