In Matter of Hair Club For Men, LLC, DTA No. 822686 (N.Y.S. Div of Tax App., Aug. 19, 2010), the Division of Tax Appeals was presented with a case of first impression involving the issue of whether Hair Club’s “Bio-Matrix” process constituted non-taxable hair restoring services or, as the New York State Department of Taxation and Finance asserted, the sale and maintenance of tangible personal property.  

Hair Club is one of the largest providers of hair restoration services in the United States offering various hair restoration alternatives, including: (i) hair therapy; (ii) hair transplants; and (iii) the Bio- Matrix process. The Bio-Matrix process involves the cutting, styling and blending of an individual’s own hair with new hair that is added by Hair Club in a process that is designed to enable individuals to create a new look and image and to be undetectable. Customers entered into a membership agreement to receive the various services in exchange for a monthly membership fee based on the service level chosen.

Customers would meet with one of Hair Club’s hair stylists, who would work with the individual to achieve the individual’s desired look, a process that involves taking detailed measurements of the thinning area on the individual’s head as well as hair samples so that Hair Club can match the individual’s hair in the same diameter, thickness, density, texture and color. Approximately four to six weeks later, the individual would return to receive the new hair, which consists of hair that matches the individual’s own hair and is woven into a fine matrix that is blended into the individual’s own growing hair. Depending on the service level selected, a member could receive new hair several times throughout the year and could return to a Hair Club facility for shampooing, styling and additional services other than those provided when they receive new hair.

Hair Club also emphasized client service. Individuals could receive services at any Hair Club facility throughout the United States, facilities would open early or close late to accommodate client needs and Hair Club would send stylists to client locations if a client was unable to come into a facility for service.

In response to a severe economic crisis in the early 1970s, the New York State Legislature vested New York City with the right to impose its sales tax on certain personal services, including “hair restoring services,” Tax Law § 1212-A; N.Y.C. Admin. Code § 11-2002(h), and Hair Club for Men collected such tax for New York City. The Legislature, however, did not provide the State with similar authority.

The primary issue before the DTA was whether Hair Club’s Bio-Matrix process constituted “hair restoring” services that were taxable in New York City, but not in New York State.

In support of its position that the Bio- Matrix process constituted the sale and maintenance of tangible personal property, and not hair restoring services, the Division asserted that Hair Club was merely selling wigs or toupees and that “hair restoring services” encompassed only surgical procedures. The Administrative Law Judge initially reviewed the plain language of the statute and the dictionary definition of the term “restoration” and concluded that “hair restoring” is a service, not performed by a physician, which seeks to put the scalp back in its former position. Citing to the New York Court of Appeals’ decision in People v. Rubin, 424 N.Y.S.2d 592 (1979), in which the court noted that hair transplantation included wigs, toupees, hair weaves and hair transplantation, as well as witness testimony that “hair restoration” was a catch-all term in the industry which included all therapies used to replace hair, the ALJ concluded that the Bio-Matrix process fell within the many diverse interpretations of the term “hair restoring” and therefore did not constitute one of the enumerated services under the Tax Law.  

The ALJ also rejected the Division’s argument that the Bio-Matrix process was nothing more than the sale of tangible personal property (i.e., a wig or toupee). Noting that, if the client’s goal was to purchase a wig or toupee, he or she would not enter into a membership agreement which placed such an “overwhelming emphasis” on service, the ALJ explained that the Bio-Matrix process was, instead, “a creative process that strives to deliver something more than just a wig, be it a personal dream, quest for youth or something as simple as regaining a part of one’s persona lost with age” and that “it cannot be said that what is primarily being sold . . . is tangible personal property.” Although noting that there was no dispute that tangible personal property (i.e., the new hair) was transferred as part of the Bio-Matrix process, the ALJ concluded that, based on cases such as Atlas Linen Supply Co. v. Chu, 149 AD2d 834 (3d Dep’t 1989), because the new hair was not a stock product but was created after consultation with hair loss specialists and designed to precisely match the client’s own head and desired look, the transfer of the new hair was merely incidental to, and inseparably connected with, Hair Club’s Bio-Matrix process and therefore did not constitute a separate transaction for tax purposes.

Additional Insights

The position taken by the Division in Hair Club represents yet another attempt by the Division to make an end run around the Legislature’s decision to tax only specifically enumerated services. The Division’s position was especially questionable given that the Legislature recently rejected legislation that would have expressly provided for the taxation of “hair restoring services” and other personal services now taxable only in New York City. S.B. 60-A, Part V, § 1. The ALJ’s decision recognizes and reaffirms the long-standing principle that only enumerated services are taxable in New York State and that services must be analyzed in their entirety and not broken down into their component parts, some of which may be taxable. Since the Department did not appeal the case, the decision is now final. Morrison & Foerster represented Hair Club in this matter.