A New York State Administrative Law Judge has held that a company’s data processing services furnished to broker-dealers and financial institutions did not involve the licensing of pre-written software for sales tax purposes, but that certain other data analysis services constituted the furnishing of a taxable information service.  Matter of SunGard Securities Fin. LLC, DTA No. 824336 (N.Y.S. Div. of Tax App., Feb. 6, 2014).  Thus, the decision addresses two sales tax areas where the Department of Taxation & Finance has taken aggressive positions in recent years.

SunGard Securities Finance LLC (“SunGard”), headquartered in Salem, New Hampshire, provides consulting and related data processing services to securities broker-dealers, banks and other financial institutions. The principal services were:

  • “Smart Loan” service.  This service involves the processing and maintaining of accounting ledgers on a daily basis for customers’ securities lending and borrowing transactions, using the customers’ own data. Each day, SunGard processes customer data using its own hardware and proprietary software, the results of which are then furnished to customers with a limited amount of software that SunGard provides without charge solely to facilitate a secure Internet connection.  Sungard charges customers a monthly fee for this service based on the number of simultaneous “users,” plus an additional monthly fee for each “optional module.”
  • “Lending Pit” and ancillary services.  SunGard also furnishes what it calls its “Lending Pit” service, which involves the compiling, analyzing and processing of customer trade data on a daily basis.  Customers view the data and analysis over a secure Internet connection using SunGard’s proprietary web-based application.  Data reports are delivered to customers over the Internet, based substantially on the customer’s own data, and are made available only to the customer that furnishes the data. Part of the service incorporates market data from public sources to allow SunGard’s customers to compare their own data to market data.  SunGard’s “Board Reporting” service, a component of its Lending Pit service, involves the periodic furnishing of reports to the customer’s management which evaluate the customer’s own lending program, including a comparison with market performance benchmarks. “Performance Analytics,” another component of the Lending Pit service, involves the furnishing of written documents showing customer earnings results compared with the results of other securities lenders in the industry.

SunGard filed New York State sales tax returns, but did not collect or remit sales tax on its receipts from these services that it provided to its New York customers.  The Department also claimed that SunGard’s Smart Loan service involved the taxable licensing of pre-written computer software.  The Department also claimed that SunGard’s Lending Pit and other services were subject to sales tax as information services.

Sales tax is imposed on the sale of tangible personal property in the State, including the licensing of pre-written computer software.  Tax Law §1101(b)(6).  Sales tax is also imposed on the furnishing of information services, but not on information that is personal or individual in nature and which may not be substantially incorporated in reports furnished to other customers.  Tax Law § 1105(c)(1).

ALJ decision. The ALJ concluded that SunGard’s SmartLoan services did not involve the sale or licensing of Sungard’s proprietary software. The ALJ found that the service contracts with customers made clear that SunGard was furnishing a “processing service,” and was not selling or licensing software (or, for that matter, providing customers with any access to that software). The fact that the SmartLoan service was available to customers only during prescribed business hours was also found to be inconsistent with the notion that SunGard was selling or licensing pre-written software to customers. According to the ALJ, SunGard, not its customers, was using its proprietary software. The ALJ also considered whether the SmartLoan service was a taxable information service, and concluded that even if it was, the service was based solely on the customer’s own data, and therefore would be excludable from sales tax as being personal and individual to each customer.

The taxability of the Lending Pit and related services as an information service was another matter.  The ALJ initially noted that he was applying the rule of statutory construction under which a tax imposition statute (such as Tax Law § 1105(c)) is to be construed against the taxing authority, and in favor of the taxpayer. However, even applying this rule of construction, the ALJ found that SunGard did not meet its burden of proof to show that the service was not a taxable information service.  Applying the “primary function” test — under which the taxability of a service is determined by looking to its “primary function” — the ALJ concluded that the primary purpose for the Lending Pit service was to compile and analyze information, which clearly made it an information service.

Although an information service that is personal or individual in nature, and that may be substantially incorporated into reports furnished to others, is not subject to sales tax, the ALJ found that the service did not qualify for this exclusion from tax.  He noted that the Lending Pit service involved furnishing and analyzing data from all subscribers to the service, not just the customer’s own data.  Since the information compiled and analyzed came from SunGard’s common data base, and was capable of being substantially incorporated into reports furnished to others, Sungard’s Lending Pit and ancillary services were held to be taxable information services.

Additional Insights

Although on audit the Department has frequently adopted an expansive interpretation of what constitutes the taxable furnishing of pre-written software, this is one of the few ALJ decisions in this area.  The ALJ’s conclusion that the taxpayer, not the customer, was using its own proprietary software to furnish its Smart Loan service demonstrates the limits of the Department’s frequent claims that there has been a “constructive” furnishing of taxable software to customers.

There has been recent case law regarding information services, much of which has been favorable to taxpayers.  See, e.g., Matter of Nerac, Inc., DTA Nos. 822568 & 822651 (N.Y.S. Div. of Tax App., July 15, 2010)   In SunGard, the ALJ found that the taxpayer did not prove that it was providing a nontaxable consulting service. Once the ALJ reached that conclusion, it followed that, under the sales tax law and regulations, Sungard’s Lending Pit and related services were information services. Since an essential component of that information service involved providing customers with information that was available to all customers, it was not personal or individual to any one customer, and therefore it was found subject to sales tax.