Is a merchant return-authorization (fraud-scoring) service taxable in NY, and what about a linked discount-coupon service?

Plain-English summary

The petitioner sells retail merchants two services: a merchandise-return Authorization Service (swipe a returning customer's ID, and the provider's models recommend accept/reject to fight return fraud) and an add-on Discount Coupon Service (prints a promo coupon on the return receipt). It asked whether each is taxable.

Authorization Service -- taxable information service:

• It compiles return-behavior information and furnishes a recommendation, which is a taxable information service under Tax Law 1105(c)(1).
• It does not qualify for the personal/individual exclusion. Information from common sources/data repositories isn't personal or individual (ADP Automotive; Rich Products; Towne-Oller), and the service's shared-data feature lets one merchant's decision draw on other merchants' transactions -- so the information may be incorporated in reports furnished to others. Customizing the output doesn't change that.
• It's also a risk-management analysis service: it uses statistical models and historical data to predict the risk of a fraudulent return, exactly the kind of report TSB-M-10(7)S (and DZ Bank) makes a taxable information service for sales on or after September 1, 2010.

Discount Coupon Service -- not taxable:

• It isn't a sale of tangible property, and it isn't a taxable printing service (1105(c)(2)): the provider doesn't contract to print a set number of coupons and is paid based on coupons redeemed, not printed.
• What the provider really does is design and run a marketing/advertising program -- a service not enumerated as taxable under 1105(c).

Software and equipment: The merchants don't obtain constructive possession or the right to use/control the software (20 NYCRR 526.7(e)(4)), so the provider isn't selling software -- it's the user/consumer and owes sales or use tax on its own software and on the pilot-period terminals it provides free and takes back.

Sourcing: Sales tax is a destination tax (20 NYCRR 525.2(a)(3)). Because the Authorization Service is priced per merchant location, the provider allocates receipts between the merchant's NY and out-of-state locations that use the service (KPMG, TSB-A-03(5)S).

What this means for you

Data-scoring, screening, and analytics providers

If your product compiles data and hands back a scored recommendation, it's likely a taxable information service -- and the personal/individual exclusion is lost the moment you draw on a shared or common database (even if you customize each report). Anything whose primary function is risk analysis/forecasting has been taxable since 9/1/2010. Allocate the tax to where your customers actually use the service.

Marketing and coupon services

A genuine marketing/advertising service -- designing and running a coupon program paid on redemptions -- isn't an enumerated taxable service, even though a coupon gets printed in the process. The key facts: no set quantity printed, and pay tied to redemption, not printing.

Common questions

Q: My fraud/return-screening service is customized per client -- is it still taxable?
A: Yes. Customizing the output doesn't create the personal/individual exclusion when the service draws on a common or shared database. It's a taxable information service (and a risk-management analysis service since 9/1/2010).

Q: Why isn't the coupon service a taxable printing service?
A: Because the provider doesn't sell a set number of printed coupons or get paid for printing -- it's paid on coupons redeemed. It's a nontaxable marketing/advertising service.

Q: The software runs on the merchant's POS -- did the merchant buy software?
A: No. The merchants don't get constructive possession or the right to use/control the software, so the provider is the consumer and owes tax on its own software and equipment.

Citations and references

• Tax Law section 1105(c)(1) (tax on information services; personal/individual exclusion)
• Tax Law section 1105(c)(2) (tax on printing/imprinting tangible personal property)
• Tax Law section 1101(b)(6) (prewritten computer software is tangible personal property)
• Tax Law section 1101(b)(14) (definition of prewritten computer software)
• 20 NYCRR section 526.7(e)(4) (constructive possession / right to use software)
• 20 NYCRR section 525.2(a)(3) (destination tax)
• TSB-M-10(7)S (risk management analysis reports taxable from 9/1/2010)
• TSB-A-03(5)S (allocation by customer-location use)

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_50s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-10(50)S
SalesTax
October 14, 2010

