Are a company's customized background and investigative reports taxable as detective services or as information services in NY?

Plain-English summary

The petitioner produces customized background and investigative reports for law firms, accounting firms, banks, private-equity firms, and similar clients. Its reports include: (1) pre-employment reports on prospective hires; (2) pre-employment reports for other professional firms; (3) pre-appointment reports on corporate board nominees; (4) pre-engagement reports on prospective clients; (5) general investigations of companies/principals for deals (IPOs, mergers, etc.); and (6) asset/encumbrance reports (liens, deed restrictions) from public records. Its researchers make independent judgments and write narrative assessments (not cut-and-paste). The company argued its reports should be treated as information services that qualify for the "personal or individual" exclusion and therefore aren't taxable. The company asked whether its background-report service is taxable.

The Office of Counsel concluded the reports are taxable:

• Detective service if a PI license is needed. Tax Law 1105(c)(8) taxes protective and detective services. Because the Tax Law doesn't define "detective services," courts equate them to the broad private-investigator definition in General Business Law 71(1) -- investigations into a person's identity, conduct, transactions, reputation, etc. (Compass Adjusters). When preparing a report requires a PI license, it's taxable under 1105(c)(8) (and use tax under 1110(a)(C)), taxed where delivered.
• Items 1-4 are detective services. The pre-employment, pre-appointment, and pre-engagement reports fall within GBL 71(1), so they're taxable detective services (TSB-A-97(14)S resume verification; TSB-A-99(3)S school background checks).
• Items 5-6: information services if no PI license. If the general company investigations and asset/encumbrance reports don't require a PI license, they're taxable information services under 1105(c)(1) because they involve searches of public records (Hooper Holmes).
• No "personal/individual" escape from the detective tax. The company's reliance on the personal-or-individual exclusion (20 NYCRR 527.3(b)(2); New York Life) fails: that exclusion and case law predate the 1990 enactment of the 1105(c)(8) detective tax, so they don't limit it. Otherwise two identical investigations would be taxed differently based only on whether a written report was delivered -- which the law doesn't require.

What this means for you

Background-screening and investigative firms

If your work is the kind that requires a private-investigator license -- vetting people's identity, conduct, history, reputation (pre-employment, due diligence on individuals, etc.) -- it's a taxable detective service under 1105(c)(8), full stop. The "personal or individual" exclusion that can shelter some information services does not apply to detective services, so you can't avoid the tax by skipping a formal written report or customizing each engagement. Work that doesn't need a PI license but pulls from public records is still likely a taxable information service. In short: most investigative report work is taxable -- the practical question is just which provision applies and at what local rate (where you deliver).

Buyers

Expect sales tax on background-check and investigative reports delivered to you in New York.

Common questions

Q: Are background checks taxable in New York?
A: Generally yes. If preparing them requires a PI license, they're taxable detective services; if not, public-records reports are taxable information services.

Q: Doesn't the 'personal or individual' exclusion make our reports nontaxable?
A: Not for detective services. That exclusion predates the 1990 detective-services tax and doesn't limit it.

Q: Can we avoid tax by not delivering a written report?
A: No. The detective-services tax doesn't depend on delivering a written report -- two identical investigations are taxed the same way.

Citations and references

• Tax Law section 1105(c)(8) (protective and detective services)
• Tax Law section 1105(c)(1) (information services; personal/individual exclusion)
• Tax Law section 1110(a)(C) (compensating use tax on services)
• General Business Law section 71 (private investigator)
• 20 NYCRR section 527.3(b)(2) (information services)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a11_11s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-11(11)S
Sales Tax
April 8, 2011

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S101220A

Petitioner name redacted asks whether its service of providing background reports is subject to
New York State sales and use taxes. We conclude that the service is taxable as a detective service under
Tax Law section 1105(c)(8) if Petitioner needs to have a detective license under General Business Law
section 70(1) in order to obtain the information in the reports.
Facts
Petitioner is a business corporation headquartered in California with offices in New York City. It
is qualified to do business in New York State, but is not registered to collect sales tax. Petitioner
produces a wide variety of customized reports for law firms, accounting firms, commercial banks,
investment banks, private-equity firms and other high-level professional companies. Petitioner's reports
include:
1.

pre-employment reports for law firm hires (addressing all tiers of hiring positions from
entry-level to partner);

2.

pre-employment reports for other professional firm hires (addressing all tiers of hiring
positions from entry-level to "C"-level);

3.

pre-appointment reports for nominees to corporate boards of directors;

4.

prospective client pre-engagement reports on companies and/or principals for accounting
firms;

5.

general investigations of companies and/or principals for various business transactions,
including IPOs, partnerships, buyouts, joint ventures, mergers and acquisitions; and

6.

individual and corporate reports on asset holdings and encumbrances (such as liens and
deed restrictions).

