A recent New York Tax Appeals Tribunal decision provides a good reminder of the subtle distinction between those information services which are subject to NY Sales Tax and those which are not because, under the applicable statutory exception, the relevant information “is personal or individual in nature” and “is not or may not be substantially incorporated in reports furnished to other persons.”  Section 1105(c)(1) of the NYS Tax Law defines a taxable information service as the “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.”

In the Matter of the Petition of Dynamic Logic, Inc.

, NY Tax Appeals Tribunal, Docket No. 828619 (January 20, 2022), addressed the application of NY Sales Tax to the petitioner’s provision of services involving the collection of information regarding the effectiveness of clients' advertising by conducting surveys, analyzing the information and furnishing the information and analysis to clients in reports that present the results and offer recommendations intended to improve the effectiveness of the clients’ advertising.  In an earlier proceeding, an Administrative Law Judge observed that petitioner would have nothing to report to its clients without the collected information, thus concluding that the petitioner's services were information services within the meaning of §1105(c)(1) of the NYS Tax Law, and determined that although the information furnished by the petitioner to its clients was personal and individual in nature, it could be substantially incorporated in reports furnished to others and thus was not excluded from application of NY Sales Tax.

In appealing the ALJ’s decision to the Tax Appeals Tribunal, the petitioner asserted that (i) its primary function is to provide advice and recommendations for clients to improve their future advertising campaigns and that its services thus were not information services within the meaning of §1105(c)(1) of the NYS Tax Law, and (ii) even if its services are information services, they are not taxable because they satisfy not only the first prong of the statutory exclusion (they are “personal or individual in nature”), as the ALJ had conceded, but also the second prong (the information “is not or may not be substantially incorporated in reports furnished to other persons”) because (A) the information furnished is the report itself, which is never provided to third parties, and not the underlying data, and (B) the petitioner’s retention of the right to use the data it collects in the performance of its services did not compel a conclusion that the information it obtained in performing its services may be substantially incorporated into reports furnished to others. The petitioner argued that this interpretation renders superfluous the statute's use of the term "substantially," contrary to the rules of statutory construction, and also asserted that only a de minimis amount of its survey data was ever so incorporated.

In its recent decision, the Tax Appeals Tribunal determined that the petitioner’s services “consist entirely of the evaluation of advertising campaigns through the collection and analysis of information and thus plainly fall within the statutory definition of an information service” and that the recommendations or advice included in the petitioner’s reports “is subordinate to the services' evaluation function” because “without the data there would be no basis for most of the recommendations.”  The petitioner’s services, therefore, were clearly “information services” within the meaning of §1105(c)(1) of the NYS Tax Law.  The Tax Appeals Tribunal also disagreed with the petitioner's contention that the exclusion for information that "is not or may not be substantially incorporated in reports furnished to other persons" refers only to actual reports provided to customers and not to underlying data.  Quoting Matter of Rich Prods. Corp. v Chu, 132 AD2d 175, 177-178 (3d Dept. 1987), leave denied 72 NY2d 802 (1988), the Tax Appeals Tribunal noted that "the fact that no two reports to different customers are likely to be the same and that such reports are customized in some respects to respond to the needs of the particular client is not dispositive of entitlement to the exclusion ...." Accordingly, the Tax Appeals Tribunal concluded that the petitioner’s receipts from most of its services did not qualify for the exclusion because the information collected and analyzed in providing those services may be incorporated in reports furnished to other clients and found, in fact, that some of the information collected by the petitioner in the provision of such services is shared with third parties.

 Of note, however, the Tax Appeals Tribunal found that receipts from one of the petitioner's services did qualify for the exclusion notwithstanding the petitioner’s retention of a contractual right to use the data it collects in the performance of such service because the petitioner does not currently have the means to furnish to third parties the information collected and analyzed in providing that service.  A lingering question, therefore, is whether the Tax Appeals Tribunal would have reached the same conclusion with respect to the latter service if the petitioner had the means to furnish to third parties the information collected and analyzed in providing that service, but there was no evidence that the petitioner actually had furnished such information to third parties.  In essence, that is the question raised by the somewhat awkward use of the disjunctive “or” rather than the conjunctive “and” in the statute’s exclusion of information that “is not or may not be substantially incorporated in reports furnished to other persons.”  Was the use of the disjunctive “or” intentional on the part of the NYS Legislature?  If so, the exclusion may have broader application, but if the conjunctive “and” was really intended, then the exclusion’s application may be substantially limited.