Are litigation support / e-discovery services -- and the discs, drives, and files used to deliver them -- subject to NY sales tax?

Plain-English summary

The petitioner provides litigation support / e-discovery services. Using proprietary software the customer never accesses, its technicians take the customer's own documents (often on hard drives), index, sort, de-duplicate, and add unique searchable identifiers so the customer can search by concept, keyword, Boolean, etc. The organized data goes back to the customer -- and only the customer -- on the customer's choice of "deliverable" (DVD, CD, hard drive, text file, or hosted access). It asked whether the services and the deliverables are taxable.

The Office of Counsel concluded the services are not taxable, on any media.

• It's an information service -- but a personal/individual one. Because the provider adds intelligence to the documents (categorizing, making them searchable, adding identifiers) rather than just reformatting, the work is an information service (ADP Automotive Claims). However, it fits the "personal or individual" exclusion in Tax Law 1105(c)(1): the provider works only on the customer's own documents and gives the documents and its analysis to no one but that customer. The fact that the customer might later produce documents to a third party in discovery doesn't change this -- neither the provider nor the customer is furnishing the added intelligence to others.
• The optional add-ons aren't taxable. Foreign-language translation, project management, e-discovery consulting, and training are not taxable services (TSB-A-09(46)S; TSB-A-09(33)S; KPMG, TSB-A-00(7)S). Clustering and file filtering can be information services (they add intelligence), but because they too work only on the customer's own documents and aren't shared, they're excluded as personal/individual.
• The deliverables (discs, drives, files, hosting) aren't separately taxable. Some deliverables (DVDs, CDs, hard drives) are tangible personal property -- but because a nontaxable information service isn't taxable regardless of how it's delivered, tangible property that is an integral part of delivering that service isn't separately taxable. This is true even though the provider charges a separate fee per deliverable -- the opinion specifically clarifies that a separate charge doesn't conclusively make the property taxable, correcting any contrary implication in Tower Innovative Learning Solutions (TSB-A-06(5)S).
• But the provider owes tax on its own media. The provider's purchases of the tangible media (discs, drives) it uses to deliver the service are subject to sales/use tax.

What this means for you

E-discovery, data-processing, and document-management vendors

Working on a single client's own data and never sharing the data or your analysis with anyone else keeps you inside the personal/individual exclusion -- so the core service is nontaxable, even though "adding searchability/intelligence" technically makes it an information service. A client's later discovery production to opponents doesn't break the exclusion. And the media you hand over -- discs, drives, hosted access -- ride along nontaxable as an integral part of the service, even with a separate line-item charge. But remember the flip side: you are the end consumer of those blank discs/drives, so pay tax on your own media purchases.

Common questions

Q: We make our client's documents searchable and de-duplicated. Is that a taxable information service?
A: It's an information service, but it's excluded as personal/individual if you work only on that client's own documents and don't share them or your analysis with anyone else.

Q: We charge separately for the DVD/hard drive we deliver. Does that make it taxable?
A: No. The media is an integral part of a nontaxable service, so it isn't separately taxable even with a separate charge (clarifying Tower Innovative).

Q: Do we owe any tax at all?
A: Yes -- on your own purchases of the blank discs, drives, and other media you use to deliver the service.

Citations and references

• Tax Law section 1105(c)(1) (information services)
• Tax Law section 1105(a) (sales of tangible personal property)
• Tax Law section 1101(b)(6) (tangible personal property)
• ADP Automotive Claims Services, Inc. v. Tax Appeals Tribunal, 188 AD2d 245 (3d Dept 1993)
• TSB-A-09(46)S; TSB-A-09(33)S; TSB-A-00(7)S (KPMG)
• TSB-A-06(5)S (Tower Innovative Learning Solutions) (clarified)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a10_20s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-10(20)S
Sales Tax
May 6, 2010

