TiNY has been off the air for the last few weeks while waiting for the DTA to provide enough content for us to prepare a Report with critical mass. Cases have been dribbling out recently, and over the last three weeks, there is just one Tribunal decision and one ALJ determination on which to report. We had hoped for more this week and were disappointed.
Still, the Decision and Determination were not process cases (i.e., neither case involved timeliness or other jurisdictional issues). So, at least there is some substance there.
The next TiNY Report will be post-election. Thank goodness. Talking heads of all stripes are launching their partisan grenades at a frequency that is impossible to ignore. Your editor yearns for simpler times when 95% of the news he needed came from the Weather Channel, ESPN, Tax Notes, Weekend Update, and the DTA website.
Decision
Matter of Cushlin Limited (October 10, 2024); Div’s Rep. David Markey, Esq.; Petitioner’s Rep. Richard Levine, Esq.; Article 9-A/Expense deduction substantiation (Zoe Peppas).
Petitioner was the corporate parent of affiliated entities that acquired and refurbished three- and four-star hotels. The Division started an audit of one of Petitioner’s underlying entities in 2008 for the year 2005. The entity had sold real property in New York but did not file the required partnership return with the State. The Division’s audit of the affiliate for 2005 matured into audits of Petitioner for the years 2002 through 2006, and then for 2007 through 2009, to determine if Petitioner reported gains and losses appropriately.
Petitioner was found to have not filed tax returns for a significant portion of the audit, and instead provided the Division with “pro forma” numbers. When the returns were eventually filed by Petitioner, Petitioner failed to substantiate the deductions it claimed. Following a hearing an ALJ ruled that Petitioner failed to provide sufficient documentation to substantiate deductions and losses and to prove payment for the expense invoices it submitted. The ALJ ruled that the pro forma numbers the Division used to calculate the assessment established a rational basis for tax the Division argued was due.
The ALJ also determined Petitioner didn’t correctly calculate its entire net income and capital bases correctly.
On exception before the Tribunal Petitioner argued; (1) the audit did not have a rational basis, (2) the ALJ “erred in sustaining the finding of a tax liability under the ENI method for certain years and under the capital base method for others,” and (3) that the ENI base had been computed correctly by Petitioner, so the notices were erroneous.
The Tribunal found Petitioner did not satisfy its burden of proving its points. During the audit the Division had provided Petitioner numerous opportunities over several years to provide the necessary documentation to substantiate or refute the Division’s initial findings, yet Petitioner failed to provide such documentation. In fact, “Petitioner provided only partial responses that lacked any externally verifiable substantiation.” The Tribunal held the audit had a rational basis and Petitioner failed to bear its burden to provide sufficient proof for the basis for its income and expense entries on its late-filed returns.
Finally, the Tribunal found the Division’s use of fair market valuation of real property assets under the capital base method was rational, and that Petitioner did not meet its burden of proof regarding the abatement of penalties.
Determination
Matter of Millward Brown, Inc. (by Kantar LLC, as successor) and Dynamic Logic, Inc. (by Kantar LLC, as successor) (ALJ Chu-Fong, October 17, 2024); Div’s Rep. Lori Antolick, Esq.; Pet’s Rep. Leah Robinson, Esq.; Articles 28 and 29/Information Services (Pete Calleri).
The second time was not a charm for Petitioners, companies seeking to prove that their marketing-related services are not subject to sales tax as “information services.”
This determination comes on the heels of a Third Department case from February, Dynamic Logic, Inc. v. New York State Tax Appeals Tribunal, et al. (“Dynamic Logic”). There, Petitioner Dynamic Logic, which later merged with Petitioner Millward Brown, Inc. to form Petitioner Kantar LLC, had appealed a January 2022 Tribunal decision holding that the Dynamic Logic sold taxable information services. In rejecting Dynamic Logic’s arguments, the Third Department acknowledged the Tribunal’s earlier decision that a research tool that “gauges the effectiveness of a particular advertisement by surveying consumers or internet users who have seen the advertisement and comparing the results to responses of those who have not been exposed to it” constituted the sale of information under Tax Law § 1105(c)(1).
