Online loan service not subject to New York sales tax

A New York administrative law judge (ALJ) recently reversed a sales tax assessment against LendingTree, Inc. after finding the services LendingTree provided via its online loan marketplace should not be classified as taxable information services.¹ The ALJ determined that LendingTree’s primary function was to facilitate the writing of loans by its customers rather than providing the sale of taxable information services.

Background
 

LendingTree operates an online loan marketplace which connects lenders (e.g., banks) with prospective borrowers (e.g., consumers) seeking loans and other credit-based offerings (e.g., mortgages, reverse mortgages, home equity loans, personal loans, business loans, and auto loans). LendingTree helps lenders close loans and allows prospective borrowers to compare loan offers, obtain loans at competitive rates, and ultimately save money.

LendingTree’s process for matching lenders with prospective borrowers consists of four steps. First, a prospective borrower completes and submits LendingTree’s loan request form.² Next, LendingTree verifies, matches, and transmits the prospective borrower’s loan request form to participating lenders. In the third step, the matched lenders evaluate the prospective borrower’s loan request form and decide whether to make a conditional loan offer. In the final step, LendingTree presents a list of up to five matched lenders and their conditional offers (if any) to the prospective borrowers. From there, the prospective borrowers click (or select) the lender and conditional offer they want. Depending on the loan product and lender, the prospective borrower has the option to be redirected to the lender’s website to complete a loan application. This matching process is performed in real-time and the entire process typically taking less than fifteen seconds.

LendingTree charges a “match fee” when it matches a lender with a prospective borrower. Also, it charges a “closed loan fee” when a lender closes a loan with a prospective borrower that LendingTree matched with the lender. Depending on the type of loan and lender, LendingTree may charge upfront match fees, closed loan fees, or both for its online loan marketplace services. LendingTree’s sales and lender development teams are tasked with developing and maintaining long-term relationships with new and existing lenders. In addition, LendingTree helps lenders create “campaigns” which are a specific set of criteria established by a lender to generate matches with specific types of prospective borrowers.

Ultimately, LendingTree is pursuing loans that will close, and it works with lenders by providing them with support, analytics, account reviews, diagnostic checks, proposals, and training. The cost a lender is willing to pay relative to a loan is closely tied to the lender’s “conversion ratio,” which is equal to the number of loan request forms received from LendingTree that the lender converts into closed loans over the total number of loan request forms the lender receives from LendingTree. Thus, if a lender’s monthly spend (its match fees and/or closed loan fees) is too high in comparison to the revenue it generates from closed loans, then the lender may stop using LendingTree’s online loan marketplace services.

The New York State Department of Taxation and Finance audited LendingTree for the September 1, 2014 through Aug. 31, 2017, tax periods. During this time, LendingTree was not registered for New York sales and use tax and did not file returns. After determining that LendingTree’s online marketplace services were taxable information services (from the provision of gathering and selling information in the form of leads), the Department assessed LendingTree approximately $2.16 million in tax,³ plus failure to file penalties and interest.⁴ LendingTree filed a petition for revision of a determination or for refund of New York sales tax with the ALJ.

Tax treatment of information services in New York
 

Subject to certain exceptions and exclusions, New York imposes sales and use tax on services that involve the furnishing of information by printed, mimeographed or multigraphed matter, or by duplicating written or printed matter in any other manner.⁵ This includes collecting, compiling, or analyzing information of any kind or nature and furnishing it to others.⁶ As a general rule, furnishing information created or generated from a common database, or information that is widely accessible, is a taxable information service.⁷ However, whether a service qualifies as a taxable service will often depend on its primary function.⁸ The fact that one element of a service is an information service does not necessarily mean that the service as a whole is a taxable information service.⁹

LendingTree did not sell taxable information services

Following a hearing, the ALJ held that LendingTree’s sales on its online loan marketplace were not sales of taxable information services. In reversing the assessment, the ALJ reviewed whether LendingTree’s services qualified as taxable information services and applied a primary function analysis.¹⁰ Ultimately, the ALJ determined that the primary function of LendingTree’s services was to help lenders write and close loans and the furnishing of information during this process (e.g., when LendingTree matches and transmits loan request forms to lenders) was simply a means to accomplishing an end—the actual writing of loans. The ALJ noted that this reasoning was further supported by the fact that LendingTree does not earn a closed loan fee unless a loan actually closes.

