Matter of MarketShare Partners, LLC; Division’s Rep.: Stephanie Scalzo; Petitioner’s Reps.: R. Gregory Roberts, and Jeremy Gove; Articles 28 and 29

Hodgson Russ LLP

Hodgson Russ LLP

After weeks of being absent from TiNY (in part due to Chris Doyle’s encroachment on my territory), I’m back in a big way.  The Division of Tax Appeals issued a whopper of a sales tax determination – 55 pages!  It addresses one of the most perplexing issues in all of New York sales tax – the proper characterization of a technology product – is it a nontaxable service, taxable information, or taxable software?  Let’s dive in. 

Petitioner was a marketing analytics firm that enabled large companies to measure, predict, and improve their marketing spend impact.  In other words, better marketing means more sales, and Petitioner claimed to help customers optimize their marketing dollars.  Petitioner sold four products: (i) advertiser service, (ii) media company service, (iii) white paper service, and (iv) advertising agency product.  Below is a review of each product, and its corresponding taxability according to the determination.  

  1. Advertiser service: Despite the presence of licenses to use software in Petitioner’s contracts for advertiser services, the Division and Petitioner agreed that the sales under these contracts should be treated as services for sales tax purposes and not as sales of software (e., tangible personal property).  The Division, however, viewed this service as a taxable information service because Petitioner collected data, built models based on that data, and then disseminated information and recommendations derived from those models to the customer.  Petitioner, on the other hand, viewed it as a nontaxable consulting service because the goal of the service was to provide the customer with advice and recommendations about how to apply analytic marketing to resolve the customer’s toughest marketing questions.  Ultimately Petitioner’s view of the product carried the day with the Judge who found that the contracts at issue obligated Petitioner to provide advertiser service customers with guidance on how to adopt analytic marketing as their marketing strategy and advice on how to make particular marketing decisions based on analytic marketing.  In other words, a service that requires judgment and the provision of advice does not qualify as a taxable information service. 

We wholeheartedly agree with this conclusion.  A memo I provide to a client advising whether or not their product is subject to NY sales tax should not become a taxable information service simply because I provide copies of the law, regulations, and interpretive authority on which my advice is based.  

  1. Media company service: This service was similar to the advertiser service detailed above, but it was for a different customer base.  Here, Petitioner sold the same advertiser service to media companies, except that this service also contained an additional element in that the media company customers could also have Petitioner show their clients “how well those media companies perform[ed], and how the different properties that the media company own[ed] performed for the specific advertisers.”  The Judge applied the same analysis as above to conclude that, rather than just providing the information requested by the customer, Petitioner helped its media company customers determine exactly what models should be developed and identified how analytic marketing could be used to improve the customer’s marketing function.  Petitioner then took its conclusions and experience and helped sell the media company to advertisers.  Thus, this was deemed to be a nontaxable service.  

Note that for one contract, classified as a media company service, the engagement was more limited and required only that Petitioner provide a “model rebuild” and access to its software platform.  This transaction was held to be a taxable information service. 

  1. White paper service: The deliverable for this service was a white paper providing information about the effectiveness of different types of advertising media on different industry categories.  According to Petitioner, it generated insights and recommendations by engaging in the same activity it conducted when providing its marketing analytics service, with the only difference being that the insights were provided in white paper form.  Thus, Petitioner argued that if the marketing analytics service is nontaxable, the white paper should be as well.  The Judge, however, concluded that Petitioner did not prove that the white papers followed the same process as the marketing analytics service.  Moreover, the Judge was unable to determine the balance between the general information and data contained in the white papers and the recommendations because no examples were placed in the record and there was no knowledgeable testimony on the subject.  Thus, this offering was deemed to be a taxable information service because Petitioner failed to satisfy its burden to prove otherwise.  

This feels a bit like a missed opportunity.  

  1. Advertising agency product: The parties agreed that the product that Petitioner sold to advertising agencies qualified as prewritten software.  This software allowed advertising agencies to run marketing scenarios for their own clients.  This seems like a pretty straight-forward sale of software, but Petitioner made an interesting argument that had the potential to undermine much of how New York State taxes software.  Petitioner argued that no taxable sale occurred within New York when it made its software platform, located on a server out-of-state, available to a customer who used it over the internet while located in New York.  This involved a pretty technical argument that parsed various statutory and regulatory definitions and case law to show that customers never received exclusive control of the software product, which, according to Petitioner, was a requirement of a taxable transaction.  We’ll likely do a deep dive on this topic in our sales tax blog, indeed, we have previously addressed this issue, but here it is sufficient to say the Judge didn’t buy the argument and found that customers received sufficient control to view the transaction as a taxable software license.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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