Petitioner’s website includes a sample of a “business background report” that appears to be the service
described in the next to last bullet point above. That report references searches of a number of public
records, including court records, lien records, and securities registries. Its website also specifies that
Petitioner’s “Asset/Encumbrance” service involves the “[i]nvestigation of an individual or corporate
entity to determine (from public records) asset holdings and encumbrances, such as liens and deed
restrictions.”
Petitioner maintains a staff of approximately 50 researchers based outside of New York who
undertake the required analysis and write the reports. Petitioner also has a staff of quality assurance
personnel who review reports prior to delivery to customers. Researchers must have at least the

-2-

TSB-A-11(11)S
Sales Tax
April 8, 2011

equivalent of a bachelor's degree. They undergo training in background research and investigations
through Petitioner and become thoroughly familiar with particular laws and regulations relating to
background screening and investigations. In addition, through Petitioner’s training, research staff become
expert in matters particularly germane to potential employees in law, accounting, finance, banking and the
other industries that petitioner serves. When a client engages Petitioner, it explains its objective in seeking
a report and specifies the level of detail desired. The terms and scope of the engagement are documented
in a written engagement letter between the client and Petitioner. Petitioner’s researchers who are assigned
to write the reports will make independent judgments about sources to be utilized, and use the results of
sources to write personalized narratives. Petitioner’s reports do not simply “cut and paste” source
information, but provide a narrative assessment of the source information as well. Petitioner does not
charge fixed fees for reports, given that each report is specifically customized to address each customer's
particular requirements and objectives.
Petitioner is a member of the National Association of Professional Background Screeners, a trade
association that promotes ethical business practices, promotes compliance with the Fair Credit Reporting
Act, fosters awareness of issues related to consumer protection and privacy rights and promotes best
practices within the background screening industry.
Analysis
Among the services subject to sales tax are information services. Specifically, Tax Law section
1105(c)(1) imposes sales tax on the receipts for the service of furnishing information by printed matter,
including the services of collecting, compiling or analyzing information of any kind or nature and
furnishing reports thereof to other persons. Excluded from the section 1105(c)(1) tax is information that
is “personal or individual in nature and which is not or may not be substantially incorporated in reports
furnished to other persons” (Id.).
The Tax Law also imposes a tax on the provision of protective and detective services (see Tax
Law § 1105[c][[8], enacted by Chapter 190 of the Laws of 1990). Because the Tax Law contains no
definition of detective services or detective agency, the courts have found it appropriate to equate the
terms “detective services” and “detective agencies” to the “broad definition of private investigator” found
in section 71 of Article 7 of the General Business Law (see Compass Adjusters and Investigators Inc. v
Commissioner of Taxation and Finance (197 AD2d 38 [3d Dept 1994]). As described in section 71(1) of
the General Business Law, such services include, for example, investigations for the purpose of obtaining
information with reference to the “identity, habits, conduct, movements, whereabouts, affiliations,
associations, transactions, reputation or character of any person, group of persons, association,
organization, society, other groups of persons, firm or corporation.”
In the wake of the 1990 amendment to the Tax Law, reports that include information that require
a private investigator’s license to prepare are taxable under Tax Law § 1105(c)(8) and not Tax Law §
1105(c)(1) (see, e.g., TSB-A-93[32]S[service of providing reports to management about a client’s internal
controls for cash register operators found to be taxable under section 1105[c][8]). If the information in a
report does not require a private investigator’s license to prepare, it will be taxable only if it qualifies as a
taxable information service. Therefore, when any of the services being performed by Petitioner requires a
private investigator’s license issued under Article 7 of the General Business Law, Petitioner’s sales of
such services are subject to sales and use tax imposed under sections 1105(c)(8) and 1110(a)(C) of the
Tax Law. The charges to the client for performance of such detective services are subject to sales tax at
the rate in effect where the services are delivered.

-3-

TSB-A-11(11)S
Sales Tax
April 8, 2011

The pre-employment, pre-appointment, and pre-engagement services (items 1-4 above) offered
by Petitioner appear to fall within the ambit of General Business Law § 71(1) and are thus taxable as
detective services (see TSB-A-97[14]S [service of verifying accuracy of information in a resume found to
be a taxable detective service]; TSB-A-99[3]S [a service of providing background checks of prospective
school employees found to be a taxable detective service]).
It is not clear whether the fifth and sixth services described above require a private investigator’s
license. If they do not fall within section 71(1), the services are taxable as information services under Tax
Law § 1105 because they involve searches of public records (see Matter of Hooper Holmes, Inc. v.
Wetzler, 152 AD2d 871 [3d Dept 1989][service of retrieving accident reports from the Department of
Motor Vehicles held to be taxable information service]; Sales and Compensating Use Tax Treatment of
Certain Information Services, TSB-M-10[7]; cf. New York Life Ins. Co. v. State Tax Commission (80
A.D.2d 675, 676 [3d Dept 1981], affd 55 N.Y.2d 758 [1981][“confidential character reports” derived
from “field investigations” and interviews held to qualify for the personal or individual exclusion from
the tax on information services]).
Petitioner argues that reports by detective agencies are to be treated as information services in
determining their taxability and not as a detective service and that, because its reports qualify for the
personal or individual exclusion, its services are not taxable, citing 20 NYCRR section 527.3(b)(2) and
Matter of New York Life Insurance Co., supra. Such a rule would mean that two otherwise identical
services might be treated differently as to their taxability merely because in the case of one the seller
included a written report and in the case of the other the seller did not provide such a report. The
authorities cited by Petitioner do not necessitate or justify such a rule. The cited regulation was
promulgated before the enactment of the Tax Law section 1105(c)(8) tax on detective services and thus
does not control whether the section 1105(c)(8) tax applies. Similarly, New York Life was issued prior to
Tax Law section 1105(c)(8)’s enactment and is thus not relevant to that section’s scope.

DATED: April 8, 2011

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.