The ALJ also rejected the Department’s argument that LendingTree’s services were similar to a taxable subscription-based service that provided listings of New York City apartments for sale or rent.¹¹ Unlike this service where the apartment listings were simply collected from subscribers and public sources and re-transmitted among the subscribers, LendingTree’s services did not connect prospective borrowers or lenders participating on the online loan marketplace with non-participants. Further, lenders did not have full access to prospective borrowers to contact on their own. Only a matched borrower was matched in real-time with a prospective lender. Accordingly, LendingTree’s online marketplace services did not constitute taxable information services and the Department’s assessment was canceled.

Commentary

The Department has been more aggressive in recent years with sales and use tax audits involving (or appearing to involve) information services.¹² As discussed in the decision, this audit was recommended by an individual in the Department’s Midwestern regional field office after he read a magazine article about LendingTree. Given how this audit arose, companies should be mindful of how they voluntarily describe their business activities in external communications such as market advertising, job postings or financial reports. If confronted with a challenge by the taxing authority, companies should evaluate the entire transaction to determine whether it is subject to New York sales tax as an information service. Although this decision is not precedential, it provides valuable insight into how a primary function analysis (to show a service is nontaxable) can be helpful during an audit.¹³ Taxpayers should focus on describing their service in its entirety (i.e., what is the service trying to accomplish) and not focus on the service’s individual parts or the means by which it is delivered, which the Department often does when making taxability determinations.

1 In re LendingTree, Inc., New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 829714 (Dec. 9, 2021).
2 This loan request form contains information regarding the type of loan the prospective borrower is seeking, loan preferences, and other data such as geographic region.
3 During the audit period, LendingTree also earned revenue from sales of other online services, consisting of six different revenue streams: (i) credit cards; (ii) bank deposit accounts; (iii) pre-prime credit services; (iv) insurance; (v) student loans; and (vi) real estate (collectively referred to as “advertising” or “non-matching” services in the decision).
4 The Department eventually agreed to cancel all penalties at issue.
5 N.Y. TAX LAW § 1105(c)(1).
6 N.Y. COMP. CODES R. & REGS. tit. 20, § 527.3.
7 TSB-M-10(7)S, New York Department of Taxation and Finance (July 19, 2010) (providing guidance on the sales and use tax treatment of information services).
8 Id.
9 In re SSOV ’81 Ltd., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA Nos. 810966 and 810967 (Jan. 19, 1995) (noting the focus should be on “the service in its entirety, as opposed to reviewing the service by components or by the means in which the service is effectuated” when making taxability determinations).
10 The ALJ rejected LendingTree’s alternative argument that taxing its services, but not taxing the same services that are provided orally by a similar business (see N.Y. COMP. CODES R. & REGS. tit. 20, § 527.3(b)(3), providing that sales tax does not apply to information services only furnished orally), violates the federal Internet Tax Freedom Act (ITFA) (discrimination against electronic commerce). Under the ITFA, a tax discriminates against electronic commerce if it “imposes an obligation to collect or pay the tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means.” ITFA § 1105(2)(A)(iii). The ALJ noted that LendingTree did not present evidence that other similarly situated businesses were transmitting their information orally (versus electronically) and escaping taxation.
11 In re Principal Connections, Ltd., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 818212 (Feb. 12, 2004).
12 See Wegmans Food Markets, Inc. v. Tax Appeals Tribunal, 131 N.E.3d 876 (N.Y. 2019).
13 Per N.Y. TAX LAW § 2010(5), ALJ decisions are not precedential.

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