Are monthly fees for litigation-support and e-discovery hosting of a client's own documents subject to NY sales tax?

Plain-English summary

The petitioner provides litigation-support and electronic-discovery (e-discovery) services. Clients give it their own paper and electronic documents; the petitioner consults on requirements, then collects, processes, organizes, and securely stores the documents on a web platform (hosted on out-of-state servers). Clients pay a monthly hosting fee (per user or per gigabyte) to retrieve and view their documents and to mark them up using an online toolbar (tagging for redaction, highlighting, annotations). Those markups are overlays that simply tell the petitioner if a document modification is needed; the underlying images stay static. Document production (creating documents reflecting the modifications) is billed separately. The petitioner asked whether the monthly fees are taxable.

The Office of Counsel concluded the monthly fees are exempt. Tax Law 1105(c)(1) taxes information services -- collecting, compiling, or analyzing information and furnishing reports -- but excludes information that is personal or individual in nature and not substantially incorporated into reports furnished to others.

• It is an information service. Analyzing, compiling, and organizing the client's documents adds to the "intelligence" in the original documents (ADP Automotive Claims Services v. Tax Appeals Tribunal).
• But it is excluded as personal/individual. The petitioner organizes and analyzes only the client's own documents and gives the documents (and its analysis/organization) to no one but that client. That the client may later hand documents to a third party in discovery does not change the result.
• Not a software sale. The redaction/markup toolbar has some software attributes, but it is a single aspect integrally related to the overall service, so the primary function is an information service, not a sale of prewritten software (TSB-A-10(59)S).

One taxable piece: the petitioner's separate charges for document production are taxable sales of tangible personal property.

What this means for you

E-discovery, litigation support, document-hosting providers

Hosting and organizing a client's own documents -- even with online tools to tag, redact, and annotate -- is generally an exempt personal/individual information service in NY, as long as you analyze only that client's information and don't furnish it to others. Build the service so the work product is for the one client. Watch the carve-out: if you also produce/deliver tangible documents for a separate charge, that piece is taxable.

Why the software question matters

A markup/redaction tool embedded in a larger information service does not turn the whole thing into taxable software, as long as it is integral to the service and not the primary thing being sold.

Common questions

Q: We host the documents on a web platform with redaction tools -- isn't that taxable software?
A: No. The tools are a single aspect integral to a comprehensive information service, so the primary function is an (exempt) information service, not software.

Q: Our client later produces documents to opposing counsel -- does that make our service taxable?
A: No. The service stays personal/individual; the client's later third-party production in discovery does not change the result.

Q: Is anything we charge taxable?
A: Yes -- separate charges for document production are taxable sales of tangible personal property.

Citations and references

• Tax Law section 1105(c)(1) (tax on information services; personal/individual exclusion)

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_13s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(13)S
Sales Tax
May 20, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S120323A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name redacted, asking whether the monthly fees charged to Petitioner’s customers for certain
litigation and electronic discovery services are subject to New York sales and uses taxes. We
conclude that the receipts are not subject to such taxes because Petitioner is providing its
customers with exempt personal information services.
Facts
Petitioner submits the following facts as the basis for the Advisory Opinion. As part of
Petitioner's litigation and electronic discovery services, customers engage Petitioner to collect
paper and electronic documents, process, and securely store customer data. The paper and
electronic documents are the customers’ own documents and are provided directly to Petitioner.
As part of its service offering, Petitioner consults with customers to understand the specific
requirements associated with organizing the documents. Petitioner then uploads, organizes, and
saves the information on a web-based platform in a manner that meets the customer's specific
requirements.
Petitioner charges its customers a monthly fee to retrieve and view documents in their
native form, and request document modifications electronically. Customers access their
documents by logging on to a web based platform that is hosted on Petitioner's servers located
outside the State. Customers are able to use an online toolbar to perform various actions, such
as tagging words for redaction, highlighting, and making annotations regarding document being
reviewed. The actual images and electronic documents that were loaded into the web depositories
remain static, as any redactions, highlights, etc. that are made by customers are overlays that
simply direct Petitioner if a document modification is necessary. Petitioner bills a customer a
monthly “hosting fee” for these activities on either a per user or per gigabyte of storage basis.
Petitioner may also produce documents that reflect the customer’s document modifications, but
separately bills for such document production.
Analysis
We conclude that 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.

-2-

TSB-A-13(13)S
Sales Tax
May 20, 2013

As relevant here, Tax Law § 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 . . . .
Petitioner’s litigation support services are information services because they include
analyzing, compiling, and organizing the clients’ information. 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). The ability for a client to mark and redact documents has some attributes of the use
of software. However, because this is a single aspect of a more comprehensive service, and this
aspect is integrally related to the overall service provided by Petitioner, we conclude that the
primary function of Petitioner’s service is the provision of an information service, and not the
sale of prewritten computer software. See TSB-A-10(59)S.
We further conclude that Petitioner’s services are excluded from the tax on information
services because they are personal and individual in nature. Petitioner organizes and analyzes
the clients’ own documents and does not provide the original documents, or the analysis,
compilation, or organization, to any party other than the client. The fact that the client, in the
context of a litigation discovery process, may subsequently provide the original documents to a
third party does not change this result.
Petitioner’s separate charges for document production, if requested, are taxable sales of
tangible personal property.

DATED: May 20, 2013

NOTE:

/S/
DEBORAH R. 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.