Are an HR-outsourcing company's fees for administering health/welfare benefits, retirement plans, COBRA/flex spending, and pre-employment background checks subject to New York sales tax?

Plain-English summary

ADP's Employer Services Division offers employers four outsourced HR administration products: Health and Welfare Administration (tracking benefit eligibility, processing enrollment changes, distributing confirmations, running a call center); Retirement Services Administration (daily plan valuation, investment tools, loan/disbursement processing, compliance reporting); COBRA/Flex Spending Account Administration (enrollment, billing, notices, claims tracking); and Pre-Employment Screening and Selection (criminal record checks, credit histories, employment/reference verification, and similar background checks). Each service has separately stated monthly per-employee fees plus (for the first two) one-time start-up/implementation charges, all billed unbundled on ADP's invoices. ADP owns and controls the proprietary software used to deliver these services; clients get limited access but don't buy the software itself.

The Department found three of the four service lines are basically nontaxable data-processing and record-keeping administration — collecting, tracking, and reporting each specific client's own benefits data isn't an enumerated taxable service, and even where a piece of it looks like an "information service," it's exempt as personal/individual information tied to that one client relationship, not information pooled and resold to others. The fourth service, Pre-Employment Screening, is fundamentally different: the background-check data comes from public-record databases, company databases, and third-party sources that are common to every client using the service, and the same information could be (and functionally is) incorporated into reports for other requesters — so it's a taxable "information service" regardless of how the request is framed around one specific job applicant. Because the four services are billed separately and unbundled on ADP's invoices, only the Pre-Employment Screening charges are taxed; the benefits/retirement/COBRA charges stay tax-free without needing any special "separately stated" workaround, since they were never taxable to begin with.

What this means for you

HR outsourcing, payroll, and benefits administration providers

Ordinary benefits/retirement/leave administration — tracking a specific client's own employee eligibility, processing that client's enrollment changes, and reporting back to that same client — is generally nontaxable data-processing/record-keeping, even when delivered through sophisticated proprietary software and call-center support. The key distinguishing feature from a taxable "information service" is that the data stays tied to one client's own workforce rather than being pooled into a database sold to multiple parties.

Employment background-check and pre-screening services

Because criminal records, credit histories, and similar background information come from databases common to all clients (public records, third-party sources), and the same underlying information could be incorporated into reports for other requesters, this kind of service is a taxable information service in New York — even though each report is nominally about one specific job applicant for one specific employer.

Businesses billing multiple service lines to the same client

Keeping taxable and nontaxable service lines genuinely separate and unbundled on your invoice — as ADP did here — means you don't need to rely on the "separately stated and reasonable" bundling workaround; each line is simply taxed (or not) according to its own nature.

Common questions

Q: Is data-processing and record-keeping for employee benefits automatically exempt from New York sales tax?
A: Generally yes — administrative record-keeping and data processing tied to a specific client's own workforce isn't among New York's enumerated taxable services, and any information-service component is typically exempt as personal/individual information about that one client relationship.

Q: Why is pre-employment screening taxed differently from benefits administration?
A: Because the background-check information is drawn from databases and sources common to all of the provider's clients (public records, credit bureaus, third-party verification services) rather than being unique data tied to a single employer-employee relationship — that makes it a taxable "information service" rather than exempt personal/individual data.

Q: Does using proprietary software to deliver these services change the tax analysis?
A: Not by itself — since the provider retains ownership, development responsibility, and control of the software (clients get only limited access, not ownership), the software itself isn't being sold to clients; the tax analysis instead turns on the nature of the underlying service.

Citations and references

Statutes and rules:

• Tax Law § 1105(a), (c)(1) (retail sales tax; information services, personal-information exclusion)
• Tax Law § 1101(b)(3) (receipt definition; bundling)
• 20 NYCRR 527.3(a), (b) (information services imposition and exclusions)
• 20 NYCRR 526.7(a)(4) (employee-performed services not separately taxable)

Case law and prior advisory opinions relied on:

• Deloitte & Touche LLP, TSB-A-98(26)S (administrative/data-processing services not enumerated taxable)
• Rich Products Corporation v. Chu, 132 AD2d 175; Towne-Oller & Assoc. v. State Tax Comm, 120 AD2d 873; Alan/Anthony, Inc., TSB-A-92(51)S (common-database information taxable despite customization)
• Penfold v. State Tax Commission, 114 AD2d 696; Hodgson, Russ, Andrews, Woods and Goodyear, TSB-A-92(31)S; PricewaterhouseCoopers LLP, TSB-A-03(11)S (bundling rule)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a04_25s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(25)S
Sales Tax
November 12, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S021001A

