New York Court Concludes that Taxpayer is Providing a Taxable Information Service

By: Betsy Goldstein, SALT Senior Manager

At a glance

• The main takeaway: A New York Appellate Court upheld a lower court decision that a taxpayer’s service of measuring the effectiveness of advertising campaigns constituted as a taxable information service and not a nontaxable consulting service.   
• Assess the impact: Classifying which services are taxable and nontaxable is not a clear-cut analysis. This case provides an important reminder that two sides can look at the same service and draw completely different opinions.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help you determine if your services are taxable and, if recommended, draft a binding ruling request to obtain clarity on the sales tax obligations for your business.  

Schedule a free consultation today to learn more!

The full story:

The New York Supreme Court Appellate Division (Court) issued an opinion in which it upheld the Tax Appeals Tribunal’s (Tribunal) decision that the taxpayer (Taxpayer) provided taxable information services.[1]

A closer look at the case

The Taxpayer provides services to clients to measure the effectiveness of its client’s advertisements. While the Taxpayer provides a handful of different services to customers in New York, the focus of the appeals was on their AdIndex service. The AdIndex service uses propriety tracking software and consumer surveys to collect data from consumers who have been exposed to the client’s ad campaigns and those who have not. The survey data is analyzed, and the customer is provided with a report summarizing the findings. The standard AdIndex report includes both the client’s specific results as well as a comparison to Taxpayer’s benchmarking data, referred to as MarketNorms. Additionally, the Taxpayer’s report may include recommendations as to how to improve advertising effectiveness.

Pursuant to the service contracts, customers grant Taxpayer the rights to use the survey data as part of the Taxpayer’s MarketNorms database as long as the data keeps the customer’s identity anonymous. The MarketNorms database aggregates the anonymous data from customer surveys, and the Taxpayer uses that data for benchmarking, and it also offers subscriptions to the MarketNorms as a separate service line. MarketNorms is not freely available to the public.

Unpacking the ruling

With a few exceptions, states do not broadly impose sales tax on services, but instead impose tax only on specifically enumerated services. One service that New York taxes is “information services.” Specifically, New York imposes sales tax on “[t]he furnishing of information by printed, mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner, including the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons.”[2] Excluded from tax is the furnishing of information which is “personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons.”[3]

The Court upheld the Tribunal’s decision that the Taxpayer’s services were taxable information services and not non-taxable consulting services. The Taxpayer argued that it provided non-taxable consulting services because its report included advice and recommendations. However, the Court agreed with the Tribunal’s analysis that the primary purpose of the AdIndex service is the collection and analysis of information and that any recommendations or advice are secondary to that purpose. A few of the factors relied on by the Court in reaching that conclusion include the following:

• A review of the Taxpayer’s reports shows that most of the recommendations are drawn from the data. As the opinion states, “In other words, without the data there would be no basis for most of the recommendations.”
• The Taxpayer’s marketing materials emphasize data collection and analysis. Although the materials state that the service includes “key recommendations,” the materials primarily describe AdIndex as “the most trusted solution for evaluating digital advertising effectiveness.”
• While the Taxpayer’s standard contract promises recommendations, those same sections make more promises regarding the evaluation of the customer’s advertising campaign and generally commit the Taxpayer to providing “advertising effectiveness studies.”

The Court also agreed with the Tribunal that the Taxpayer’s services were not eligible for exclusion since the customer grants the Taxpayer the right to use the survey data in the MarketNorms database, and that the MarketNorms data is substantially incorporated into reports furnished to other customers. Accordingly, the Court ruled that the Taxpayer provided a taxable information service.

The bottom line

Classifying services for sales tax purposes is not a clear-cut analysis. Two sides can look at the same service and view it differently, as was the case here. Businesses need to be aware that just because they refer to their service as something that is non-taxable does not mean that is how the state will view the same service. 

Aprio’s SALT team has experience with understanding the various categories of services that a state may treat as taxable and the tests that states apply to analyze how a particular service should be classified. In some cases, we may draft and submit a binding ruling request to provide the business with certainty regarding its sales tax obligations. Our goal is to ensure that your business complies with sales tax requirements and does not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Matter of Dynamic Logic, Inc. v Tax Appeals Trib. of the State of N.Y., 224 AD3d 1181 (N.Y. App. Div., 3d Dept. Feb. 29, 2024).

[2] N.Y. Tax Law § 1105(c)(1)

[3] Id. (emphasis added)