The New York State Department of Taxation and Finance recently issued Advisory Opinion TSB-A-24(6)S, addressing whether sales receipts from products that provide mobile and web analytics of user online behavior are subject to New York State and local sales tax. This opinion has significant implications for businesses that offer analytics services that gather and analyze user data to generate customized client reports. Articles show that the mobile apps and web analytics market has a market size of $12.77 billion in 2024, estimated to grow to $58 billion by 2034. For New York sales tax purposes, this advisory opinion can have an everlasting effect… but did New York state get this sales tax issue right?
What Is the New York Sales Tax Issue?
A company (the "Petitioner") offers mobile and web analytics services to businesses worldwide to help them understand their users' online behavior. The Petitioner has a client base of nearly 20,000 customers and has applied its analytics services to over 500,000 mobile apps, projects, and websites.
The Petitioner's services revolve around two main types of data: "Events" and "People."
- Events refer to any actions a user performs on a customer's website or app that can be tracked in real-time.
- People data encompasses information stored on a user profile, such as the user's name and email address.
To access these analytics services, customers enter into a service agreement with the Petitioner that grants them a limited, non-exclusive, non-transferable license to use the Petitioner's online, web-based, and mobile-based applications. Customers integrate the Petitioner's technology into their mobile or web applications by installing client-side libraries or sending data through server-side libraries or formatted HTTP requests.
The data collected is streamed to the Petitioner's servers and is securely made available to customers. While some customers can modify reports or conduct analyses, most receive pre-formatted reports generated by the Petitioner. An important concept here is that the Petitioner does not share or sell one customer's data with any other party.
The Petitioner offers its services through tiered plans based on the type and amount of data tracked:
- Event Plans: Three service packages—Startup, Business, and Enterprise—cater to different business sizes and needs, focusing on tracking event data.
- People Plan: Pricing is based on the total number of user profiles a customer tracks.
Customers can choose to pay for these services on a monthly or annual subscription basis.
Differences Between Petitioner’s Subscription Service Plans
The Petitioner offers three main subscription service plans—Startup, Business, and Enterprise. The Startup plan provides access to the complete analytics platform, delivering live and historical data through a user-friendly Dashboard. Live data offers real-time insights, while historical data summarizes user activities over selectable periods.
Pricing for the Startup plan starts with a monthly base rate, which includes a set of one million data points and allows Dashboard access for the customer and up to ten team members. Customers can purchase additional packages as their data volume increases. They can pay monthly or annually, with overage fees applied if they exceed their purchased data points. Once customers surpass the maximum data point threshold allowed within the Startup plan, they must upgrade to either the Business or Enterprise plan.
The Business subscription plan builds upon the Startup plan with two significant enhancements: there are no monthly data point limits, and it allows unlimited team members to access the Dashboard. Charged on an annual base rate, the Business plan includes ten million data points.
The Enterprise subscription plan is similar to the Business plan but offers unlimited data history, premium support, and added security features. Pricing varies based on the customer's needs and can be structured monthly or annually. This plan allows an unlimited number of team members to access the Dashboard and hide events or properties from view. Customers receive standard support on weekdays between 12 a.m. and 5 p.m. Pacific Time.
To utilize any Petitioner's products and services, customers must agree to the terms outlined in the Terms of Use or a unique Master Services Agreement and complete an Order Form specifying the subscription services purchased. Under these agreements, the Petitioner grants customers a limited, non-exclusive, non-transferable license to access and use the application services. Customers also consent to the Petitioner's collection, storage, and use of their data to maintain, improve, and support the products.
The DTF’s Analysis
The DTF examined whether the services provided by the Petitioner are subject to state and local sales tax under Tax Law § 1105. This law imposes sales and use tax on retail sales of tangible personal property, including prewritten computer software.
