Is a service that facilitates obtaining FBI criminal-history records for an employer -- acting only as a conduit -- subject to sales tax as an information service?

Plain-English summary

The Petitioner is an FBI-authorized "channeling agency." Its clients are banks that want to check whether job applicants have criminal records. The FBI will release criminal-history records only to certain authorized parties. In a typical transaction, the bank fingerprints the applicant and gets a signed authorization, then transmits the fingerprints and authorization to the Petitioner, which forwards them to the FBI; the FBI runs the check and returns an electronic data file, which the Petitioner immediately forwards to the bank. Crucially, the Petitioner is prohibited from viewing the file's contents, does not supplement the information, and does not incorporate any of it into reports. Its invoice shows two line items: the FBI's processing fee and the Petitioner's own conduit fee. It asked whether its service is taxable.

The Office of Counsel concluded the service is not subject to sales tax:

• The Petitioner merely facilitates the processing of the bank's request to the FBI and acts as a conduit for transmitting the criminal-history record from the FBI back to the bank.
• It does this without examining the content of the record.
• A service that only facilitates and conveys records this way is not a taxable information service.

What this means for you

Background-check channelers and conduits

If your role is strictly to pass a request through to a source and relay the result back -- without reading, analyzing, supplementing, or repackaging the information -- you are providing a nontaxable service, not a taxable information service. The fact that you never see the contents is a strong, favorable fact.

The line is whether you furnish information

New York's information-service tax targets businesses that collect, analyze, or furnish information. A pure conduit that is contractually barred from viewing the data isn't furnishing information of its own -- it's just moving it. Keep documentation (here, FBI rules and the prohibition on viewing files) showing you're a conduit.

Itemizing the source's fee

Here the Petitioner separately listed the FBI's processing fee and its own conduit fee; both were treated as part of a nontaxable service. The transmittal/facilitation role drove the result.

Common questions

Q: We channel FBI (or similar) background checks to employers. Is that taxable?
A: On these facts, no. Acting only as an authorized conduit that transmits the request and relays the results -- without viewing or supplementing the record -- is a nontaxable service.

Q: What would make it taxable?
A: Furnishing information of your own -- reviewing, analyzing, supplementing, or compiling the records into reports -- could make it a taxable information service.

Q: Does separately stating the FBI's fee matter?
A: The opinion treated both the FBI fee and the conduit fee as part of a nontaxable service; the key was the conduit role, not the billing format.

Citations and references

• Tax Law section 1105(c)(1) (information services)
• Tax Law section 1105(c)(9) (certain information services)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-14(22)S
Sales Tax
July 22, 2014

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

PETITION NO. S110428A

On January 21, 2011 Department of Taxation and Finance received a Petition for
Advisory Opinion from REDACTED REDACTED REDACTED REDACTED REDACTED
REDACTED on behalf of REDACTED REDACTED REDACTED (Petitioner), REDACTED
REDACTED REDACTED. Petitioner asks whether sales tax is imposed on its receipts for the
service of acting as facilitator in the acquisition from the Federal Bureau of Investigation of
criminal history information about applicants for employment with a client of Petitioner.
We conclude that the service is not subject to sales and use tax.
Facts
Petitioner acts as a facilitator or conduit in the acquisition of criminal history information
from the Federal Bureau of Investigation (FBI). Its clients are banks that want to know if
applicants for employment have criminal records. The FBI has criminal history information on
file, but will release this information only to a state or federal agency, the actual person to whom
the information relates, or an authorized channeling agency that has obtained permission to make
the request from the person about whom information is sought. Petitioner states that it is an
authorized channeling agency. The FBI provides the information via an electronic data file.
Petitioner is expressly prohibited from viewing the contents of files and from incorporating any
part of the files into reports furnished to third parties.
A typical transaction commences with a bank obtaining personal information from an
applicant for employment. The bank takes the applicant’s fingerprints and has the applicant
execute a written authorization to obtain the applicant’s criminal history records from the FBI.
The bank electronically transmits images of the fingerprints and authorization form to Petitioner,
which then transmits these electronic files to the FBI. The FBI uses the submitted fingerprints to
confirm that the person whose prints are submitted is the person whose criminal history record is
sought. The FBI transmits the results of the criminal history records check in an electronic data
file to Petitioner, which immediately forwards it to the requesting bank. At no time does
Petitioner review the contents of the file. Petitioner also does not supplement the information
contained in the file received from the FBI. Petitioner does not incorporate any part of the files
received from the FBI into reports or other documents furnished to a third party. The FBI
reviews Petitioner’s operations and security controls to ensure that Petitioner is compliant with
government rules for the dissemination of criminal records.

-2-

TSB-A-14(22)S
Sales Tax
July 22, 2014

Petitioner pays the FBI a standard fee for processing a request for a criminal history
record. Petitioner‘s invoice to its customer will contains two itemized charges. The first is the
amount paid to the FBI for processing requests for records. The other is Petitioner’s standard fee
for acting as a conduit in obtaining criminal records from the FBI.
Analysis
Petitioner is providing a service that is not subject to sales tax. Petitioner merely
facilitates the processing of a request for criminal history record made to the FBI by its customer
and acts as a conduit for the transmission of criminal history record from the FBI to the
customer without examining the content of the record.

DATED: July 22, 2014

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.