On October 1, 2002, the Department of Taxation and Finance received a Petition for
Advisory Opinion from ADP, Inc. - Employer Services Division, One ADP Boulevard,
Roseland, New Jersey, 07068. Petitioner, ADP, Inc. - Employer Services Division, submitted
additional information on November 29, 2002, January 13, 2003, and February 13, 2003.
The issue raised by Petitioner is whether its start-up and on-going charges relating to
various employee benefit and human resource services provided to Petitioner’s clients are subject
to sales tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner provides technical solutions to employers that facilitate the administration of
various aspects of human resource management. The data processing and administrative
services provided by Petitioner under consideration here are known as (1) Health and Welfare
Administration, (2) Retirement Services Administration, (3) COBRA/Flex Spending
Administration (FSA) and (4) Pre-Employment Screening and Selection Service Administration.
This Petition is limited to these services.
The following provides some details for the four processing and administrative services
addressed in this Advisory Opinion.
Health and Welfare Administration
The basic On-Going services provided by Petitioner as part of its Health and Welfare
Administration service include:
$

maintaining benefit plan rules, based on data gathered from the client, such as hours
worked, service time, age, employment status-class-type, resident state-zip code,
company and pay group;

$

collecting and maintaining up-to-date employee data to determine benefit eligibility;

$

processing benefit related charges resulting from human resources activity (i.e., hiring,
firing, promotions, etc.);

$

collecting employee family status change information and processing changes;

2
TSB-A-04(25)S
Sales Tax
November 12, 2004

$

distributing confirmation materials to participants;

$

providing standard management reports that identify participants, plans and coverage
amounts;

$

maintaining call center support;

$

providing system/database maintenance; includes eligibility rules, statement templates,
plan modifications, rate tables, zip codes, training materials, and system testing.

Health and Welfare Administration data is collected, analyzed and compiled to the
specifications of each client company, and assembled into reports accessible by or furnished to
the client company. This service involves the processing of data provided by the client, or the
client’s employees. The information processed is not derived from a common database.
Retirement Service Administration
The basic On-Going services provided by Petitioner as part of its Retirement
Administration service include:
$

daily valuation record-keeping via common database rate data;

$

investment selection tools with investment performance monitoring;

$

employee communications via online, email and mail function;

$

an interactive website with a voice response system;

$

call center for special needs;

$

loan withdrawal processing either electronically or via paper forms;

$

daily investment transfer, investment allocation, and contribution rates;

$

rollover contribution processing;

$

disbursement processing;

$

electronic transmission/receipt of payroll data;

$

periodic management reports;

3
TSB-A-04(25)S
Sales Tax
November 12, 2004

$

compliance testing and government reporting;

$

monthly plan activity reporting.

Retirement Service Administration data is collected, analyzed and compiled to the
specifications of each client company, and assembled into reports accessible by or furnished to
the client company. This service involves the processing of data provided by the client, or the
client’s employees. This service does rely to some extent on externally provided data, such as
data on prices of securities in which the plan assets are invested.
COBRA and Flex Spending Account (FSA) Administration
The basic On-Going services provided by petitioner as part of its COBRA Administration
service include:
$

processing open enrollment documents;

$

processing initial COBRA notification letters to qualified participants;

$

setup of participants into COBRA services;

$

administering enrollments, billing and carrier interaction for clients and their participants;

$

issuing documents to participants confirming eligibility and account activities, including
changes in status or plans and termination notifications;

$

furnishing reports pertaining to current status, activity, termination, new elections, and
premium distribution;

$

collecting payments from participants and transfer to carriers;

$

management of established accounts.

Data is collected, analyzed and compiled to the specifications of each client company,
and assembled into reports accessible by or furnished to the client company. This involves the
processing of data provided by the client, or the client’s employees.
COBRA account administration represents election-based health plan processing for
client’s qualifying employees. The qualifying event information, which includes reasons for
eligibility, length of eligibility, plans offered, employee demographic data and health insurance

4
TSB-A-04(25)S
Sales Tax
November 12, 2004

information, is provided to Petitioner by the client. The client’s employees are notified when
there is a COBRA qualifying event (such as an employee termination) and the tracking of the
electing employees is maintained for coverage and premium reporting.
On-going services for Flex Spending Account Service Administration include:
$

enrollment processing of employee data, check registers, and funding requirements;

$

employee contribution administration;

$

quarterly summarizing of activity by employee;

$

forfeiture reporting of fund amounts in the plan, not used within the specified time.