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S100406B

Petitioner name redacted. asks whether its merchandise return authorization service and discount
coupon service are subject to New York State and local sales and use taxes.
We conclude that Petitioner’s merchandise return authorization service is an information service
that is subject to the sales taxes imposed by section 1105(c)(1) of the Tax Law. Petitioner’s discount
coupon service is neither the sale of tangible personal property nor the sale of a service subject to sales
tax imposed by section 1105 of the Tax Law.
Facts
Petitioner is an out-of-state corporation that has no permanent employees or offices in New York
State. However, Petitioner’s employees enter the State to visit potential and existing customers.
Petitioner’s customers are primarily retail merchants. Approximately ninety-five percent (95%)
of Petitioner's revenue is derived from the provision of merchandise return authorization service
("Authorization Service") to merchants. Petitioner's remaining revenue is derived from an add-on service
that generates merchant coupons ("Discount Coupon Service") for customers making returns to a
merchant. A merchant purchases Petitioner's Authorization Service to assist it in determining whether the
merchant will accept merchandise returns from one of the merchant's customers.
Refused returns generally fall into two categories: (1) returns that break the retailer’s return
policy (such as a return without a receipt or a return after the allowed return period) and (2) returns under
circumstances that indicate fraud or abuse. Examples of return fraud and abuse problems are described
on Petitioner’s Webpage to include:
•
•
•
•
•
•

Wardrobing or renting - Buying merchandise for short-term use with intent to return, such as
video cameras for weddings, big-screen TVs for a Super Bowl game, or a dress for a special
occasion;
Employee fraud - Returning goods stolen by employees or with their help for full retail price;
Receipt fraud - Using falsified, stolen, or reused receipts to return merchandise;
Returning stolen merchandise - Shoplifting with intent to return for full retail price;
Price switching - Putting lower priced tags on merchandise with intent to return for full retail
price;
Price arbitrage - Buying differently priced, similar-looking items and returning the cheaper one as
the expensive item.

Petitioner’s Webpage explains that its Authorization Service is designed to identify those
consumers whose behaviors mimic return fraud or abuse. Without this system, retailers are forced to
create stricter policies such as “no receipt, no return,” or raise prices for consumers to offset the losses

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incurred from fraudulent returns. The Authorization Service assists merchants to expedite the handling of
returns and reduces the probability of merchandise return fraud. A merchant uses Petitioner's
Authorization Service when a customer attempts to make a merchandise return to that merchant. To use
the service, the merchant must swipe its customer's driver’s license or state ID card through a device on
merchant's point-of-sale (“POS”) system and transmit the information electronically to Petitioner's data
center in California. Petitioner's servers process the information and electronically transmit an
Authorization Decision back to the merchant about whether to accept or reject the merchandise return.
The types of information provided by a merchant to Petitioner include the information on the face
of an ID card, such as the identification number, the customer's name, address, date of birth, and
expiration date. Certain additional information is necessarily supplied, such as the time of day or night of
the transaction, the address of the merchant's store where the transaction is occurring, and the type of
merchant. The data is transmitted to Petitioner's host server which issues an Authorization Decision to
approve the return or exchange, similar to a credit card or check verification.
Upon receipt of the information provided by the merchant, Petitioner performs a two-step
analysis at its data center in California. First, the return data described above is run through Petitioner's
proprietary, self-created and updated "activity database," which was created by Petitioner and contains all
return data that Petitioner has amassed for that specific merchant. Any historical data that appears linked
to the customer's return data (such as the driver's license number) is identified for any positive or negative
indications.
The data gleaned from the foregoing process is then run through Petitioner's "risk scoring
system." The risk scoring system consists of a highly proprietary and sophisticated computer model
created by Petitioner. Petitioner considers its models and algorithms to be trade secrets and does not
share them with anyone. These models perform a risk analysis applying intricate, complex, confidential
and proprietary statistical models, algorithmic processes and other risk assessment tools to the return data
and any historical return data to predict the risk to a merchant of a customer's fraudulent or abusive
merchandise return. After analyzing the information, Petitioner formulates a recommendation about
whether a return should be accepted or declined and provides its recommendation in the form of an
Authorization Decision to the merchant.
In general, the Authorization Decision provided by Petitioner to a merchant pertains only to the
single return transaction of one customer. Even though the same process is applied to different merchants
concerning return transactions by the same person (e.g., a customer goes to one merchant to make a return
and then goes to a different merchant to make another return), this does not guarantee the same
recommendation will be made because risk parameters specific to the customer and each individual
merchant will vary. In other words, Petitioner designs and integrates the Authorization Service based on
each merchant's individual return processes and desired risk levels. Petitioner charges its customers a
separate fee for professional consulting services associated with the initial set-up and integration support
services. The fee for the Authorization Service is billed separately on a per-store basis.
However, Petitioner’s Authorization Service also includes a “shared data” feature. If electing to
participate in the shared data feature, merchants are able to obtain a recommendation about a return
transaction based on data from multiple merchants’ return activity experience. Using the Authorization
Service’s shared data feature, a merchant could leverage the additional data collected from other
merchants’ experiences to approve or deny customer transactions. A smaller merchant might obtain an
advantage by using a large nationwide merchant’s return experiences.

