Is a single-price, integrated portfolio and risk-management support service for investment managers subject to NY sales tax?

Plain-English summary

The petitioner is a financial-services firm selling "Product A" -- a fully integrated enterprise portfolio- and risk-management support service for financial institutions and investment managers. It bundles many things into one labor-intensive service (3-15 dedicated staff per client): customized risk analysis and reporting, data control/operations, trade-management workflow, compliance evaluation, daily support, a desktop analytical calculator, a dedicated client platform delivered over a private network, and the telecommunications connecting the firm's and client's data centers. It charges one annual fee (over $1 million minimum) plus a separate implementation fee (~12 months, also over $1 million). It asked whether Product A is taxable.

The Office of Counsel reached a layered conclusion:

1. Product A itself is not taxable. Several components, viewed separately, would be taxable -- the intrastate telecommunications link (Tax Law 1105(b)(1)(B)), the prewritten-software web interface (1101(b)(6); 1105(a)), and the information services (risk analysis, calculator; Matter of DZ Bank). The threshold question is whether the firm is bundling taxable and nontaxable items for one price (20 NYCRR 527.1(b)) or selling one integrated product (Matter of SSOV '81). The Department found a single integrated product because: (a) Product A always includes the same elements (the only variation is which third-party data sources a client accesses); (b) clients use the components in different proportions without extra charges; and (c) the components are highly synergistic (e.g., real-time risk analysis works because the firm also maintains the databases, routes the trades, and does data-integrity control). That makes Product A analogous to the nontaxable "operations and management" contract in TSB-A-10(14)S -- here, an operations-and-management service for investment portfolio managers.

2. The implementation fee is also not taxable -- it is simply another way of charging for the (nontaxable) Product A service. (Contrast TSB-A-11(17)S, where a "set-up" fee was taxable because the underlying service -- email-campaign software -- was itself taxable.)

3. The firm pays tax on its taxable inputs. Taxable items it buys to provide Product A do not qualify for the resale exclusion, because they are not being resold (Tax Law 1101(b)(4)).

4. Third-party information services bought for individual customers are taxable resales. When the firm buys a third-party information service for a specific customer and is reimbursed, it is selling that service and must register and collect tax (1105(c)(1); reimbursed costs are "receipts," Stouffer v. Tully). But because it is reselling, it may buy those services without tax using a resale certificate (20 NYCRR 532.4(b)(2)).

5. Stand-alone sales of the components are taxable. The daily risk-analysis service and the analytical calculator, when sold separately, are taxable information services -- they transfer information and don't qualify for the personal/individual exclusion (DZ Bank; TSB-M-10(7)S) -- so the firm must collect tax on those stand-alone sales.

What this means for you

Fintech / managed-service providers

A genuinely integrated, single-price service can be nontaxable even if some pieces (software access, telecom, information reports) would be taxable on their own -- if it is one product, not a priced bundle of separable items. The factors that matter: it always includes the same elements, customers pay the same regardless of which components they lean on, and the components are interdependent. A large implementation/set-up fee follows the character of the underlying service: nontaxable if the service is nontaxable, taxable if the service is taxable.

The traps even when the main service is exempt

You still owe tax on the taxable inputs you consume to deliver the service. If you resell third-party information services and get reimbursed, that's a taxable sale you must collect on (buy those with a resale certificate). And if you also sell components stand-alone (a report service, a calculator), those stand-alone sales can be taxable information services.

Common questions

Q: Some parts of our service would clearly be taxable -- doesn't that make the whole thing taxable?
A: Not if you sell one integrated product for a single price. The components being individually taxable doesn't control if the offering is genuinely a single, synergistic service.

Q: Is our big implementation fee taxable?
A: It follows the main service. Here it was nontaxable because Product A is nontaxable. If the underlying service were taxable, the set-up fee would be too.

Q: We buy taxable software/telecom to run the service -- can we use a resale certificate?
A: No. Those inputs aren't resold; you pay tax on them.

