Are a coupon clearinghouse's products, sold to retailers and advertisers, subject to New York sales tax?

Plain-English summary

A coupon clearinghouse acts as the middleman between retailers (who redeem manufacturers' coupons) and advertisers (who fund them). It receives and scans coupons, screens for fraud, applies payment policies, stores the data, and tabulates and transmits the money owed from advertisers to retailers, all as a disclosed agent of its customers. As part of the product, it gives customers limited prewritten software to run reports, and for advertisers it adds fraud-prevention checks and benchmark data drawn from aggregated coupon data. The components are sold together; the software/data piece is listed separately on advertiser invoices but cannot be bought on its own.

The Office of Counsel concluded none of the charges are taxable. Integrated services are taxed by their primary function (SSOV '81). The primary function of both the retailer product and the advertiser product is coupon processing and payment handling, which is not an enumerated taxable service. The limited software is incidental; and because the multi-component advertiser product is a standardized, integrated offering whose parts can't be bought separately, it is taxed as a single unit by its non-taxable primary function (Penfold). So the fraud-prevention and software/data components don't make the product taxable.

What this means for you

Clearinghouses and back-office service providers

Where your offering's primary function is a non-taxable service (processing, payment handling), incidental software or data bundled in, and sold only as part of the package, generally won't make the whole thing taxable. Standardized, can't-buy-separately bundling supports single-unit treatment.

Retailers and advertisers

Coupon clearing/processing fees are generally not taxable in New York.

Accountants and tax professionals

This is the primary-function doctrine in action (SSOV '81; Penfold). Contrast TSB-A-15(13)S, where separately useful services billed under one charge were treated as separate because they weren't a single standardized offering. Note the opinion does not address separately-contracted analytics, which the petitioner didn't ask about.

Common questions

Q: There's prewritten software in the product, why isn't it taxable?
A: The software is incidental to the primary non-taxable coupon-processing service, so it doesn't make the charges taxable.

Q: Does separately listing the software/data on the invoice change the result?
A: No, because the components can't be bought separately; the integrated product is taxed as a single unit by its primary function.

Q: Are the fraud-prevention checks taxable as protective services?
A: No. They are part of the non-taxable processing product, not a standalone protective service here.

Q: Can I rely on this opinion?
A: It binds the Department only as to the petitioner. Use it as guidance and confirm your own facts.

Citations and references

Statutes and guidance:
- Tax Law § 1105(c)(1), (8), (9)
- Matter of SSOV '81 Ltd. (TAT 1995); Matter of Penfold v. State Tax Comm'n, 114 AD2d 696 (3d Dep't 1985); TSB-A-15(20)S; TSB-A-15(13)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales-ao-2020.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20-28s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(28)S
Sales Tax
June 9, 2020

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
The Department of Taxation and Finance received a Petition for Advisory Opinion from
[ REDACTED ] (Petitioner). Petitioner asks whether the coupon clearing products it sells to
advertisers that issue discount coupons and the retailers that accept them are subject to sales and
use tax.
We conclude that the products are not subject to sales and use tax.
Facts
Petitioner provides coupon clearing products for discount coupons redeemed at retail
stores located in New York State. Petitioner's customers are the retailers who redeem those
coupons and the advertisers whose product or service is subject to the discount offered via the
coupon. Petitioner does not design, print, or distribute coupons. Instead, Petitioner's customers
engage Petitioner to manage coupon information and the monetary transactions connected with
the redemption of physical and electronic coupons by consumers. An advertiser will contract
separately with a third party to place the advertiser's coupons in newspapers, direct mail, and
other tangible advertising media distributed in the State, as well as on Internet websites, mobile
applications, and other electronic distribution platforms accessible via computers and mobile
devices.
The practice of redeeming coupons at a retailer's point of sale requires the retailer to
provide a discount to its shopping customer against the selling price of a product and to perform
various administrative functions as required to obtain reimbursement of that discount from the
advertiser. Per industry practice, an advertiser is required to reimburse the retailer for the
discount and to pay the retailer one or more fees for the administrative burden imposed on the
retailer. Almost all retailers and advertisers use a coupon clearinghouse as a "middle-man" to
manage the data flowing between the retailer and the advertiser and to facilitate the payment of
the monies owed by the advertiser to the retailer. Petitioner is a coupon clearinghouse that
facilitates the flow of data and funds for its customers. Each of Petitioner's customers must enter
into a written agreement for its coupon clearing products that explicitly establishes a formal
agency relationship between Petitioner and the customer. This agency relationship is disclosed
to all retailers and advertisers with whom Petitioner interacts on behalf of the customer. Further,
standard industry practice ensures that all parties interacting with Petitioner recognize that
Petitioner is a formal agent on behalf of its customer.