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Petitioner uses third-party statistical model software in the development of its proprietary
program. Petitioner’s Authorization Service contract with its merchants provides that the software
installed on merchants’ POS equipment or otherwise at merchant locations is to facilitate the merchant’s
access to and use of Petitioner’s services. Likewise, Petitioner’s contract with respect to its provision of
Discount Coupon Service permits the merchants to access Petitioner’s remote software to facilitate use of
the Discount Coupon Service.
The result of each Authorization Service transaction performed by Petitioner for any merchant is
added to Petitioner's in-house activity database. The database is continually updated with new
information, which may impact any future merchandise return authorization analyses. The Authorization
Decision is not binding on a merchant.
In addition to its return Authorization Service, Petitioner offers a Discount Coupon Service that
generates merchant coupons to customers making returns to the merchant. The merchant coupon program
is a proprietary, patented service that promotes increased sales after legitimate return or exchange
transactions. Coupons are printed directly on the merchant's return receipts. The coupon program drives
incremental sales by using statistical modeling, simulation techniques, and predictive analytics. Petitioner
maintains the Discount Coupon Service software on its servers, and makes all changes that may be
requested by the merchant. Merchants cannot make any changes to the software settings. Petitioner
receives payment for the Discount Coupon Service in the form of commissions based on the number of
coupons used rather than the number of coupons distributed.
When using the return Authorization or Discount Coupon Services, merchants transmit and
receive information from Petitioner in one of two ways: (i) VeriFone terminals or (ii) the merchant's POS
system. The terminal or POS system is used to transit the merchandise return authorization information
to Petitioner and receive the Authorization Decisions, discount coupons, or both. For some merchants,
Petitioner may provide countertop VeriFone terminals for the merchant to use during a brief pilot period.
Petitioner does not make a separate charge to the merchant for the temporary use of the terminals. Rather,
the terminals remain the property of Petitioner and must be returned to Petitioner at the termination of the
initial pilot period (ranging from 30 to 90-days). If a merchant executes an agreement for Authorization
or Discount Coupon Services beyond the pilot period, the merchant may purchase the necessary terminals
from third-party vendors. Alternatively, a merchant may access the services directly from its own POS
system. In either case, merchants access the services by dial-up phone service, over the Internet (through
the merchant's Internet Service Provider), or over dedicated lines. Other than the countertop terminal
provided to certain merchants during the pilot period, Petitioner does not provide its customers with any
equipment or telecommunication services.
The structure of the customer fee varies depending on the service. For example, the fee for the
Authorization Service is generally based upon the number of stores using the service. The number of
transactions processed does not affect the amount charged to the merchant. In contrast, the fee for the
Discount Coupon Service is based on an agreed-upon percentage of all net sales proceeds from
transactions in which the coupon is redeemed. If the merchant's customers do not use the coupons
generated, Petitioner receives no fee for this service. The fee for each service is shown as a separate line
item on Petitioner's billing invoice.
Petitioner asks the following questions:
1. Is the Authorization Service subject to State and local sales or use taxes?