Q: We sell the risk-analysis report and the calculator separately too -- taxable?
A: Yes. Sold stand-alone, they are taxable information services. And third-party info services you buy and get reimbursed for are taxable resales (collect tax; buy with a resale certificate).

Citations and references

• Tax Law section 1105(c)(1) (information services; personal/individual exclusion)
• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1101(b)(6) (prewritten software is tangible personal property)
• Tax Law section 1105(b)(1)(B) (intrastate telecommunications)
• Tax Law section 1101(b)(4) (resale exclusion)
• 20 NYCRR section 527.1(b) (bundled charges)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_12s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(12)S
Sales Tax
April 23, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S110913A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Petitioner name redacted. Petitioner asks whether its investment management product (“Product
A”) is subject to sales and use tax. We conclude the following: (1) Petitioner’s receipts from the
sale of Product A are not subject to sales and use tax because Product A constitutes a nontaxable
service; (2) Petitioner must pay tax on any of the taxable inputs used in providing that service;
(3) Petitioner’s sales of third-party information services for which it makes a separate charge are
taxable, but its purchases of those services would qualify for the resale exclusion.
Facts
Petitioner is a financial services firm that provides investment management and risk
management services to clients. Specifically, Petitioner provides Product A, which is a fully
integrated enterprise portfolio management support service for financial institutions and other
investment managers. The service includes: customized investment analysis and reporting; data
control and operations; compliance evaluation and reporting; customized trade management
workflow; daily support and ongoing service enhancements; and ancillary services. In general,
the contract does not limit how much of each of the components of Product A that Petitioner
must perform in any contract year. Moreover, customers use the different components in
different proportions without incurring extra charges as a result. For example, two otherwise
similarly situated customers—with the same assets under risk management, same number of
portfolios, and the same number of employees interfacing with petitioner—would in general
incur the same charges even though one requests more dynamic risk analyses reports, while the
other requires more compliance coding and re-coding. While many aspects of Product A are
customized, Product A always includes the above components, with the only variation being that
different clients may opt to access different third-party data sources through Product A, as
discussed below.
Product A is a labor-intensive service that requires a significant employee resource
commitment from Petitioner. To perform Product A, Petitioner provides between 3 and 15 fulltime equivalent personnel for each Product A client, including those types described below.
Petitioner provides dedicated support personnel who are responsible for any issues relating to the
daily service requests, administrative tasks, and analytic and reporting issues. As part of Product
A, Petitioner’s highly educated and experienced team of financial and portfolio analysts
regularly apply their knowledge and judgment to perform services related to each client’s unique
portfolios, as described more fully herein. Petitioner utilizes a range of skilled professionals to
perform Product A, including: analytics specialists, portfolio analysts, relationship managers,

-2-

TSB-A-13(12)S
Sales Tax
April 23, 2013

data integrity specialists, technology and interfacing specialists, product developers, and
financial modeling specialists.
a.