Flex Spending Account Administration encompasses the administration of flexible
spending plans, dependent care plans and mass transportation reimbursement plans. Petitioner
receives employee account, contribution and enrollment eligibility records from the client and
arranges the data into manageable records. Thereafter, the client’s employees file claims against
these contributions.
Pre-Employment Screening and Selection Service Administration
The basic On-Going services provided by Petitioner as part of its Pre-Employment
Screening and Selection services include:
$

criminal record checks;

$

worker compensation histories;

$

motor vehicle records;

$

employment and personal reference checks;

$

credit histories;

$

name, address, social security number verification;

$

education and credential verification.

Pre-Employment Screening and Selection services provide employee background
information services to client companies. The client companies match employee background

5
TSB-A-04(25)S
Sales Tax
November 12, 2004

information with the employer job requirements through the verification of job applicant
background. This screening and selection information is gathered or compiled to the
specifications of each client and assembled into reports accessible by or furnished to each client.
The employee background information is obtained by Petitioner through source document
retrieval, public record database searches, company databases and a national network of third
party couriers. The information is not proprietary in nature and is equally available to other
parties.
Billing the Clients
Petitioner charges clients for On-going Services for each of the administration services
provided. Charges and services vary depending on which administration service Petitioner
provides to the client. Sample invoices indicate that Petitioner’s billings separately state many of
the options discussed above including the base monthly charge, charges per account, per
employee, and per transaction, and start-up and implementation charges.
Health and Welfare Administration - Fees for Health and Welfare Administration
services are unbundled and separately stated on the invoice. The fees for this service are
computed on a per member (client employee), per month basis for the standard menu of services
plus a minimum base fee for the bare minimum of service provided. The Health and Welfare
Administration services also include charges for start-up services. These start-up services are
provided upon commencement of each new contract for a client company and consist of
determining the size of the company, ascertaining what specific benefit plans the company wants
to offer, plan analysis, and general consulting to establish the best benefit plan for the customer.
These start-up services also include project management for programming and developing the
interface between the customer’s information system and Petitioner’s system, as well as
separately stated charges with respect to the client’s change requests. Charges for Start-up
services are based on the number of hours worked, whether worked on the client’s premises or
otherwise. The charge may also include reimbursable expenses, such as travel, lodging, meal
allowance, phone calls, etc. Charges for Start-up Services made to the client are one-time only
and are unbundled and separately stated on the invoice.
Retirement Services Administration - Fees for Retirement Administration services are
unbundled and separately stated on the invoice. The fees for this service are computed on a per
member (client employee), per month basis for the standard menu of services plus a minimum
base fee for the bare minimum of service provided. The Retirement Administration services also
include charges for start-up services (as described above for the Health and Welfare
Administration services) which are made one-time only and are unbundled and separately stated
on the invoice.

6
TSB-A-04(25)S
Sales Tax
November 12, 2004

COBRA and FSA Administration - Fees for COBRA and FSA Administration services are
unbundled and separately stated on the invoice. The fees for these services are charged on a per
participant (client employee), per month basis and are based on qualifying events and the number
of employee participants who elect to have coverage. There are no special start-up services or
fees for COBRA and FSA Administration. Separate charges are made for extra services such as
additional reports, multiple location setup, etc.
Pre-Employment Screening and Selection - Fees for Pre-Employment Screening and
Selection services are unbundled and separately stated on the invoice. A package option that can
include any combination of the available products and services is invoiced at a flat rate for the
package, based on the number of products chosen. If the package option is not chosen, each data
and service option is charged separately.
Petitioner’s services are offered via technologies that streamline and automate the
processing and managing of employee and related benefits information for employers.
Depending on the needs of the client, Petitioner’s services are provided through both manual
processing and web-access screens. Common to the services is Petitioner’s use of its proprietary
software and the technical expertise of Petitioner’s staff in implementing its products for each
client. Petitioner maintains ownership of all product related software and is responsible for the
development, maintenance, enhancements, marketing, and support of the software, all of which
is housed and maintained on Petitioner's premises. Some of Petitioner’s administrative services
are performed by its call center and account representatives.
Applicable law and regulations
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby imposed
and there shall be paid a tax . . . upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
*

*

*

(c) The receipts from every sale, except for resale, of the following services:
(1) The furnishing of information by printed . . . matter or by duplicating written
or printed matter in any other manner, including the services of collecting, compiling or
analyzing information of any kind or nature and furnishing reports thereof to other
persons, but excluding the furnishing of information which is personal or individual in

7
TSB-A-04(25)S
Sales Tax
November 12, 2004

nature and which is not or may not be substantially incorporated in reports furnished to
other persons . . . .
Section 527.3 of the Sales and Use Tax Regulations provides, in part:
(a) Imposition. (1) Section 1105(c)(1) of the Tax Law imposes a tax on the
receipts from the service of furnishing information by printed, mimeographed or
multigraphed matter or by duplicating written or printed matter in any manner such as by
tapes, discs, electronic readouts or displays.
(2) The collecting, compiling or analyzing information of any kind or nature and
the furnishing reports thereof to other persons is an information service.
(3) Among the services which are information services are credit reports, tax or
stock market advisory and analysis reports and product and marketing surveys.
*