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TSB-A-20(28)S
Sales Tax
June 9, 2020

When Petitioner receives a batch of coupons from a retailer, Petitioner typically performs
the following services as part of its coupon clearinghouse products (except that items 3 through 5
do not apply to retailer customers):
1.
2.
3.
4.
5.
6.
7.
8.

Receipt and separation of coupons;
Manual scanning of coupons into Petitioner’s production system;
Manual review of coupons for fraud prevention;
Automated analysis of coupons by Petitioner's system to support fraud prevention;
Automated application of advertiser payment policies (regarding coupon expiration dates
and redemption exceptions);
Destruction of the physical coupons after processing;
Transmission of coupon data to Petitioner's servers for storage; and
Tabulation of payments owed by advertisers to retailers, transmission of the required
funds to retailers, and management of an advertiser's on-going funding requirements.

In performing the above services, Petitioner populates databases within its production
systems with the offer and coupon data obtained from scanning and validating the coupons
submitted by the retailers. All scanning activities occur outside New York and the servers on
which the data is stored are located outside the State.
After Petitioner has compiled a customer's information in its databases, Petitioner will
provide the information to the customer and may provide some or all of the customer's
information to the customer’s designees. In addition, Petitioner aggregates the customer
information and may provide certain categories of the aggregated information (stripped of any
customer name or other customer-specific detail) to third-parties, including other advertiser
customers. Petitioner also may use its customers’ aggregated data in performing discrete
analytics for a customer, which are typically contracted and billed separately from Petitioner's
standard coupon clearing fees. Petitioner is not inquiring about the taxability of these analytical
services.
Petitioner’s standard coupon clearing product for advertisers includes a certain level of
fraud protection, as shown in the above list, including verifying, through the Internet, that a
retailer submitting coupons actually exists. Petitioner also contracts with a third-party service
provider to make field visits to retail stores submitting coupons through its service to verify that
the retailers actually exist and that their product mix includes those products for which the
retailers have submitted coupons. Petitioner bills its advertiser customers separately for these
services, but these services are not optional.
As part of its products, Petitioner provides each customer with access to prewritten
software created by Petitioner that enables the customer to run various reports to view the
coupon and payment data applicable to the customer. The software does not allow the customer
to add, edit, or delete data. A customer may import reference data (such as division number or
general ledger account number) into a limited set of fields to align with Petitioner’s data, but
Petitioner must upload the data on behalf of the customer. While most of the software's reports

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TSB-A-20(28)S
Sales Tax
June 9, 2020

