New York: Digital advertising analysis services taxable information services

An Administrative Law Judge (ALJ) for the New York Division of Tax Appeals recently addressed the taxability of a service designed to assess the effectiveness of Internet advertising campaigns. The taxpayer/service provider measured the effectiveness of its customers’ advertisements by (1) using software and cookies to survey Internet users, (2) analyzing the results of the surveys, and (3) informing its customers of how an ad performed and how it could be improved. After the data was collected on a specific advertisement, the taxpayer retained the right to use the collected information as long as it did not disclose the identity of its clients. Clients were allowed to share the data and information collected from the taxpayer internally and in reports to their own clients. The taxpayer’s fees were based on the complexity of the survey administered and the sophistication of the analysis reported back to the client.

Under New York law, sales tax is imposed on “the furnishing of information … including the services of collecting, compiling, or analyzing information of any kind or nature and furnishing reports thereof to other persons, but excluding 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 others.” Regulations promulgated by the Department of Taxation and Finance further provided that a taxable information service includes “product and marketing surveys.” Although the taxpayer argued that it was providing consulting services, the ALJ determined that the primary function of the taxpayer’s service was to collect information and furnish that information to its clients. In the ALJ’s view, the process of collecting, compiling, and analyzing information was the “very essence” of an information service. Moreover, product and marketing surveys were specifically listed as examples of information services in the Department regulations. The ALJ then addressed the taxpayer’s argument that it qualified for the carve-out for furnishing information that is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to others. In the ALJ’s view, the source of the information was personal or individual in nature because the information was not publicly available and was unique to each client.  The next question was whether the information was or could be incorporated into reports furnished to other persons. Although the taxpayer asserted that the information was not incorporated into reports furnished to others, the statutory language also looked at whether the information “may” be incorporated into such reports. Under the taxpayer’s contracts with clients, the taxpayer retained the right to copy, distribute, resell, modify and otherwise use the data it collected, providing client confidentiality was maintained. Clients also had the ability to publish the information and data furnished by the taxpayer in their own reports or to their clients. As such, the ALJ concluded the taxpayer did not qualify for the personal and individual information exception and was selling taxable information services. For more information on Matter of the Petition of Dynamic Logic, Inc please contact Judy Cheng at 212-872-3530.