New York Rules Again Against Taxpayer’s Sales Tax Exemption from Information Services by Jeremy Katz, JD, MBA, LLM
Posted on May 07, 2025
by
Jeremy Katz
In a recent decision by the New York State Court of Appeals, an advertising research firm is liable for $2.3 million in unpaid sales tax for information services it provided to its customers over a three-year period. According to the court, Dynamic Logic Inc. (Dynamic) had erroneously treated one of its information services products as a professional consulting service exempt from the state’s sales tax despite its reliance on data collection and the sharing of that information and analysis with other clients. The case has far-reaching implications for other information services businesses that gather data and provide recommendations to other customers based on those facts.
Background
Under New York State Tax Law Section 1105(c)(1), sales tax applies to information services defined 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.” However, the law specifically excludes from sales tax “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.”
New York-based research firm Dynamic Logic had presumed its services qualified for the exclusion from state sales tax because it considered its primary business to be consulting, based on the premise that it provides businesses with personalized advice to improve their marketing campaigns. The company’s AdIndex service surveys individuals exposed to clients’ advertisements and a control group who did not see those messages. It then analyzes the survey results against broader market data in its proprietary MarketNorms database to produce a custom client report of insights and recommendations. That information is then added to the MarketNorms database, which Dynamic continuously updates and uses to prepare reports for other clients.
In 2014, the New York Commissioner of Taxation and Finance audited Dynamic and disagreed with its interpretation of the law, finding that AdIndex’s primary function was conducting surveys it furnishes to others, and that any recommendations the company provided to clients were subordinate to the company’s collection, compilation and analysis of information provided to clients. The division of Tax Appeals subsequently upheld this decision, adding that an exclusion of tax would not be permitted because Dynamic provided the data it collected to others through its MarketNorms database. Dynamic appealed to the state Supreme Court, which upheld the tax tribunal’s decision and added that Dynamic’s consulting services drew heavily from the personal data it collected, and that data was substantially incorporated into reports furnished to others. The Court of Appeals agreed.
Implications for Other Businesses
States are increasingly attempting to bolster their coffers and broaden their tax base by adding sales tax to a growing number of services. Today, 41 states and the District of Columbia do not tax services by default but do tax specific enumerated services that can vary significantly from one jurisdiction to the next. This creates a challenging environment for businesses with various functions and operations to understand their state-by-state sales tax obligations.
However, when looking at the outcome in the Dynamics case, it is important to consider the court’s dissenting opinion, which centers around the tax exclusion for “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.”
According to the dissent written be the Honorable Shirley Troutman with the New York State Court of Appeals, “in determining what falls under the exclusion, one should look at the report that is furnished to the customer and determine based on what appears on that report whether it may be incorporated in reports furnished to others. It is not the information used to create the reports that is important. What is important is whether the specific information furnished to one customer may be substantially incorporated in reports furnished to others.” In other words, the determination of tax ability should not be based on the information used to create the reports, but rather whether the report provided to one customer can be given to another client.
In the Dynamics case, the reports prepared by the company are customized to each client’s specific campaigns and never shared with other clients. Moreover, AdIndex survey questions, findings and recommendations provided to clients are “not uploaded to the MarketNorms database”; rather, the raw data is “aggregated and anonymized” to generate a benchmark for different industries. AdIndex clients do not know which prior campaigns were included or any specific information contained in the MarketNorms database. Additionally, MarketNorms requires a client subscription for which Dynamic does charge sales tax because it does not include any personal or unique information. According to the court’s dissent, the exclusion contained in the tax law section 1105(c)(1), “therefore protects from taxation information tangibly furnished on the pages of a report that may not to a great extent or degree be incorporated on the pages of another report. Here, the information furnished in a report to one client may not be substantially incorporate into another client’s report because the information is never shared.”
As the Dynamic case points out, it is critical for businesses to properly analyze the entirety of their operations and sources of revenue to identify whether their primary functions are the sales of information they gather or the sales of consulting services, since the taxability of both can change from one jurisdiction to the next. Any decision taken should be discussed with trusted accounting advisors, including state and local sales tax experts, and supported by substantial, demonstrable proof.
About the Author: Jeremy Katz, JD, MBA, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant, where he specializes in state and local tax (SALT) analysis, planning and compliance for businesses in a broad range of industries. He can be reached at the CPA firm’s New York, NY, office at info@bpbcpa.com or (646) 213-7600.
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