Implementation & Platform

Product A requires a tremendous amount of information to be transferred on a daily basis
between Petitioner and a client, as well as to third parties involved in a client’s investment
management activities. Petitioner creates a customized platform, which is delivered via a private
network through a web interface, for each client as a means to obtain and transfer such
information and facilitate a client’s business processes. Each client’s dedicated, private platform
allows the Petitioner and the client to electronically exchange information, including information
originating from, and distributed to, third parties involved in the client’s investment management
activities.
Petitioner purchases, builds, and configures the technological infrastructure—including
telecommunications and dedicated databases—to establish and support the client platform, which
is then accessed by the client through its own network via a web interface. Petitioner dedicates a
team of skilled analytical, implementation, product specialist, and technology employees to
implement the electronic platform for each client, which is the foundation for a long-term service
relationship between Petitioner and each Product A client. The implementation process is
customized and configured based upon the needs of the client and can take upwards of a year to
complete.
Petitioner charges an implementation fee on a monthly basis during the
implementation period that is separate and distinct from Product A’s ongoing service fees. The
average Product A implementation takes approximately 12 months and has an implementation
fee over $1 million. Product A contracts generally include a five year term commitment.
Petitioner generally provides Product A to its clients during business hours from Monday
through Friday. During non-business hours each business night, Petitioner’s employees perform
data quality control, analytical review, report production and exception support, and production
support necessary to provide the services discussed above, including reviewing risk analysis
reports and performing various administrative tasks.
Product A’s platform is maintained on databases and servers owned by Petitioner. The
client accesses the platform through a web interface by entering password information. Once on
the platform, a client may initiate a trade, review the balances in its portfolios, use third-party
financial analysis tools, use the Analytical Calculator, etc.
Petitioner procures and maintains the telecommunication services necessary to connect
Petitioner’s data centers to client’s data centers and to allow the client’s employees, through the
client’s internal network, to connect to the Product platform.
The investment management services, trading platform, and key functionality of Product
A are not made separately available for sale as part of any other product.

-3-

b.

TSB-A-13(12)S
Sales Tax
April 23, 2013

Product A: Portfolio Management Workflow Service
1. Customized Investment Analysis Services

Petitioner provides two types of risk analysis services as part of Product A, daily risk
analysis and reporting (“daily risk analysis service”) and dynamic ad hoc risk analysis (“Ad Hoc
Risk Analysis”).
The daily risk analysis service will analyze the client’s portfolio and position information
as they stand at the conclusion of a day of trading using a previously specified set of analyses
and tests. Petitioner has developed proprietary risk models incorporating over 1,500 global risk
factors, which Petitioner employs to create customized analyses and reports for each client on a
daily basis. Petitioner’s employees review each daily analysis, as required by the contract,
before providing Petitioner’s customized suite of risk reports to each of its clients.
Petitioner’s daily risk analysis service computes the performance of each client portfolio
to track investment performance and identifies and analyzes risk associated with client portfolio
investments. At the end of each month, Petitioner performs a customized analysis of monthly
portfolio performance to attribute profits and losses to various factors, including interest rate
exposure, credit risk, foreign currency risk, market exposure, etc. Similar to the other reporting
services offered within Product A, Petitioner’s skilled employees review and perform quality
control for each performance attribution report before release to its clients.
Petitioner sells its daily risk analysis service separate from Product A, in which case it
collects sales tax on those sales. When sold as a stand-alone offering, the daily risk analysis
service requires comparatively minimal implementation and requires only a two to three-year
commitment. The daily risk analysis service, when sold alone, generally does not include any
holdings-based performance attribution and never includes daily transaction-based performance
calculations because Petitioner needs transaction-based data to perform those analyses which it
generally does not have when it sells its daily risk analysis service as a stand-alone product. In a
limited number of cases, the stand-alone daily risk analysis service may include holdings-based
performance attribution, which is generally of more limited utility to the client.
The daily risk analysis service performs a daily, scheduled analysis (i.e., using portfolio
positions and balances as they exist at the end of a business day). In contrast, Product A’s Ad
Hoc Risk Analysis service can use real-time and/or historical portfolio data maintained as part of
Product A. Moreover, the Ad Hoc Risk Analysis service also provides a much more
sophisticated and resource-intensive level of analysis, as it may involve several analysts
performing a stress test analysis using several variables. The Ad Hoc Risk Analysis service
analyzes a client’s current portfolio investments under various potential scenarios, which can be
based on the client’s individually provided assumptions. Petitioner’s analysts perform basic
sensitivity analyses, full scenario analyses, and scenario stress testing analyses. Requests for the
Ad Hoc Risk Analysis service are originated by the client and generally necessitate significant
interaction between the client and Petitioner’s analysts to understand the nature and scope of the