One such taxable service is furnishing information services, which includes collecting, compiling, or analyzing information of any kind and reporting to others. According to Tax Law § 1105(c)(1) and further elaborated in NYCRR § 527.3(a)(2), services that primarily involve the delivery of information are considered information services and are taxable. The primary function test is applied to determine if a service qualifies as an information service. The primary function test, which is further explained in TSB-M-10(7)S, asks whether the primary purpose of purchasing the service is to receive information for the service. If yes, the service, in its entirety, qualifies as information services even if other benefits are received as part of the service.
In Petitioner’s case, their services involve embedding software on a customer's website to collect data about user interactions, such as how users arrive at the site, their devices, and their activities. This data is then compiled and analyzed, with reports furnished to customers via a password-protected dashboard hosted on the Petitioner's servers. The DTF concluded that the Petitioner's primary function is to provide an information service because the customers' primary objective is to receive these analytical reports. The embedded software merely collects data for the comprehensive information service offered.
Furthermore, the DTF addressed whether the Petitioner's services qualify for the exclusion for personal or individual information services under Tax Law § 1105(c)(1) and (9) and NYCRR § 527.3(b)(2). This exclusion applies when the information provided is personal or individual and is not substantially incorporated into reports furnished to others. While the Petitioner's data collection is specific to each customer, the company also uses aggregated customer data to generate publicly available benchmark reports. The service remains taxable since the underlying customer data contributes to these public reports.
The DTF also considered the Petitioner's notification and messaging services, which allow customers to engage with their users through email, push notifications, SMS messages, and in-app notifications. These services aim to market and re-engage users with the customer's product.
Although advertising services are generally excluded from taxation under Tax Law § 1105(c)(1) as per NYCRR § 527.3(b)(5), the DTF determined that the exclusion does not apply because the messaging and notification features are inseparable components of the taxable information service. Based on the DTF's analysis, the Petitioner's services are deemed taxable information services under New York State Tax Law.
Potential Challenge to the DTF's Sales Tax Analysis
One of the strongest grounds for challenging the DTF’s assessment is the argument that the Petitioner's services furnish personal or individual information and are not substantially incorporated into reports furnished to others. In the Petitioner’s case, the data collected, and reports generated by the Petitioner are unique to each customer and derived solely from user interactions within that specific customer's application. Although the Petitioner produces aggregated and anonymized benchmark reports available to the public, these reports do not disclose any proprietary or confidential information from individual customers. The high level of aggregation and anonymization could be argued to fall short of "substantial incorporation," thereby qualifying the services for the exclusion from sales tax.
In an effort to limit the burden of sales tax applicability for future subscriptions, this begs us to ask the following question – what if the Petitioner removes the anonymized, free, benchmark reports available to the public? The reality is that these benchmarking reports likely serve as a pure customer acquisition tactic; if the DTF takes the position that publicly available benchmarking reports are the only reason why the Petitioner does not qualify for the informational services exemption, it may be worth considering alternative customer acquisition tactics. In conjunction, other analytic companies can consider fine tuning their public offerings in an effort to be compliant with New York sales tax exclusion on informational services.
Further, the DTF agrees that generally speaking advertising services are exempt for New York sales tax imposition. However, because the messaging and notification services is not sold as a stand-alone subscription, the message and notification feature is a part of the larger taxable information service. This opens the door for web analytics companies to bifurcate the sale of analytics and messaging services as two forms of subscriptions, in an effort to limit the taxability of at least the messaging and notification services.
Closing Thoughts
This advisory opinion shows the efforts that New York state goes about in analyzing information services and its applicability to New York sales tax; the state not only analyzes a company’s invoices and service agreements, but it also utilizes a company’s free marketing efforts to claim why it is not subject to an information services sales tax exclusion.
Strategic planning with our New York attorneys at Sales Tax Helper LLC will ensure the most effective and efficient result. With our professional guidance, you can focus on growing your business with confidence, knowing that your New York sales and use tax obligations are in expert hands. Reach out to us at our New York office and we will do our part in analyzing your business model, while at the same time, advising on paths forward in reducing any potential sales tax obligations.