Are a NY company's R&D services for its out-of-state parent taxable when the resulting reports or samples are delivered outside New York?

Plain-English summary

The petitioner makes refractory products and contracted to perform research and development exclusively for its foreign parent. The deliverables -- written communications and/or samples -- are shipped to the parent's offices outside New York (and outside the U.S.). The petitioner is reimbursed for cost plus a 7% markup. It asked whether these receipts are taxable.

The Office of Counsel concluded no New York tax is due:

• Services are taxable only if enumerated. Tax Law 1105(c)(1) taxes information services (collecting/compiling/analyzing information and furnishing reports), but excludes personal/individual information. A report of scientific laboratory analysis can be a taxable information service (TSB-A-95(8)S), while genuine R&D to develop new products or perfect technologies is not taxable even if a report results (Matter of Rochester Gas and Electric).
• The classification didn't have to be decided. The facts weren't enough to say whether this was a taxable information service or nontaxable R&D -- but it didn't matter.
• Destination tax settles it. Sales tax is a destination tax: the point of delivery (where possession transfers to the purchaser or its designee) controls both tax incidence and rate (20 NYCRR 525.2(a)(3); David Hazan). Because the reports/samples are delivered to the parent outside New York, no New York sales or use tax is due even if the service were taxable.

What this means for you

Companies doing service work for out-of-state clients

If your service's deliverable is received by the customer outside New York, New York sales tax generally doesn't apply -- regardless of whether the service is technically taxable. Keep delivery records (shipping to out-of-state/foreign offices) to prove the destination.

R&D vs. information service

True product-development R&D isn't a taxable information service even when it produces a report; lab-analysis reporting can be. But where delivery is out of state, you may not need to resolve which it is.

Common questions

Q: My service might be a taxable information service -- do I owe NY tax?
A: Not if the report or product is delivered to your customer outside New York. The destination controls, so no New York tax is due.

Q: Is research and development a taxable information service?
A: Genuine R&D to develop products or perfect technology isn't taxable even if it yields a report; reporting scientific lab analysis can be. Here the question was left open because delivery was out of state.

Q: What proof matters most?
A: Evidence of where the deliverables were delivered -- shipping the reports/samples to an out-of-state (or foreign) office shows the destination is outside New York.

Citations and references

• Tax Law section 1105(c) (sales tax on enumerated services)
• Tax Law section 1105(c)(1) (information services)
• 20 NYCRR section 525.2(a)(3) (destination tax; point of delivery controls)

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_39s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(39)S
Sales Tax
October 22, 2013

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

PETITION NO. S120705C

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner inquires whether its performance of research and
development services on behalf of its out-of-state parent, which result in reports or samples
being delivered out-of-state, are subject to sales and use tax. We conclude that, even if the
service is a taxable one, Petitioner’s receipts from the service are not taxable since the service
results in reports or samples being delivered to Petitioner’s parent outside the State.
Facts
Petitioner is a producer of refractory products that are used mainly by manufacturers in
various industrial high-temperature manufacturing applications. Petitioner has negotiated a
contract with its parent company, which has its offices outside the United States. The contract
requires Petitioner to perform research and development services exclusively for the parent
company. The end products of the research and development are written communications and/or
samples being shipped to the parent’s offices outside the State. Petitioner will be reimbursed for
the cost incurred while performing the research and development work, plus an additional 7%
markup for these services.
Analysis
Sales of services are generally not taxable unless the Tax Law specifically enumerates
them as taxable (Tax Law § 1105[b], [c]). Tax Law § 1105(c)(1) imposes tax on the sale of
information services, “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.” Furnishing a report of the
results of scientific laboratory analysis can constitute an information service within the scope of
section 1105(c)(1) (see TSB-A-95[8]S). However, research and development services in the
laboratory sense to develop new products or perfect existing technologies are not taxable as
information services even if a report is produced (see Matter of Rochester Gas and Electric
Corp., Tax Appeals Tribunal, Jan. 4, 1991).
The details in the petition are not sufficient to determine whether Petitioner’s service is
an information service or a nontaxable research and development service. It is not necessary,
however, to resolve that issue here. Sales tax is a destination tax, such that “[t]he point of
delivery or point at which possession is transferred by the vendor to the purchaser or designee

-2-

TSB-A-13(39)S
Sales Tax
October 22, 2013

controls both the tax incidence and the tax rate.” Thus, because the reports and/or samples
resulting from the service are sent to the customer outside New York, no New York sales and use
tax would be due even if the transactions were taxable (see Sales Tax Reg. § 525.2[a][3]; Matter
of David Hazan, Inc. v. Tax Appeals Tribunal, 152 A.D.2d 765, 766 [1989], aff’d 75 NY2d 989
[1990])

DATED: October 22, 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.