Reversing a decision of the Appellate Division, a sharply divided New York Court of Appeals has upheld the assessment of sales tax on information services by interpreting the statutory exclusion for information services that are "personal or individual in nature" as inapplicable when the information is obtained from publicly available sources. Probably even more far-reaching is the Court's holding on how tax statutes should be interpreted, with the Court (by a narrow 4-3 majority) concluding that ambiguities in a statutory exclusion like the "personal or individual" exclusion for taxable information services must be interpreted like tax exemption statutes, in favor of the government, rather than the taxpayer. Wegmans Food Mkts., Inc. v. Tax Appeals Trib., No. 56, 2019 NY Slip Op. 05184 (N.Y., June 27, 2019). The decision may be among the most significant tax decisions to be issued by the Court of Appeals in recent years.
Facts. Wegmans Food Markets, Inc. ("Wegmans"), a regional supermarket chain, contracted with RetailData, LLC to monitor its competitors' retail prices through "competitive price audits" of competitor supermarkets. RetailData collected pricing information on specified retail products by scanning prices directly from competitors' store shelves. It compiled the pricing information into confidential reports uniquely tailored for Wegmans, which Wegmans used for its own pricing strategies.
Following an audit, the Department determined that Wegmans had purchased a taxable information service, rejecting Wegmans' claim that the information was "personal or individual" in nature and therefore excludable from sales tax.
Sales tax is imposed on the furnishing of information services, but charges for information services are excludable if (i) personal or individual in nature to each client and (ii) the information cannot be substantially incorporated into reports furnished to other clients. Tax Law 1105(c)(1). It was undisputed that Wegmans was purchasing an information service, with the sole question being whether the information was personal or individual to Wegmans.
The Tax Appeals Tribunal had held that the information services did not qualify for the exclusion because the information was obtained from competitors' supermarket shelves, which was widely accessible and not confidential. The Appellate Division reversed that decision, holding that the pricing information furnished to Wegmans did not derive from a widely accessible common source or database as that test had previously been applied by the New York courts. Since the personal or individual provision was a statutory exclusion, the Appellate Division held that it should be interpreted in favor of the taxpayer. The Court of Appeals granted the Tax Department's motion for leave to appeal.
[T]he court opined that . . . statutory exclusions should be interpreted "in favor of the taxing power," concluding that in interpreting tax statutes, there is no difference "between exemptions, exclusions and deductions."
Decision. In a far-reaching decision issued only three weeks after the oral argument, a majority of the court upheld as rational the Tribunal's decision that the pricing information furnished to Wegmans was not personal or individual in nature because it was collected from publicly available, widely accessible and non-confidential sources i.e., competitor supermarket shelves. According to the majority, the fact that the information was customized for Wegmans' needs did not change the outcome.
Furthermore, although it is not clear that the majority found the sales tax law to be ambiguous so as to raise questions of statutory interpretation, the court nonetheless opined that, under its decision in Mobil Oil Corp. v. Finance Administrator of New York, 58 N.Y. 2d 95 (1983), statutory exclusions should be interpreted "in favor of the taxing power," concluding that in interpreting tax statutes, there is no difference "between exemptions, exclusions and deductions." In so holding, the court rejected the argument that its long-standing decision in W.R. Grace v. New York State Tax Commission, 37 N.Y.2d 193 (1975), had clearly distinguished between tax exclusions and tax exemptions.
Concurring opinion. In a lengthy opinion concurring with the court's conclusion that the information being furnished was not "personal or individual in nature," the judge strongly criticized the majority for failing to acknowledge its own "landmark decision" in Grace and the considerable judicial precedent over several decades recognizing a distinction in interpreting tax exemptions and tax exclusions.
Dissent. Another judge, in a lengthy (and equally blunt) dissent, not only disagreed with the majority's "abolishing [of] the exclusions/exemptions distinction" under New York law ("I doubt our legislature intended to establish a rule, whether for exclusions or exemptions that taxpayers should lose whenever the language of a tax statute is unclear"), but also criticized the majority for failing to address what the "personal or individual" exclusion actually means. The dissent traced the legislative history for the exclusion and concluded that the "personal or individual" language was meant to modify the information service being provided, to make sure that the information, as here, was customized to the client's needs so as not to be in the nature of a commodity capable of being sold to others. According to the dissent, the majority (and the Tribunal) had erroneously looked to whether the information itself was personal or individual.
The Court of Appeals opinion, and its concurrence and dissent, offers an interesting (and, at times, quite entertaining) discourse among judges with strongly opposing views on the issues before the court. The majority's decision that information obtained from a publicly available and non-confidential source can never qualify for the personal or individual exclusion which is consistent with the Department's current policy can only be justified if the "personal or individual" phrase modifies the noun "information," and not the information service itself. The dissent provided ample authority for why it modifies the latter. The court's decision could significantly limit the availability of the exclusion, although if the primary function is the furnishing of a nontaxable service rather than information, it should not result in sales tax in the first place.
Yet it is the court's narrow 4-3 decision regarding the rules of statutory construction that will likely have the most far-reaching impact. The concurring opinion succinctly characterized the majority's holding on statutory construction as follows: "[T]he majority today declares a new rule: in New York, the taxpayer always loses." It must be acknowledged that there has been considerable confusion over the years regarding the distinction between the statutory interpretation of tax exemption and tax exclusion provisions, with courts having frequently used the terms interchangeably, something that the majority in Wegmans refused to even acknowledge. It is difficult to see why a statutory exclusion for example, the sale for resale exclusion under the sales tax should be interpreted more narrowly than a tax imposition statute. Both reflect the legislature's view of types of activities and transactions that are properly taxable. One interesting question posed by the concurring opinion is that if the statutory exclusion is as clear as the majority found, then it was unnecessary to apply rules of statutory interpretation in the first place, thus possibly rendering the majority's holding on such interpretation to be in the nature of nonbinding dicta.