While Dynamic Logic involved a prior sales tax period, many of the same services were at issue in the new ALJ determination summarized here. In the new case, Judge Chu-Fong considered three issues:
- whether Petitioners’ services are information services under Tax Law § 1105(c)(1);
- if so, whether any of the services are excluded from tax under the “personal or individual” exclusion; and
- whether the Division erred in applying tax to receipts from sales of services that occurred outside of New York.
Petitioners’ services analyze the effectiveness of marketing, such as individual ads, ad campaigns, and brands, through various methodologies, but primarily online. Petitioners conduct studies to obtain data about their clients’ businesses and then render insights and advice based on that data. Petitioners’ clients consist of advertisers, media agencies, and advertising publishers. In performing their services, Petitioners often rely on consumer surveys to acquire data, after which they analyze the data, form insights, and provide advice.
Regarding the first issue, Judge Chu-Fong extended to Petitioners the holding in Dynamic Logic that all of Petitioners’ services constitute taxable information services under Tax Law § 1105(c)(1). In doing so, he looked to the services’ primary function, which controls whether a service that may involve the transfer of information as an element is actually subject to tax as an information service. The services here include the gathering and examining of data used to provide advice and insights. Importantly, the acquisition of customer information about a client’s business is key in Petitioners rendering their advice. Simply put, Petitioners’ services revolve around acquiring this client information, analyzing it, and distributing that analysis over the internet in the form of actionable advice. Judge Chu-Fong noted that these services are indistinguishable from those in Dynamic Logic and concluded that they are similarly taxable as information services.
Worth noting is Petitioners’ argument that Tax Law § 1105(c)(1) only imposes tax upon the furnishing of information by certain methods (i.e., “by printed, mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner”) and that this shouldn’t include the online “furnishing” done by Petitioners. However, as Judge Chu-Fong noted, Dynamic Logic extended the tax on information services under § 1105(c)(9)(i) to services provided via telecommunication, which includes the internet. Accordingly, Petitioners’ services still qualified as taxable information services.
Turning to the second issue, Judge Chu-Fong considered whether any of Petitioners’ services fell within the exclusion in § 1105(c)(1) for “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.”
To determine if information is personal or individual in nature, the source of the information is controlling. Here, the information gathered from clients was not public. The data could not be easily accessed, as it was based on customers’ opinion and clients’ views of their respective markets, which would not have been discovered but for Petitioners’ solicitation. Therefore, it was concluded that the source of the data that drives Petitioners’ services was personal and individual in nature.
However, the next question—whether the information “is not or may not be substantially incorporated in reports furnished to other persons”— was determined to be controlled (again) by Dynamic Logic. Judge Chu-Fong went product-by-product in making his determinations, but the key takeaways are as follows: first, the exclusion does not apply when the reports in question contain information that was also provided to third parties; and second, third-party access to an information service’s aggregated data constitutes the furnishing of information to other persons for the purposes of the exclusion. For example, Petitioners’ “AdIndex” service helped clients ascertain the return on their investment in an ad campaign using surveys and demographic information. Because this service (and more specifically, its data) was both incorporated into Petitioners’ “MarketNorms” product and was available to third parties, this service fell outside the exclusion. However, a product like “CrossMedia (legacy),” whose data was not incorporated into another database and whose studies were not provided to anyone other than the client, was excluded from tax.
Finally, regarding the third issue, Judge Chu-Fong simply concluded that, because the record included numerous examples of sales delivered to clients outside New York State, the notices at issue were modified to remove sales tax on the non-New York State sales. Additionally, the notices at issue were canceled to the extent that tax was asserted on excluded services, and the corresponding refund claim denials were modified to grant refunds for tax paid on sales of excluded services.
