The New York State Tax Appeals Tribunal reversed the determination of an Administrative Law Judge and held that reception services, even though provided by a security service business in conjunction with clearly taxable security guard services, are not subject to sales tax as “protective and detective services.” Matter of AlliedBarton Security Services LLC, DTA Nos. 825169 & 825690-825693 (N.Y.S. Tax App. Trib., Feb. 16, 2016). This decision, the first issued by the Tribunal that analyzes what are and are not “protective and detective services” in many years, provides needed clarity and may require the Department to rethink the broad application it has been urging for application of the tax on protective and detective services.
Facts. AlliedBarton is primarily engaged in providing security services to business clients, including financial institutions. Its security officers are designed to serve as a deterrent to potential criminal activity and provide a safe and secure workplace. They require special training and a license under New York’s Security Licensing Law, set forth in Articles 7 and 7-A of the General Business Law and the regulations promulgated thereunder. AlliedBarton hires security officers by recruiting people interested in law enforcement, including students of criminal justice, former police officers, and military personnel, and subjects them to a thorough background check. They are provided with cell phones and handcuffs, and in some cases with firearms. Services provided by security officers gave rise to approximately 95% of AlliedBarton’s revenue. AlliedBarton also provides certain of its clients with receptionists, whose duties included greeting, screening, and processing visitors, and, on occasion, informing unexpected visitors that they could not enter. If such visitors refuse to leave, the security officers, and not the receptionists, have the responsibility of dealing with the situation. The receptionists do not require state licensing, have no handcuffs or weapons, wear different uniforms from those worn by security guards, and are recruited from people with hotel, airport, or concierge/receptionist backgrounds. While security guards occasionally perform the duties of a receptionist, receptionists never perform the duties of a security guard.
AlliedBarton’s clients also included two private entities that AlliedBarton claimed were acting as agents of governmental entities – the Metropolitan Transit Authority and the City of New York Department of Citywide Administrative Services, respectively – which AlliedBarton treated as exempt from sales tax. However, the record did not contain any Forms ST-122, the Exempt Purchase Certificate for an Agent of a New York Governmental Entity, or any Forms DTF-122, Certification of Agency Appointment by a New York Governmental Entity, which were required under the Department’s Publication 765, effective July 1, 2005.
Issue and ALJ Decision: AlliedBarton collected and remitted sales tax on the 95% of its receipts that arose from providing security officers, but it took the position that its receptionist services, for which it was separately compensated, were not “protective and detective services” subject to tax under Tax Law 1105(c)(8). On audit, the Department disagreed, and assessed sales tax on the receipts for the reception services, and also denied any exemption for the sales that were treated as having been made to exempt agencies.
The ALJ agreed, finding that the reception services were part of the taxable security services, and that the inquiry must focus on “‘the service in its entirety, as opposed to reviewing the service by components,’” citing Matter of SSOV ’81, Ltd., DTA Nos. 810966 & 810967 (N.Y.S. Tax App. Trib., Jan. 19, 1995). The ALJ also found that AlliedBarton did not qualify for exemption for sales to the two clients it claimed were agents for state entities, because it had not submitted properly completed exemption certificates nor otherwise established that the sales were to governmental entities that were exempt from tax.
Tribunal Decision. First, the Tribunal reviewed the facts, and found significant differences between the security officer services and the reception services, noting that both the qualifications for the jobs and the duties performed were completely different. While acknowledging that some duties by the receptionists could be considered protective in nature, the Tribunal concluded that the services “are really more of a hybrid.” The issue therefore turned not on a factual determination, but on a question of statutory interpretation: whether the term “protective and detective services” in Tax Law § 1105(c)(8) includes such a hybrid service. In making the determination, the Tribunal reiterated that, since the issue is the imposition of a tax, the “statute cannot be read to allow the government to tax anything more than the clear terms of the statute allow,” and that there is no reason to defer to the expertise of the state agency.
The Tribunal then determined that, while there is no definition of protective or detective services in the Tax Law, a consideration of the types of services listed as examples, such as alarm systems, detective agencies, and patrol and watchman services, indicated that the statute was intended to cover services such as those provided by AlliedBarton’s security officers, but not the services performed by the receptionists such as checking a visitor’s identification and issuing passes to enter facilities. It also cited to Compass Adjusters & Investigators v. Comm’r of Taxation & Fin. of State of N.Y., 197 A.D.2d 38, 41 (3d Dep’t 1994), in which the Appellate Division found that, since there was no definition of “detective services” in the Tax Law, the court should look to the definition of “private investigator” in GBL § 71(1). The court in Compass Adjusters concluded that services requiring a private investigator’s license were taxable as detective services, while services for which no private investigator’s license was required were not subject to tax. In AlliedBarton, the Tribunal similarly found that the language in GBL § 71(2), referencing such activities as “watch, guard or patrol agency,” was consistent with and appropriate to use to interpret Tax Law § 1105(c)(8), and that the duties performed by the receptionists were not covered by the statute.
The Tribunal also disagreed with the ALJ’s refusal to separately analyze the two components of AlliedBarton’s service. The Tribunal found that the security services were on occasion provided without receptionist services, and that even when they were provided together they were separately invoiced, so that the analysis in Matter of SSOV, which dealt with an attempt to separate out parts of a nontaxable dating service into separate taxable components, did not apply.
However, the Tribunal did sustain the ALJ’s decision denying the claimed exemptions, finding that the guidance issued by the Department in May 2005 required vendors to provide Forms ST-122, including copies of Forms DTF-122, and that there was no evidence of any such forms, which would entitle AlliedBarton to a presumption of exemption, or of any other clear evidence to overcome the presumption of taxability.
The decision in AlliedBarton is consistent with the earlier interpretation of the tax on detective and protective services by the Appellate Division in Compass Adjusters, which also equated the services taxable under Tax Law § 1105(c)(8) to those covered by GBL § 71(1). It is also a clear indication of the longheld view of both the Tribunal and the courts that the statutory language is the ultimate guidance, and that language imposing a tax must be narrowly interpreted in favor of taxpayers and cannot be expanded by the Department. This reminder may be particularly useful in the area of detective and protective services, where no precedential decision interpreting the scope of Tax Law § 1105(c)(8) has been issued for many years, and where, in the absence of precedential guidance, the Department has recently taken a much more expansive view of the reach of the statute. Last year, in an Advisory Opinion, TSB-A-15(16)S (N.Y.S. Dep’t of Taxation & Fin., May 7, 2015), the Department took the position that cloud-based “fraud management services,” described as services offered to merchants accepting credit cards to analyze and identify risks based on parameters provided by the merchants were subject to sales tax as detective and protective services. The Advisory Opinion did not discuss Compass Adjusters, GBL § 71(2), or indeed any other case or statutory support for its conclusions. In light of the distinct narrowing of the scope of the Tax Law § 1105(c)(8) by the Tribunal in AlliedBarton, the continued validity of the Department’s position in this Advisory Opinion is questionable.