The New York Tax Appeals Tribunal recently published a decision concluding that certain services provided by a marketing analytics firm were properly taxable as sales of information services and prewritten software, while others qualified as non-taxable consulting services.1 Specifically, the firm’s advertiser and media company services were non-taxable consulting services, while white paper research service was a taxable information service and advertising agency product sales constituted a taxable sale of prewritten software. In an advisory opinion dealing with similar taxability issues, the New York State Department of Taxation and Finance determined that a single bundled charge by a digital marketing service which included a third-party software license was fully taxable, but only the software fee would be taxable if the charges were separately stated.2
Background of Tribunal matter
MarketShare Partners, LLC (MSP), is a marketing analysis firm headquartered in California with offices in New York and, prior to late 2015, was not registered to collect New York sales and use tax. MSP generally earned revenue from sales to: (i) advertisers; (ii) media companies; (iii) advertising agencies; and (iv) companies requesting white paper research services.
During 2016, the New York State Division of Taxation audited MSP for the periods from March 1, 2010, to Nov. 30, 2015. The Division concluded that sales from all four lines of MSP’s business were subject to sales tax on the basis that MSP was selling taxable information services or prewritten software. Specifically, the Division concluded that the firm’s advertiser service, media company service and white paper research services were information services, and product sales to advertising agencies constituted sales of prewritten software.3 Upon receipt of a Notice of Determination in late 2017 which assessed additional sales tax, MSP filed a petition for redetermination with the Tribunal.
The sole issue in the controversy was whether any or all of the four services provided by MSP to its customers were properly subject to sales tax. To gain an understanding of each service, the Tribunal relied upon a significant amount of testimony provided by MSP’s employees and/or representatives. Based on the facts and circumstances surrounding each line of business, the Tribunal concluded that MSP’s advertiser service and media company services were non-taxable consulting services, while the white paper research service was a taxable information service and the advertising agency product sales constituted a taxable sale of software.
Sales tax imposition
Like most states, New York generally imposes sales tax on the retail sale of tangible personal property.4 Further, New York’s definition of ‘‘tangible personal property’’ subject to sales tax includes prewritten computer software.5 A related regulation further provides that, with respect to a “license to use,” a transfer of possession has occurred if there is actual or constructive possession, or if there has been a transfer of “the right to use, or control or direct the use of tangible personal property.”6
In addition, New York generally 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.”7 However, the statute excludes, “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.”8
To determine the taxability of the advertiser service provided by MSP, the Tribunal first turned to relevant testimony provided by MSP. The advertiser service was described as a strategic marketing analytics consulting service used to aid advertisers in defining their marketing strategy. Specifically, this service consisted of four stages: (i) goal alignment; (ii) data collection and processing; (iii) database creation and analysis; and (iv) presentation of findings. During the first stage, MSP engaged in dialogue with the client to understand the key questions to be answered. In the second stage, MSP obtained and reviewed client data, third-party data, and some publicly available data. Next, MSP developed a separate database for each client and analyzed the client-produced data to create a unique, client-specific model. Lastly, MSP presented its findings to the client either through a client meeting or via its software platform. The remotely accessed software provided the client the ability to simulate “what if” scenarios to predict results. Notably, MSP indicated that clients rarely took advantage of this function due to the time-intensive nature of such an exercise.
While the Division and MSP agreed that the advertiser services should be treated as services rather than sales of software for sales tax purposes, they disagreed as to the nature of the services. The Division argued that the advertiser services did not qualify as personal or individual in nature and thus should be treated as taxable information services. MSP argued that advertiser services should be treated as a non-taxable consulting service because these services were meant to provide a client with advice and recommendations on how to apply analytic marketing to answer specific marketing questions. Based largely on the facts provided, the Tribunal agreed with MSP and found the advertiser services to be a nontaxable consulting service rather than an information service.
Media company service
Performing a similar analysis with respect to MSP’s media company services, the Tribunal found them parallel to its advertiser services, with the only significant difference being the addition of performance analysis. The analysis service allowed media companies to measure their performance in comparison to competitors and evaluate how property owned by media companies performed for specific advertisers. Similar to the advertiser service, the Tribunal concluded that MSP’s media company service was a nontaxable consulting service not subject to sales tax.
Notably, the Tribunal indicated that in cases where MSP did not provide any professional services but simply provided access to the software platform and a “model rebuild,” the related charge would be considered a taxable information service.9
White paper service
At the Tribunal, MSP indicated that its white paper service provided “information about the effectiveness of different types of advertising media… on different categories, including references to publicly available information.” Further, MSP argued that its white paper service was not an information service, but instead a non-taxable research and development service. The Tribunal determined that the white paper service did not include data collection and modelling services like the advertising and media company services. Based on the lack of evidence presented, and the fact that the white papers are based upon widely available public information, the Tribunal agreed with the Division and concluded that MSP’s white paper service was in fact a taxable information service.