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2. Is the Discount Coupon Service subject to State and local sales or use taxes?
3. If the Authorization Service is found to be a taxable information service, would it be
   considered a risk management analysis service, for which tax must be collected beginning on September
   1, 2010?
   Analysis
   Petitioner’s Authorization Service is an information service subject to tax under section
   1105(c)(1) of the Tax Law. New York State and local sales and use taxes are imposed on the sale of
   tangible personal property and certain enumerated services. See Tax Law § 1105. Under section
   1105(c)(1) of the Tax Law, sales tax is imposed on the receipts from sales, other than sales for resale, of
   the furnishing of 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 not or may not be
   substantially incorporated in reports furnished to other persons. Petitioner’s Authorization Service is an
   information service, because it compiles information about return behavior and provides a
   recommendation based on that information to its customers.
   Information derived from common sources or data repositories does not come within the scope of
   the statutory exclusion for information that is “personal or individual.” See Matter of ADP Automotive
   Claims Service Inc. v Tax Appeals Tribunal, 188 AD2d, leave to appeal denied 82 NY2d 655; Rich
   Products Corporation v Chu, 132 AD2d 175 (3d Dept 1987) lv denied 72 NY2d 802; Towne-Oller &
   Assoc. v State Tax Comm, 120 AD2d 873(3d Dept 1986); Alan/Anthony, Inc., Adv Op Comm T&F, June
   19, 1992, TSB-A-92(51)S. Information generated from a common database is not personal or individual,
   regardless of whether reports, screens, or displays of the information are customized to meet the specific
   needs of a customer. Moreover, the Authorization Decision provided to one merchant may incorporate
   shared data of transactions occurring at other merchants. Because the Authorization Decision may be
   based on shared data about transactions with other merchants, Petitioner’s Authorization Service also fails
   to satisfy the criteria that the information may not be incorporated in report furnished to other persons.
   See Tax Law § 1105(c)(1).
   Beginning on September 1, 2010, the sale of a service the primary function of which is to provide
   risk management analysis reports is the sale of a taxable information service. See Sales and
   Compensating Use Tax Treatment of Certain Information Services, TSB-M-10(7)S. A service that relies
   on statistical models and historical data to generate a report analyzing and forecasting the risk associated
   with various aspects of a client’s business is an example of the type of risk management analysis report
   that is a taxable information service. See Matter of DZ Bank, Tax Appeals Tribunal, DTA No. 821251
   (May 11, 2009). Petitioner’s Authorization Service relies on historical data and statistical models to
   predict the risk of fraud and abuse associated with accepting merchandise returns. This service is similar
   to the risk management analysis services described in TSB-M-10(7)S. Accordingly, Petitioner’s
   Authorization Service described above is subject to tax beginning on September 1, 2010. See TSB-M10(7)S, Sales and Compensating Use Tax Treatment of Certain Information Services.
   We further conclude that Petitioner’s Discount Coupon Service is not subject to sales and use
   taxes. Sales tax is imposed on the service of printing or imprinting tangible personal property performed
   for a person who directly or indirectly furnishes the tangible personal property upon which such services
   are performed. See Tax Law § 1105(c)(2). Under Petitioner’s Discount Coupon Service, a coupon for

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use by the customer in making purchases from the merchant is printed on the customer’s receipt relating
to its merchandise return transaction. It appears that the printing is performed on the merchant’s POS
register paper tapes using the merchant’s POS equipment. It does not appear that Petitioner is selling the
merchant printed coupons that might be considered taxable tangible personal property. Likewise, it does
not appear that Petitioner is selling a printing service to the merchant. Petitioner does not contract to print
any set amount of coupons and is not compensated based upon the number of printed coupons that may
be generated. Under Petitioner’s Discount Coupon Service, as described above, Petitioner is designing,
developing, and implementing a marketing and advertising service. This service is not included in the
enumerated services subject to tax under section 1105(c) of the Tax Law.
“Tangible personal property” includes prewritten computer software “regardless of the medium
by means of which such software is conveyed to a purchaser.” Tax Law § 1101(b)(6). “Prewritten
computer software” is software (including prewritten upgrades thereof) that is not designed to the
specifications of a specific purchaser. See Tax Law § 1101(b)(14). The information Petitioner provided
(including sample contracts with its customers) indicates that software is not sold to or licensed to the
merchants. Although in some instances the software may be installed or used on a merchant’s POS
equipment (and with respect to the Discount Coupon Service some software may be necessary in order to
direct the actual printing of the coupon on the merchant’s POS equipment), it does not appear that the
merchants obtain constructive possession or the right to use, control, or direct the use of the software. See
Sales and Use Tax Regulations §526.7(e)(4). Accordingly, we conclude Petitioner is not selling software
to its customers. Rather, Petitioner is the user and consumer of its software in the provision of both its
Discount Coupon Service and Authorization Service to merchants. Petitioner must pay sales or use tax on
its purchase or use of the software within New York State.
Under Petitioner’s pilot programs, as described by Petitioner and set forth in its contracts, it
appears that Petitioner is the user and consumer of the equipment provided to merchants for use during
the pilot periods for Petitioner’s services. Petitioner retains title to the equipment. Petitioner makes no
separate charge for such equipment during the pilot period. Thus, we conclude that Petitioner is not
selling this equipment, but is using the equipment to provide its services. Accordingly, Petitioner must
pay sales or use tax on its purchase or use of the equipment within New York State.
The sales tax is a "destination tax." The point of delivery for sales of property or services
controls both the tax incidence and the tax rate. See 20NYCRR 525.2(a)(3); N-90-20. Petitioner’s
charges to a merchant for the Authorization Service it provides are generally based upon the number of
merchant locations which use the service. Petitioner may allocate its receipts from the sales of this
service between the number of a merchant’s locations within New York and those locations outside
NewYork where the merchant’s use of the service has been authorized. See KPMG, LLP, TSB-A-03(5)S.

DATED: October 14, 2010

NOTE:

/S/
DANIEL SMIRLOCK
Deputy Commissioner and 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.