The Appellate Division has issued a potentially important decision regarding the sales tax exclusion for information services that are "personal and individual in nature." Reversing the Tax Appeals Tribunal, the Appellate Division has held that the furnishing of retail grocery store pricing information, although based on data that was publicly available, nonetheless qualified for the "personal and individual" exclusion because the information was both tailored to the customer's specifications and separately maintained by the provider exclusively for the particular client. Matter of Wegmans Food Markets, Inc. v. Tax Appeals Trib., et al., Case No. 523287 (3d Dep't, Nov. 22, 2017). The decision calls into question the Department's policy that whenever the source of the information being furnished is accessible to the general public, even if not obtained from a common database or substantially incorporated into reports furnished to others, the "personal and individual" exclusion does not apply.
Wegmans Food Markets, Inc. ("Wegmans"), a regional supermarket chain, retained RetailData, LLC, to provide "competitive price audits." RetailData collected competitor pricing information on specified retail products, which it then compiled into reports furnished to Wegmans. The pricing information was obtained from publicly available sources, i.e., the prices of goods on display on the sales floors and shelves of competitors' stores, which Wegmans used for its own pricing strategies.
Following an audit, the Department assessed sales tax against Wegmans on the grounds that it purchased a taxable information service for the period June 2007 through February 2010 (the Department also assessed sales tax against RetailData). An information service is not taxable if it is (i) personal and individual in nature to each client and (ii) may not be substantially incorporated into reports furnished to others. Tax Law 1105(c)(1).
An Administrative Law Judge held that the information services were not "personal and individual" in nature and therefore were subject to sales tax. The Tax Appeals Tribunal affirmed the ALJ's decision, concluding that it is the source of the information that determines whether the information qualifies for the "personal and individual" exclusion, and the fact that the information did not come from a common database, government database, or a published database was not relevant, nor was the fact that no two reports were likely to be the same because they were customized for each client.
Appellate Division decision. The Appellate Division reversed, holding that the pricing information furnished to Wegmans did not derive from a widely accessible common source or database as that test has previously been applied by the courts. The court distinguished these services from those involved in such decisions as ADP Automotive Claims Services, Inc. v. Tax Appeals Trib., 188 A.D.2d 245 (3d Dep't, 1993), appeal denied, 82 N.Y.2d 655 (1993) (upholding the imposition of sales tax on the furnishing of cost estimates for automobile repairs using information obtained from a widely available auto part database) and Allstate Insur. Co. v. State Tax Comm'n, 115 A.D.2d 831 (3d Dep't, 1985), aff'd, 67 N.Y.2d 999 (1986) (involving the provision of information obtained from motor vehicle reports accessible from the Department of Motor Vehicles).
The court found it significant that the pricing information was maintained by RetailData in a separate and unique database solely for use in preparing a written report for Wegmans and that the information was not substantially incorporated into reports furnished to others. The court concluded: "[T]o allow for the Tribunal's denial of the subject tax exclusion based solely on the fact that the information ultimately furnished [was] derived from a public source would, under the circumstances presented, serve to defeat the purpose of the exclusion."
The Appellate Division decision is potentially significant in its clear rejection of the Department's narrow interpretation of the "personal and individual" sales tax exclusion. Under that interpretation, the exclusion was unavailable any time the source of the information being furnished was publicly available, regardless of whether it was obtained from a common database or substantially incorporated into reports furnished to other clients. While there is case law holding that the provision of information obtained from a publicly accessible common database does not qualify as "personal and individual," the Tribunal in Wegmans expanded on this precedent by holding that any source of publicly available information cannot qualify for the exclusion.
Unless an appeal is sought by the Department and accepted by the Court of Appeals, the decision may require that the Department re-evaluate its policy regarding the "personal and individual" exclusion, including its policy as set forth in its Technical Memorandum, TSB-M-10(7)S (N.Y.S. Dep't of Taxation & Fin., July 19, 2010).
Another interesting aspect of the decision is the court's clear embrace of the rule of statutory interpretation establishing that where a tax exclusion rather than a tax exemption is involved, any ambiguity must be construed in favor of the taxpayer. There has been considerable confusion regarding the distinction between the two, and the court's clarification that tax exclusion provisions are interpreted in favor of the taxpayer should be welcomed by many taxpayers and practitioners.