-4-

TSB-A-13(12)S
Sales Tax
April 23, 2013

Client’s request. Based on those interactions, the analyst or a team of analysts will choose an
existing type of analysis that addresses the client’s concern or develop a new one. The design of
these dynamic risk analyses will depend crucially on the expertise of Petitioner’s financial
analysts. Petitioner maintains that Product A’s exceptional value is derived from its
comprehensive and customized dynamic analyses.
2. Data Control and Operations Services
As part of Product A, Petitioner provides a dedicated database for maintaining each
client’s portfolio information, including positions, transactions, prices, security data, and
analytics. This approach is designed to enhance data integrity and significantly reduce
operational risk while simultaneously increasing operating leverage and consistency.
Petitioner provides data management support for numerous third-party data sources that
are used by its clients, including security indicative data, pricing services, index providers, rating
agencies, and other client-specific data sources. As part of the daily support services, Petitioner
maintains relationships and interfaces with these third party data providers and quality controls
the data each day on behalf of its clients. Petitioner ensures that these interfaces are operational
and provides reports to its clients notifying them of data anomalies that may require correction.
Petitioner also maintains each client’s portfolio-related data, including each client’s
unique portfolio structure and investment positions, which only the client can access through
Product A. Petitioner maintains trade settlement, broker dealer, and custodian data management
for its clients necessary to facilitate a client’s order management process from trade execution
through post-trade functions, including trade confirmation processing, portfolio compliance, and
corporate action processing. Product A also facilitates communication to third parties related to
trade activity, including to counterparties, brokers, electronic communications networks, and
custodial banks. The trade execution and post-trade operational workflow is supported by realtime reporting on transaction status. Further, Petitioner facilitates a daily reconciliation of a
client’s positions and cash activity to other third party sources, such as a client’s custodial bank.
3. Customized Trade Management Workflow Services
Petitioner supports each client’s trade execution process as part of Product A by
facilitating trade allocation, order entry, and trade capture. Petitioner also obtains and reports the
status of all client investments covered in Product A, including the status of trades routed to or
from third party electronic trade execution services (e.g., Bloomberg, Tradeweb, FXall, etc.).
Product A clients contract directly with these third party service providers. Petitioner provides
an interface between the client and these third parties, but does not contract with them on behalf
of Product A clients.
The trade management workflow services integrate each client’s portfolios with third
party industry tools, which allow clients to manage all of their investments in one place.
Petitioner constantly provides interface support and maintenance services with third parties, such

-5-

TSB-A-13(12)S
Sales Tax
April 23, 2013

as data providers and a client’s custodians, to facilitate access to current data, pricing, and
position information. In some cases, the client contracts direct with the seller of the third-party
data. In other cases, Petitioner contracts the right to redistribute third party data from the seller
of the third-party data, in which case Petitioner acts as a redistributor of the third party data and
then generally passes the cost on to the customer.
4. Compliance Evaluation and Reporting Service
Petitioner provides a comprehensive portfolio compliance evaluation service for Product
A clients. Clients provide Petitioner with their unique portfolio and investment restrictions and
compliance parameters for each of their portfolios to ensure compliance with each portfolio’s
trading strategy and related requirements. Petitioner codes each unique compliance rule and
maintains them on behalf of each client. The compliance evaluation service is highly
personalized; Petitioner adapts the compliance service within Product A as each client's portfolio
evolves. Petitioner uses information garnered through the compliance reporting process to
consult with clients and recode rules as necessary. Petitioner analyzes each potential trade
against predetermined compliance rules before a client can execute a trade. Petitioner provides
alerts to a client’s compliance officers of any violations of the compliance rules. Petitioner’s
compliance evaluation service requires designated client personnel to authorize transactions
relative to certain compliance levels and exceptions. In addition to pre-trade compliance
analysis, Petitioner provides reporting each day on the prior business day’s compliance activity
on a post-trade basis.
5. Daily Support and Service Enhancements
Petitioner provides daily support to Product A clients through a robust Solutions Center
and relationship management function. Petitioner’s Solutions Center provides daily support and
training covering administrative requests, analytic requests and questions, training, and business
process support. This team supports numerous daily requests unique to each client, which may
range from portfolio setup and compliance coding to complex analytical questions. More
significant requests and service enhancements are handled by a dedicated team of Petitioner
employees who perform a relationship management function.
As a client’s needs evolve in response to developments in the capital markets and
changes in business processes, Petitioner enhances its models, services, and workflow support to
accommodate its clients’ needs. These ongoing service enhancements and improvements are
included in the Product A fees.
6. Desktop Analytical Calculator
Petitioner provides a desktop analytical calculator (“Analytical Calculator”) within
Product A that allows clients to perform interactive options-adjusted and static analyses on the
global universe of fixed income securities and derivatives. This Analytical Calculator provides
clients with real-time interactive access to analytics used to perform relative value, trading, and

