Practical Insights for Combatting New York's Expansion of Sales Tax Law.

AuthorGladney, Zach
PositionASK THE EXPERTS

The Experts: Zach Gladney and Matthew Hedstrom

Much has been written about the New York State Department of Taxation and Finances positions on the taxation of software, software as a service (SaaS), and other software-based services. The critiques have concerned, in part, the department's guidance on the sales and use tax consequences of cloud computing and other service transactions as well as the department's positions on audit.

While difficult to generalize, it is unquestionable that the department has taken a very intentional stance toward the taxability of services that involve the use of software, the internet, or the provision of information. Services the department has argued are taxable run the gamut from what could generally be described as advertising and marketing services, SaaS, infrastructure as a service (IaaS), analytics services and hosting to some that could be described as consulting services, to name a few. The department's position is particularly troubling, given that only receipts from sales of services specifically identified in New York tax law are subject to sales tax. See N.Y. Tax Law [section] 1105(c).

As a general matter, to be taxable under Section 1105(c)(1) of New York State tax law, the service must involve collecting, compiling, or analyzing information. These services are commonly referred to as "information services." Given the department's stance on these issues, taxpayers face challenging and contentious audits. Although many articles have focused on cloud computing, this article focuses on the issue of information services in light of a fairly recent case, Wegmans Food Markets Inc. v. Tax Appeals Tribunal of New York, 2017 BL 419635 (N.Y. App. Div., 3 (rd) Dept., November 22, 2017). In that case, the New York Supreme Court, Appellate Division, found that a retailer's purchase of competitive pricing reports was not a taxable information service, and in that finding swept away years of taxpayer-adverse administrative decisions and audit policies.

Question: What can taxpayers take away from recent victories on appeal that can be applied to ongoing audits?

Answer: Taxpayers are wise to persistently resist aggressive positions by the department when the position is untethered from the controlling tax statutes or the decisional law the department is charged with enforcing. This is true even when the department's position is supported by departmental guidance or prior decisions of the Tax Appeals Tribunal...

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