are standard, the software does allow the customer to select from a set of standard fields in order
to display certain fields or alter the arrangement of the fields in a given report.
Petitioner’s software for advertisers supports certain promotion planning analyses and
also contains a budget management function, which is the only function that allows customers to
define and perform calculations. If the advertiser has insufficient data from its prior coupon
programs to support these analytics, Petitioner’s software will supply comparative data in the
form of aggregated data derived from other customers in the product category being analyzed by
the customer, as discussed above. This combined software/data offering is separately charged
on the invoice to the advertiser, but is mandatory. This offering is not available to retailer
customers.
Customers cannot download the software and Petitioner does not provide tangible or
electronic copies of the software to its customers. Instead, the customer uses its own web
browser to access a URL that allows the customer to access the software by entering a password.
Petitioner's software is hosted on servers located outside New York State and Petitioner has
exclusive control over the servers and the software code. Petitioner gives its customers a
nontransferable, nonexclusive, revocable, and limited right to access and use the software.
Petitioner provides each customer with a copy of the license, but does not require its customers
to sign the license agreement. Petitioner can identify and update the geographic location of each
software user, meaning that Petitioner can identify the number of software users in New York
versus software users everywhere.
Petitioner charges both its advertiser and retailer customers a bundled base service fee
that covers the items listed above. Petitioner does not charge retailer customers anything for the
prewritten software that it provides them, but does charge advertiser customers a separate
monthly usage fee for its prewritten software/data product. Petitioner does not sell the prewritten
software, prewritten software/data products, or its fraud prevention services except as part of the
coupon clearance services discussed above.
Analysis
The Tax Law imposes sales and use tax on retail sales of tangible personal property
(including prewritten software), as well as on sales, except for resale, of certain enumerated
services. Among the taxable services are information services (Tax Law § 1105[c][1] and [9]),
and protective services (Tax Law § 1105[c][8]). Integrated services are to be taxed according to
their “primary function.” See Matter of SSOV '81 Ltd., Tax Appeals Tribunal, January 19, 1995.
The primary function of the coupon clearing product that Petitioner sells to its retailer
customers is the service of processing the coupons and obtaining payment from the advertisers
that issued the coupons. This is not a taxable service. See Tax Law § 1105(c); TSB-A-15(20)S.
As part of that product, Petitioner provides its retailer customers with prewritten software with
limited functionality. That prewritten software is an incidental part of the service Petitioner is
selling to its retailer customers and thus does not render that service taxable.

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TSB-A-20(28)S
Sales Tax
June 9, 2020

The product Petitioner provides to its advertiser customers has a number of components.
In addition to processing the coupons to determine how much the advertiser customer owes the
retailers that redeemed the coupons, Petitioner provides “fraud prevention services” that aim to
ensure that the coupons submitted by the retailer to Petitioner were accepted by the retailer as
part of a legitimate retail sale of the advertiser’s product. Petitioner also provides each advertiser
customer with data derived from Petitioner’s processing of the advertiser’s coupons, along with
benchmark data derived from coupon data aggregated anonymously from all of Petitioner’s
advertiser customers, and prewritten software with which to do promotion planning analyses and
budget planning. While Petitioner’s invoices to an advertiser customer list a separate charge for
the prewritten software/data offering, Petitioner’s product cannot be purchased without this
data/prewritten software component. Given the multiple-component nature of the product
Petitioner sells to advertisers, an initial question in determining the taxability of that product is
whether the product should be taxed as a single unit or as multiple units. We think it should be
taxed as a single unit because it is sold as a standardized, integrated product and its components
cannot be bought separately from Petitioner. See Matter of Penfold v State Tax Comm’n, 114
AD 2d 696 (3d Dep't 1985) (dumping fee held not to be separate from vendor’s waste-removal
service because the dumping service was almost invariably provided in conjunction with the
waste-removal service and was merely an expense of providing that service); cf. TSB-A-15(13)S
(the multiple services the vendor performed for retailers were separate services even though
billed under a single charge because they were not part of a single standardized offering and
none was necessary to perform another of the services). In our view, the primary function of the
product sold to advertisers is a coupon processing service, which, as discussed above, is not a
taxable service. Therefore, none of the Petitioner’s charges to its customers described in this
Advisory Opinion are taxable under the sales tax.
DATED: June 9, 2020
/S/
DEBORAH R. LIEBMAN
Deputy Counsel
NOTE:

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.