Advertising agency product
MSP explained to the Tribunal that its advertising agency product included customer access to a software platform located on a server in Virginia. At issue was whether access to the software by customers located in New York resulted in a sale of tangible personal property for New York sales tax purposes. While MSP argued that no “actual exclusive possession” was granted to the customer, so no license to use software was issued, the Tribunal disagreed. The Tribunal found the MSP contracts it reviewed to be licenses to use software, as they had “significant functionality and price, can be accessed from any place where there is internet access, and can be used for an unlimited time during the contract period.” These facts were distinguished from cases cited by MSP, in which the tangible personal property in question had limited functionality, the use was transient in nature, and there was no explicit charge or a minimal charge for the tangible personal property in question.10 Consequently, if MSP’s customers could directly use of the software by accessing the platform, sales of such access were taxable.
Department opinion on digital marketing and related services
In a recent advisory opinion issued to another business providing services similar to MSP, the Department addressed the taxability of digital marketing services, consisting of consulting, managed services, technical services and resales of advertising- and marketing-related offerings. The services offered revolved around a third-party platform of technology and tools. Thus, in related transactions, the taxpayer resold third-party software, licensed software and provided software support services.
As noted above, New York imposes sales and use tax on the retail sales of tangible personal property, including prewritten software.11 Generally, digital marketing services are considered advertising services that are not subject to tax in New York.12 With respect to the taxability of the services at issue, the Department concluded that if the digital marketing services were bundled with the sale of software in a single charge, the entire charge would be taxable. However, if the charges for software and service were separately stated, only the software would be subject to tax.
Businesses should note that while an advisory opinion is not precedential, it can provide valuable insight into the Department’s position on a particular issue. Specifically, advisory opinions have a limited scope and only apply to the stated facts. Similarly, determinations by the Division of Tax Appeals lack precedential value. Despite these limitations, the Tribunal’s decision and the Department’s advisory opinion offer important insight into how New York views the taxability of software-as-a-service and information services. In particular, the Tribunal’s holding relating to the advertising agency product confirms New York’s treatment of taxable software-as-a-service based on the location of the user rather than the server. Further, the decision confirms that when a consumer accesses a software application via the cloud, that consumer gains constructive possession of tangible personal property when the customer has the right to use, control, or direct its use. Additionally, the Tribunal differentiated between information services and non-taxable consulting services by pointing to the recommendations and advice involved in the Advertiser Service. This is an important distinction that shows when the purpose of a service is to deliver recommendations and advice, these elements of the service can override the data element from a taxability perspective. In its advisory opinion confirming that when charges for nontaxable services are bundled with fees for taxable software, the Department highlights and reiterates the importance of separately stating taxable and non-taxable items on invoices in order to avoid an inadvertent sales tax liability on the entire transaction.
1 Matter of MarketShare Partners, LLC, [N.Y.S. Div. of Tax Appeals, DTA No. 828562, Dec. 3, 2020].
2 TSB-A-20(27)S, New York Commissioner of Taxation and Finance, June 30, 2020.
3 The Division noted that in providing its services to customers, MSP may have also provided non-taxable consultant services, software customization and configuration and training and software support services.
4 N.Y. TAX LAW § 1101(a).
5 N.Y. TAX LAW § 1101(b)(6).
6 N.Y. COMP. CODES R. & REGS. tit. 20, § 526.7(e)(4).
7 N.Y. TAX LAW § 1105(c)(1).
8 Id. See also N.Y. COMP. CODES R. & REGS. tit. 20, § 527.3.
9 With respect to one specific contract evaluated by the Tribunal, MSP did not meet the burden of showing that the information used for data collection and analysis did not come from a public source. Thus, the charge related to this contract did not qualify for the “personal and individual in nature” exemption provided in N.Y. COMP. CODES R. & REGS. tit. 20, § 527.3.
10 See American Locker Co. v. Gallman, 308 N.Y. 264 (1955).
11 N.Y. TAX LAW §§ 1101(b)(6).
12 N.Y. COMP. CODES R. & REGS. tit. 20, § 527.3(b)(5).
Matthew DiDonato is a State and Local Tax (SALT) practice partner in the New York office and leads the Metro New York SALT practice. He has more than 18 years of public accounting, private industry and legal state and local tax experience.
Iselin, New Jersey
- Technology and telecommunications
- Retail and consumer products
- State and local tax
Arthur C.E. Burkard
Art Burkard is a managing director with Grant Thornton’s Metro New York/New England market territory State and Local Tax practice. Burkard was a law clerk with the New York State Tax Appeals Tribunal and has more than 21 years of public accounting experience at Grant Thornton, KPMG and Deloitte & Touche.
New York, New York
- Real estate and construction
- Technology and telecommunications
- Not-for-profit and higher education
- Transportation, logistics, warehousing and distribution
- Retail and consumer products
- State and local tax
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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