TSB-A-13(12)S
Sales Tax
April 23, 2013

-6-

risk analyses. Through this Analytical Calculator, clients can access Petitioner’s models and
modify assumptions to meet their specific needs. Adjustable factors include structure and
prepayment modeling, cash flow generation, and option pricing. The Analytical Calculator is
available for sale as a stand-alone offering. When sold as a separate product, the Analytical
Calculator does not require any implementation and requires only a one-year term commitment.
c.

Petitioner’s Web Site’s Description of Product A

Petitioner’s website advertises Product A as follows:
With [Product A], [Petitioner] is unique in its ability to provide a fully integrated
enterprise investment solution.
[Product A’s] investment management platform
combines sophisticated risk analytics with portfolio management, trading, and operations
tools to support a consistent, efficient and controlled investment process.
*

*

*

As a comprehensive platform, [Product A] provides a centralized database for
maintaining financial information including positions, transactions, prices, security data
and analytics. This approach is designed to eliminate redundant data input, enhance data
integrity and significantly reduce operational risk while simultaneously increasing
operating leverage and consistency.
d.

Product A Fees

Petitioner charges an annual fee for all of the services included in the Product A service
offering discussed above. The minimum fee for Product A is over $1 million per year. The
average Product A fee is a multiple of the $1 million per year minimum fee during the five-year
term of the client agreement, which increases based on measurable metrics that are indicative of
the extent of the client’s overall use of the service and overall complexity.
Charges for ancillary services (i.e., the financial calculator and the daily risk analysis
service), if purchased as a stand-alone offering, are small compared to Product A fees. The
average charges for an Analytical Calculator client or Risk Reporting client are usually less than
10% of the average Product A charge. Petitioner does not charge an implementation fee for
either ancillary service.
Analysis
The Tax Law imposes sales tax on retail sales of tangible personal property and certain
enumerated services (see Tax Law § 1105[a],[b], and [c]). The definition of tangible personal
property includes “prewritten computer software” (Tax Law § 1101[b][6]). The sale
of prewritten software is taxable if it results in a customer receiving the right to use the software
in New York, whether or not the software is actually downloaded in New York (see

