New York Tax & Finance: Internet ads not taxable


Matthew DiDonato
New York – Manhattan
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Art Burkard 
New York – Manhattan
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John O’Brien
New York – Melville
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Sammy Reisner
New York - Melville
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After several years of releasing relatively few sales tax advisory opinions, the New York State Department of Taxation and Finance recently has published 13 opinions, commonly referred to as TSB-As, which cover a variety of topics. In perhaps the most significant opinion published, the Department concluded that Internet advertising services are not subject to sales tax.1 In another, the Department held that a golf club’s membership dues are taxable.2

Internet advertising services not subject to tax The Department determined that a taxpayer’s Internet advertising services were not taxable on the basis that such activity constitutes an information service that is personal or individual in nature. The taxpayer provides reports to its customer base which show the effectiveness and performance of each customer’s Internet advertising campaigns. To provide the reports, the taxpayer automates the process of combining the results from the multiple customer advertising platforms and sites, and then downloads that information into a single consolidated database. Each customer then views an online dashboard to select the specific format and parameters of the reports. The report strictly contains the results of the individual customer’s campaign performance and does not include information from other customers or other public sources.

New York imposes sales and use tax on the retail sale of tangible personal property, including prewritten software, and the sale of certain enumerated services, including information services.3 When a taxpayer provides an informational report to a customer, the issue of whether such product constitutes prewritten computer software, the provision of software as a service or a taxable information service generally needs to be evaluated to determine the New York sales tax treatment of this revenue stream.

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.”4 However, the statute excludes, in relevant part, “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.”5

Alternatively, the element of consumer access to the dashboard and the inputs for specific formats and parameters could potentially support an interpretation that such a product constitutes prewritten computer software. New York’s definition of ‘‘tangible personal property’’ includes prewritten computer software.6 A 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.”7 Therefore, if the Department determined the customer is gaining the direct use of the software by accessing the dashboard, it can be classified as software.

Ultimately, the Department concluded that the product was not subject to sales tax, either as an information service or as prewritten computer software. The Department focused on whether the activity could be classified as a taxable information service based on the data and reporting aspect of the service. While the Department deemed the information and data compilation aspect to be an information service, the service was not taxable because the information generated by the taxpayer was unique and specific to each particular customer, and met the statutory exclusion for information that is personal or individual in nature. In addition, the Department summarily concluded the provision of access to a “dashboard” which fostered formatting traits was ancillary to the primary function of the taxpayer’s service of compiling performance metrics on behalf of its customers, and could not be considered prewritten computer software subject to tax.

Club membership dues subject to tax In a separate decision, the Department held that membership dues paid to a for-profit club owned by member-stockholders and organized to promote golf were subject to sales tax. The club sells several golf memberships that provide differing levels of access to the facilities. There are no restrictions on who may become a member. The club is operated by the board of directors and member-comprised committees established by the board.

New York imposes sales tax on all dues paid to any social or athletic club in the state if the dues of an annual active member are greater than $10, exclusive of any initiation fee.8 A social or athletic club is “[a]ny club or organization of which a material purpose or activity is social or athletic.”9 A New York regulation defines a club or organization in relevant part as “any entity which is composed of persons associated for a common objective or common activities.”10

After reviewing the applicable statutes and regulations, the Department determined that the club constituted a “social or athletic club” for New York sales tax purposes. The Department noted that the club is member-owned and member-managed through its board of directors even though not all classes of members can own stock and run or vote for the board. Member-stockholders have a proprietary interest in the club and are the only people eligible for the board.11 Because the dues of an annual active member are greater than $10, the Department concluded that all charges for dues, initiation fees and assessments are subject to tax.

Commentary The Department’s renewed focus on the review and issuance of TSB-As may have resulted in part from the suspension of other activities historically performed by the Department. In addition to the two opinions discussed above, the Department recently has released 11 other advisory opinions. In a separate opinion concerning the taxation of club membership dues, the Department held that amounts collected from a new class of limited members lacking a proprietary interest or voting rights are subject to state and local sales tax as dues paid to a social or athletic club.12 Other opinions address such topics as the tax treatment of concession stand sales,13 installation of partitions,14 installation of cellulose and spray foam insulation,15 graphic design services,16 sightseeing pedal bus tours,17 inspections of backflow prevention devices,18 and service fees charged for transferring firearms.19

Advisory opinions have a limited scope and only apply to the stated facts. The Department is bound by an advisory opinion only with the requesting party and if the relevant facts are fully and accurately provided. Also, advisory opinions are based on the law, regulations and policies in effect when the opinion is issued. Therefore, while an advisory opinion is not precedential, it can provide valuable insight into the Department’s position on a particular issue. This flood of new advisory opinions is certainly a positive sign for taxpayers who have been seeking guidance and feedback on uncertain areas of taxability.

The most interesting aspect of the Internet advertising services opinion is the Department’s conclusion concerning the prewritten software issue. Historically, the Department has been rather aggressive in this particular area. In many instances, the Department has argued that when a consumer accesses a software application via the cloud, that consumer gains constructive possession of tangible personal property and has the right to use, control, or direct its use. Accordingly, the Department usually contends the sale of software is taxable, especially if the software at issue is a small piece of a larger service. This opinion illustrates a slight shift and is promising to vendors who use software technology as a means of providing a more comprehensive non-taxable service which is merely accessed, altered, or displayed via a tool or dashboard.

1 TSB-A-20(3)S, New York Commissioner of Taxation and Finance, April 28, 2020.
2 TSB-A-20(2)S, New York Commissioner of Taxation and Finance, Feb. 3, 2020.
3 N.Y. TAX LAW §§ 1101(b)(6); 1105(a), (c).
4 N.Y. TAX LAW § 1105(c)(1).
5 Id.
6 N.Y. TAX LAW § 1101(b)(6).
7 N.Y. COMP. CODES R. & REGS. tit. 20, § 526.7(e)(4).
8 N.Y. TAX LAW § 1105(f)(2).
9 N.Y. TAX LAW § 1101(d)(13).
10 N.Y. COMP. CODES R. & REGS. tit. 20, § 527.11(b)(5). The regulation further provides that: “Significant factors, any one of which may indicate that an entity is a club or organization, are: an organizational structure under which the membership controls social or athletic activities, tournaments, dances, elections, committees, participation in the selection of members and management of the club or organization, or possession by the members of a proprietary interest in the organization.”
11 Note that the Department distinguished this from a decision holding that an entity was not a club for New York sales tax purposes because the activities were controlled by the stockholders and not all stockholders were members. Antlers County Club, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 807805, Nov. 19, 1992.
12 TSB-A-20(4)S, New York Commissioner of Taxation and Finance, May 19, 2020.
13 TSB-A-20(5)S, New York Commissioner of Taxation and Finance, May 19, 2020.
14 TSB-A-20(6)S, New York Commissioner of Taxation and Finance, May 26, 2020.
15 TSB-A-20(7)S, New York Commissioner of Taxation and Finance, May 19, 2020.
16 TSB-A-20(8)S, New York Commissioner of Taxation and Finance, May 26, 2020.
17 TSB-A-20(9)S, New York Commissioner of Taxation and Finance, May 26, 2020.
18 TSB-A-20(12)S, New York Commissioner of Taxation and Finance, June 2, 2020.
19 TSB-A-20(13)S, New York Commissioner of Taxation and Finance, June 2, 2020.

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