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S090825A

Petitioner, name and address redacted, requests an Advisory Opinion about whether its litigation
support services are subject to New York State and local sales and use taxes. We conclude that they are not
subject to sales tax, regardless of the media on which the reports are delivered.
Facts
Petitioner provides a variety of litigation support services to its customers. It provides some of these
services using its online proprietary software. Petitioner does not transfer the software to the customer or
allow the customer to access the software by remote means, nor does the customer have the ability to enter
data, manipulate data or run reports using the software. Typically, a customer preparing for litigation will
seek Petitioner’s services in processing voluminous documentation. Petitioner’s technicians will gather
copies of the customer’s data, which are often stored on hard drives. The technicians consult with the
customer about how the customer wants the data organized. Petitioner’s technicians then use the proprietary
software to index and sort the data to make it searchable by the customer, according to the customer’s
specifications. This software creates unique record identifiers that allow documents to be pinpointed using
various search methods (e.g., concept, keyword, Boolean, etc.). The software has an online review tool that
allows a customer to log in to review and batch its data. But, a customer can retrieve and print only the
information as it was originally submitted. If a client wants an image modified to produce a TIFF (i.e.,
digital image file) or for embedding, the work must be done by Petitioner. The customer’s indexed and
organized data is returned to customer. The customer’s data is not provided to any other party, or used by
Petitioner for any other purpose.
The data may be delivered to the customer on various “deliverables,” including DVDs, CDs, hard
drives, and ASCII Files (i.e., text files), or the data may be “hosted” on Petitioner’s servers and accessed by
the customer via Petitioner’s website. The customer has the ability to choose the deliverable on which the
data will be delivered. There is an additional, separately stated charge for each deliverable, with the
exception of ASCII Files, the first two of which are provided without additional charge. This charge varies
by the type of deliverable and ranges between $20 for a CD to $250 for a hard drive. Petitioner indicates that
the charge for deliverables is nominal in relation to the overall charge for the service.
Petitioner also offers the following optional services:
1. Foreign language translation.
2. Clustering (or data categorization) – Clustering is the classification of data sets into subsets, so that
the data in each subset shares one common trait. This feature allows “like” documents to be viewed
in one “folder” for a more conceptual approach.
3. File filtering – File Filtering includes the processing of customer data, so that documents can be
filtered by metadata properties (e.g., file type, date, e-mail domain, sender/recipient, doctype, etc.) or
by keyword searching.
4. Project management – Project managers work with customers to develop an efficient workflow
(including built-in quality control points), define project scope and specifications, and the impact of

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Sales Tax
May 6, 2010

any changes. Project managers provide customers with status and tracking reports throughout the
duration of the project.
5. E-discovery consulting – Consultants provide comprehensive advice throughout the course of the
litigation.
6. Training – Project managers coordinate training, assessing client needs, user access, number of sites
and reporting requirements. Initial training includes logging in, viewing/database layout, navigation,
searching, issue coding, redacting, and printing.
Analysis
Petitioner’s litigation support services are information services, but they are personal and individual
in nature, and therefore not subject to New York State and local sales taxes.
As relevant here, Tax Law section 1105(c)(1) imposes tax on the receipts from the sale, except for
resale of the service of:
[F]urnishing information by printed, mimeographed or multigraphed 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 nature and which is or
may not be substantially incorporated into reports furnished to other persons, and excluding the
services of . . . persons acting in a representative capacity . . . .
We conclude that Petitioner’s litigation support service is an information service because it includes
analyzing, compiling, and organizing customer information. Petitioner’s service does more than merely
recast or reformat the customer’s information. For example, Petitioner adds to the information by
categorizing like documents, enabling documents to be searched by type, date, etc., and by adding unique
document identifiers, etc. This analysis adds to “intelligence” contained in the original documents, and
therefore constitutes an information service. See ADP Automotive Claims Services, Inc. v. Tax Appeals
Tribunal, 188 AD2d 245 (3d Dep’t 1993). However, we further conclude that Petitioner’s service is
excluded from the tax on information services because it is personal and individual in nature. Petitioner
organizes and analyzes the customer’s own documents and does not provide the original documents, or the
analysis, compilation, or organization, to any party other than the customer. The fact that the customer, in
the context of a litigation discovery process, may provide the original documents to a third party does not
change this result, because neither Petitioner nor the customer is providing the information furnished by
Petitioner (i.e., added intelligence) to others or incorporating the same into reports furnished to others.
Petitioner’s optional services of foreign language translation, project management, e-discovery
consulting, and training, as described above, are not services that are subject to sales tax. See
TSB-A-09(46)S; TSB-A-09(33)S; KPMG, LLP, TSB-A-00(7)S. The services of clustering and file filtering
may constitute information services to the extent that they add to the intelligence contained in a customer’s
original documents. However, because these services, like the litigation support services discussed above,
are performed on the customer’s own documents, and no information or analysis, compilation, or
organization is provided to third parties, these services are excluded from tax as personal and individual in
nature.
Petitioner also asks whether its “deliverables” (i.e., DVDs, CDs, hard drives, text files and electronic
storage) are subject to sales tax. Tax Law section 1105(a) imposes sales tax on “the receipts from every
retail sale of tangible personal property.” Tangible personal property includes “[c]orporeal personal property

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Sales Tax
May 6, 2010

of any nature.” Tax Law §1101(b)(6). Some of the deliverables Petitioner describes (e.g., DVDs, CDs and
hard drives) are tangible personal property. Nevertheless, because nontaxable information services are not
subject to tax regardless of the form in which the information is provided to customers, tangible personal
property that is an integral part of the provision of such services is not separately taxable. Accordingly,
because petitioner's deliverables are an integral part of the provision of petitioner's nontaxable information
service, we conclude that the charge for the deliverables is not a receipt for tangible personal property.1
However, Petitioner’s purchases of tangible media that it uses to deliver its service to its customers are
subject to State and local sales and use tax.

DATE: May 6, 2010

NOTE:

1

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.

The existence of a separate charge for the tangible property by means of which a nontaxable information service is
provided does not conclusively render that property taxable, and any implication to the contrary in Tower Innovative
Learning Solutions, Inc., TSB-A-06(5)S was unintentional.