-7-

TSB-A-13(12)S
Sales Tax
April 23, 2013

TSB-A-08(62)S). Among the services made taxable is intrastate telecommunications (see Tax
Law § 1105[b][1][B]). Another taxable service is the tax on information services, which
excludes “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” (Tax Law § 1105[c][1]).
Many of the components of Product A seem to qualify as taxable when viewed
separately. For example, Petitioner provides the telecommunication connection between the
client’s data center and Petitioner’s data center, which would appear to be taxable under Tax
Law section 1105(b)(1)(B) to the extent that the telecommunication was intra-state in nature.
The web interface is built on prewritten software which is then customized to meet the needs of a
particular client. The prewritten portion of that software would be taxable as tangible personal
property (see Tax Law §§ 1101[b][6]; 1105[a]). Also, Product A’s financial calculator and daily
risk analysis service would appear to qualify as taxable information services (Matter of DZ Bank,
Tax Appeals Tribunal, May 11, 2009).
Petitioner makes only a single charge for Product A, leaving aside its sales of third-party
information services to some customers. Thus, a threshold question here is whether Petitioner
should be seen as bundling taxable products with nontaxable products for a single price (see
Sales Tax Reg. § 527.1[b]) or whether, alternatively, Petitioner should be seen as selling a single,
integrated product (see, e.g., Matter of SSOV '81 Ltd., Tax Appeals Tribunal, January 19, 1995).
In light of the following circumstances, we think it is appropriate to treat Product A as a single
integrated product. First, Product A doesn’t come in multiple variants: it always includes the
elements described above, with the only variation being the availability of additional third-party
information sources. Secondly, customers use the different components in different proportions
without incurring extra charges as a result. Thirdly, the different components of Product A are
highly synergistic. For example, the value of the dynamic risk analysis service is its timeliness:
the client is able to see the risk characteristics of its holdings even as those holdings change
minute to minute. Key to Petitioner’s ability to deliver this service is that, as part of Product A,
Petitioner maintains the databases containing the information about the client’s positions, all
trades and confirmations of trades are routed through it, and it performs the trade allocations.
Moreover, Petitioner’s risk analysis services are made more reliable because, as part of Product
A, Petitioner performs data integrity control on the third-party data that is incorporated into those
risk analyses.
The comprehensive, integrated nature of Product A makes it similar to the “integrated
[information technology] management and monitor service,” which was held to be nontaxable in
TSB-A-10(14)S because it constituted an information technology “operations and management”
contract. Here, Product A appears to constitute a nontaxable operations and management
contract for investment portfolio managers. This view of Product A is consistent with the way in
which Petitioner advertises the service, as discussed above. Petitioner’s implementation fee
appears to be another way of charging for Product A and therefore it is similarly nontaxable (see
TSB-A-11[17]S [Petitioner’s service for managing e-mail campaigns is found taxable as the sale
of prewritten software; its “set-up” fee for implementing that service is also found to be taxable
as additional consideration for the e-mail campaign management service]).

-8-

TSB-A-13(12)S
Sales Tax
April 23, 2013

Petitioner sometimes purchases third-party information services for individual customers
who request them and is subsequently reimbursed by the customers. Since these are not an
invariable part of Product A, their taxability is to be determined separate from Product A. In
getting reimbursed from its customer, Petitioner is selling the information services and must
register as a vendor and collect tax on those sales (see Tax Law § 1105[c][1]; Tax Law §
1101[b][3][definition of “receipt”]; e.g., Stouffer Management Food Service Inc. v. Tully, 98
Misc.2d 1128, 1130 (1978), aff’d, 69 A.D.2d 1023 [a business’s reimbursement of costs incurred
by a food service company, under contract to operate an in-house restaurant serving employees
of the business’s client, constituted “sales” that rendered the reimbursed costs taxable]).
However, because Petitioner is reselling those third-party information services, it may buy those
information services without paying sales tax by providing the vendors with resale certificates
(see Tax Law § 1132[c][1]; Sales Tax Reg. § 532.4[b][2]).
Consistent with that conclusion, Petitioner’s purchases of taxable items that it uses in
providing Product A will not qualify for the resale exclusion because those items are not being
resold (see Tax Law § 1101[b][4]).
Finally, as discussed, Petitioner’s daily risk analysis service and analytical calculator
qualify as taxable information services because they involve the transfer of information and do
not qualify for the personal or individual exclusion (see DZ Bank, supra; TSB-M-10(7)S).
Therefore, Petitioner must collect tax on those services when it sells them separately (see Tax
Law § 1105[c][1]).

DATED: April 23, 2013

NOTE:

/S/
DEBORAH LIEBMAN
Deputy 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 information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.