A financial services firm providing integrated investment portfolio management services to institutional clients in exchange for a single charge is not required to collect New York sales tax on its charge for those services. Advisory Opinion, TSB-A-13(12)S (N.Y.S. Dep’t of Taxation & Fin., Apr. 23, 2013). The Department of Taxation & Finance reached this conclusion even though it acknowledged that certain components of the services, if viewed separately, would be taxable. The Advisory Opinion is a potentially important limitation of the so-called “bundled transaction” rule under the sales tax.

Facts. The Petitioner (“Service Provider”) furnishes investment management and risk management services regarding investment portfolios, principally for financial institutions and other investment managers. One of its services (called “Product A”) is a proprietary investment management platform through which it provides its clients with a variety of sophisticated risk analytics, together with portfolio management, trading and operations tools, as a single package. 

The Advisory Opinion contains a highly detailed description of Product A, which will only be summarized here. Under Product A, the Service Provider creates a customized platform, maintained on its own databases and servers, which is delivered to clients via a private network using a web interface. The platform allows the exchange of information with clients, who can use the platform to, among other things, initiate trades, review portfolio balances and use financial analysis tools. The Service Provider procures and maintains the telecommunications services needed to connect its data centers with clients’ data centers.

An important component of Product A is the furnishing of portfolio and risk analysis. This daily risk analysis involves the analysis of clients’ portfolio and position information, and results in customized risk reports. Although this risk analysis is part of the Product A package, the Service Provider sometimes sells the service separately, but the service sold separately is somewhat more limited. When sold separately, New York sales tax is collected on those sales made to New York customers, presumably as a taxable information service. Product A also involves maintenance of a dedicated database for each client’s portfolio information, facilitating client trade executions, and a desktop analytical calculator that clients can use to analyze securities and derivative products.

The Service Provider charges a single fee for all of the services furnished as part of Product A. The fee increases based on the client’s overall use of the service and the overall complexity of the client’s needs. There is also a separate “implementation fee” in the first year for putting the customized platform in place. The Service Provider requested an Advisory Opinion on whether its single charge for Product A is subject to sales and use tax.

Advisory Opinion. The key issue addressed in the Advisory Opinion was whether the services provided for a single charge should be treated as a “bundled transaction,” which is the furnishing of both taxable and nontaxable services for a single charge. If viewed as a “bundled transaction,” then the entire charge would be subject to sales tax. 20 N.Y.C.R.R. 527.1 (containing an example, commonly known as the “cheese board” rule, in which sales tax is found to be due on a vendor’s single charge for a package containing assorted cheeses, a cheese board and a knife).

The Department noted that “[m]any of the components of Product A seem to qualify as taxable when viewed separately.” For instance, the telecommunication connection between data centers might be a taxable telecommunications service; the web interface involved the furnishing of pre-written software; and the financial calculator and daily risk analysis appeared to constitute a taxable information service. In fact, as noted above, the Service Provider was already collecting sales tax on its risk analysis services when sold separately.

The Department concluded that the service should be viewed as a single, integrated transaction, citing Matter of SSOV ’81, Ltd., DTA Nos. 810966 & 810967 (N.Y.S. Tax App. Trib., Jan. 19, 1995) (which held that charges for a dating service were not subject to sales tax as an information service under the “primary function” rule). The Department reasoned that Product A was generally sold as an all-inclusive service, and its various components were “highly synergistic”—for example, the timeliness of the risk analysis was of critical importance, and was fostered by the Service Provider’s maintenance of client databases.

The Department went on to rule that when viewed as a single, integrated transaction, Product A should be treated as a nontaxable information technology operations and management service. However, where the daily risk analysis and analytical calculator are furnished separately, they will each be considered a taxable information service.

Additional Insights

The Advisory Opinion is a potentially important development in the Department’s approach to the “bundled transaction” rule under the sales tax. The Department concluded that the product furnished was not a “bundled transaction,” despite the fact that certain components of the services, when viewed separately, were taxable. This is particularly noteworthy because the Department did not affirmatively conclude that the taxable components were trivial elements of the overall service.  

In Matter of Nerac, Inc., DTA Nos. 822568 & 822651 (N.Y.S. Div. of Tax App., July 15, 2010), which involved whether consulting services that included the furnishing of technical written research reports constituted taxable information services, the Department invoked the bundled transaction rule. It claimed that since Nerac did not separate its single charge between the allegedly taxable components (the reports) and the nontaxable components (the consulting), the entire bundled charge was taxable. The ALJ in Nerac concluded that there were no taxable components, making the bundled transaction argument moot. Here, by not invoking the bundled transaction rule, the Department adopted a prudent approach that avoided forcing the Service Provider to separately price the individual components of its bundled services, or else risk subjecting its entire single charge to sales tax.