*

*

(b) Exclusions. (1) Sales tax does not apply to receipts from sales of information
services which are for resale as such.
(2) The sales tax does not apply to the receipts from the sale of information which
is personal or individual in nature and which is not or may not be substantially
incorporated into reports furnished to other persons by the person who has collected,
compiled or analyzed such information.
Opinion
Petitioner provides technical solutions to employers that facilitate the administration of
various aspects of human resource management which assists employers in providing benefits to
their employees. The services provided by Petitioner under consideration here are known as (1)
Health and Welfare Administration, (2) Retirement Services Administration, (3) COBRA/Flex
Spending Administration (FSA) and (4) Pre-Employment Screening and Selection Service
Administration.
Some of the administrative services provided are performed by Petitioner’s call center
and Petitioner’s account representatives. In relation to the administration of benefits programs
for client companies, Petitioner performs a multitude of tasks which might be generally
categorized as record-keeping and administrative functions.

8
TSB-A-04(25)S
Sales Tax
November 12, 2004

Section 1105 of the Tax Law imposes a tax on the sales of all tangible personal property
unless such property is specifically exempt. Services are not subject to sales tax unless they are
specifically enumerated as being subject to tax under section 1105 of the Tax Law.
With the exception of its Pre-Employment Screening and Selection services, the
administrative services provided by Petitioner are similar to data processing, accounting and
other record maintenance services which are generally administrative in nature and are not
within the enumerated services specified under section 1105 of the Tax Law. See Deloitte &
Touche LLP, Adv Op Comm T&F, April 14, 1998, TSB-A-98(26)S.
To the extent Petitioner’s Health and Welfare Administration, Retirement Services
Administration and COBRA/FSA services include components that might be considered to be an
information service, they appear to be exempt from tax under section 1105(c)(1) of the Tax Law
as information services which are personal or individual in nature. Accordingly, Petitioner’s
start-up and ongoing charges for these services are not subject to sales tax, provided that
Petitioner is not engaged in the sale of tangible personal property or taxable services in
conjunction with these services.
However, Petitioner’s Pre-Employment Screening and Selection Service Administration
allows Petitioner’s clients to obtain detailed information about potential employees. The
information is obtained by Petitioner through source document retrieval, public record database
searches, company databases and a national network of third party couriers. The information is
not proprietary in nature and is equally available to other parties. Thus, the information provided
by Petitioner comes from databases which are common to all clients utilizing this service.
Although a client submits a request relating to an identified, potential employee, the information
furnished is not personal or individual in nature and may be substantially incorporated in reports
furnished to other persons. Charges for information services are subject to tax pursuant to
section 1105(c)(1) of the Tax Law. See Rich Products Corporation v. Chu, 132 AD2d 175, lv
denied 72 NY2d 802; Towne-Oller & Assoc. v. State Tax Comm, 120 AD2d 873; Alan/Anthony,
Inc. Adv Op Comm T&F, June 19, 1992, TSB-A-92(51)S. Therefore, Petitioner’s charges for
Pre-Employment Screening and Selection Service Administration are subject to sales tax
pursuant to section 1105(c)(1) of the Tax Law.
Where sales of taxable and non-taxable items are bundled in a single transaction, the
entire charge is subject to sales tax unless the non-taxable items may be purchased separately and
the charges for such items are separately stated on Petitioner’s bill or invoice and are reasonable
in relation to the total charges. See section 1101(b)(3) of the Tax Law and Penfold v. State Tax
Commission, 114 AD 2d 696; Hodgson, Russ, Andrews, Woods and Goodyear, Adv Op Comm
T&F, April 2, 1992, TSB-A-92(31)S; PricewaterhouseCoopers LLP, Adv Op Comm T&F,
March 25, 2003, TSB-A-03(11)S. Provided that Petitioner’s pre-employment screening service
is sold separately and the charges for such service are reasonable and separately stated from

9
TSB-A-04(25)S
Sales Tax
November 12, 2004

other charges for nontaxable record-keeping and administrative services, only the charges for
pre-employment screening service would be subject to sales tax.
To perform its processing and management services, Petitioner utilizes proprietary
software applications. Petitioner maintains ownership and dominion and control of all product
related software, and is responsible for the development, maintenance of, and enhancements to,
the software. While Petitioner provides limited access to some of this software to its customers,
it is Petitioner that is the user of the software in the performance of these services. Such
software and equipment, therefore, are not sold to Petitioner’s clients.

DATED: November 12, 2004

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.