A recent New York Court of Appeals ruling in Dynamic Logic, Inc. v. Tax Appeals Tribunal has sent a warning for businesses offering data-driven services. This decision broadens the definition of taxable information services, putting New York companies at risk of unexpected sales tax assessments.
Understanding the implications of this case starts with Tax Law § 1105(c)(1), which governs the taxation of information services in New York. The statute’s nuances, mainly in its exclusion of personal data, are at play here. Do not let your business be caught off guard; contact Sales Tax Helper to ensure your compliance and avoid costly audits.
Understanding Tax Law § 1105(c)(1) – New York Sales Tax on Information Services
Tax Law § 1105(c)(1) imposes a sales tax on furnishing information through tangible reports, covering services like data collection, compilation, and analysis. Relevant to the Dynamic Logic case,it includes an exclusion for information that is personal or individual in nature and not substantially incorporated into reports provided to others. The purpose of the taxing statute is to target physical reports, as opposed to oral information, which remains untaxed (20 NYCRR 527.3[b][3]).
The law was inspired by a New York City statute following the 1937 Dun & Bradstreet case. The Dun court exempted certain information services from taxation. State regulations, such as 20 NYCRR 527.3[b], illustrate taxable services, like clipping services, where data may be reused, versus non-taxable ones, like payroll computations not shared with others. Understanding these distinctions is crucial for businesses post-Dynamic Logic.
The statute’s focus on the tangible report content requires that data not be substantially incorporated elsewhere, which is central to the dispute. This framework explains why the court’s interpretation has significant implications for New York data-driven industries.
Dynamic Logic, Inc. v. Tax Appeals Tribunal
Dynamic Logic’s AdIndex service assesses digital ad campaigns through surveys, producing client-specific reports with survey data, tailored insights, recommendations, and anonymized benchmarking from its MarketNorms database. In 2014, the New York Department of Tax and Finance audited Dynamic, classifying AdIndex as a taxable information service under Tax Law § 1105(c)(1), resulting in a $2.3 million sales tax assessment for 2011–2014. The Division of Tax Appeals upheld the tax, acknowledging AdIndex data as personal but rejecting the statutory exclusion, citing potential incorporation into MarketNorms and possible client data sharing.
The Tax Appeals Tribunal affirmed the Division’s ruling, emphasizing that AdIndex’s core function was collecting and analyzing data, with recommendations deemed ancillary. The Tribunal reasoned that data from AdIndex reports, once anonymized and aggregated into MarketNorms, was substantially incorporated into future reports, disqualifying the exclusion under § 1105(c)(1). This interpretation hinged on the qualitative value of the MarketNorms data to subsequent analyses, rather than quantitative overlap in report content.
The Appellate Division, Third Department, unanimously confirmed the Tribunal’s determination, finding it rational and supported by substantial evidence. The court agreed that AdIndex was an information service whose primary purpose was data-driven analysis. It held that incorporating MarketNorms data was significant enough to bar the exclusion. It emphasized the data’s qualitative importance, noting its role in providing industry benchmarks that enhanced report value.
On April 17, 2025, the New York Court of Appeals affirmed. The majority concluded that AdIndex fit the statutory definition of an information service, as its primary function was collecting and analyzing data, with recommendations being secondary. Crucially, the court adopted a qualitative interpretation of “substantially incorporated,” holding that even anonymized data in MarketNorms was valuable enough to trigger taxation.
The Court of Appeals further supported its logic by referencing precedents like Matter of Wegmans Food Markets, Inc. v. Tax Appeals Tribunal of the State of New York (33 NY3d 587 [2019]), which favored the taxing authority in ambiguous exclusion cases, and distinguished Matter of New York Life Insurance Co. v. State Tax Commission (80 AD2d 675 [3d Dept 1981], affd. 55 NY2d 760 [1981]), which protected non-furnished background data. The majority argued that MarketNorms data, used in one or two slides per report, was integral to benchmarking, making it “substantially incorporated” despite its small volume. This reasoning leaned on analogies to federal cases defining “substantial” as qualitatively significant, not necessarily voluminous (e.g., Pierce v. Underwood, 487 US 552 [1988]).
The dissent criticized the majority for nullifying the statutory exclusion. The dissent reasoned that § 1105(c)(1) is unambiguous, focusing on tangible report content, not background data, and that anonymized MarketNorms data lacks substantial overlap with client-specific reports. Citing Rich Prods. Corp. v. Chu (1987), the dissent contended that only “significant and ultimate information” in reports should be taxed, not aggregated benchmarks.
Practical Implications and Why It Matters
The Dynamic Logic, Inc. v. Tax Appeals Tribunal of the State of New York ruling expands the reach of Tax Law § 1105(c)(1), taxing customized reports incorporating anonymized data, like benchmarking. This weakens the statutory exclusion, increasing the risk of sales tax liability for businesses using aggregated data in client reports.
Businesses must audit their services to determine if report data is reused, even anonymously, as this could trigger taxability. Clear documentation proving minimal data incorporation is essential to argue for the exclusion during audits. Firms face costly penalties that can disrupt budgets, cash flow, and operations without proactive compliance.
The ruling’s broad interpretation of “substantially incorporated” may prompt legislative or regulatory clarification, as the dissent warned of the exclusion’s near nullification. Until such guidance emerges, businesses remain vulnerable to aggressive tax audits. This uncertainty underlines the need for immediate action to safeguard financial stability.
Common Issues and How a Sales Tax Lawyer Can Help
Figuring out if data is “personal” or not “substantially incorporated” under Tax Law § 1105(c)(1) is a minefield. Expert guidance is critical to costly New York sales tax mistakes.
A Sales Tax Lawyer Can:
- Pinpoint taxable services.
- Build documentation to prove data stays personal and unique.
- Fight audits head-on.
- Defend litigation to avoid costly obligations.
- Rework data processes to lock out reusable data.
- Deliver ongoing advice to comply with shifting tax rules.
Strategic planning keeps industries like advertising and analytics ahead of New York’s challenging tax game.
Stay Ahead of New York’s Sales Tax Traps
The Dynamic Logic, Inc. v. Tax Appeals Tribunal of the State of New York ruling ramps up the stakes for businesses caught in New York’s sales tax obligations. It is a wake-up call to audit your services and data practices to dodge hefty tax hits. Team up with Sales Tax Helper now to strengthen your business’s defenses.