Are digital document services — scanning, data capture, validation and cloud storage of a customer's documents — subject to New York sales tax?

Plain-English summary

A company provides digital document services for document-heavy back-office work — typically handling invoices for accounts-payable departments. Its offering has four pieces:

• Product A — scans/receives a customer's documents and converts them to PDF, returning them to the customer or storing them.
• Product B — uses data-extraction technology plus subject-matter experts to capture and validate specific data from those documents and flag errors.
• Product C — a digital approval and exception-handling workflow that validates documents, catches duplicates/discrepancies, and keeps an audit trail.
• Product D — cloud hosting of the customer's document images, searchable and backed up off-site.

The Office of Counsel concluded none of it is taxable:

• Product A merely changes the format of the customer's information without changing its intelligence. Converting information from one form to another isn't a taxable information service (Finserv Computer Corp. v. Tully), whether the PDFs are delivered tangibly or electronically.
• Products B and C go further — compiling, analyzing, and organizing the data — so they are information services (Finserv; ADP Automotive). But Tax Law § 1105(c)(1) excludes information that is personal or individual in nature and not furnished to others. Here the provider works only on the customer's own documents and returns the results only to that customer, so the exclusion applies.
• Product D (electronic data storage) is not an enumerated service — not taxable.

So whether the products are sold separately or together, the receipts aren't taxable. And separate charges to customize a customer's existing software so it's compatible with the provider's software are exempt under Tax Law § 1115(o).

What this means for you

Document-processing, scanning, and BPO vendors

The dividing line for "information services" is whose information and who else sees it. Working a single customer's own data and returning it only to that customer lands in the personal-or-individual exclusion — even when you genuinely analyze and refine the data. Pull data from a common database shared across customers and you're on the taxable side.

Cloud storage and SaaS-adjacent offerings

Electronic data storage by itself isn't an enumerated taxable service in New York.

Accountants

Bundling didn't hurt here because every component was non-taxable. If a taxable element were mixed in, the separately-stated/reasonable-charge analysis would matter.

Common questions

Q: Products B and C analyze data — isn't that a taxable information service? A: It is an information service, but it's excluded because the information is personal and individual to the customer and is never furnished to anyone else.

Q: What makes Product A non-taxable?
A: It just converts documents to PDF without changing their intelligence — a format change isn't a taxable service (Finserv).

Q: Is cloud document storage taxable?
A: No — electronic data storage isn't one of New York's enumerated taxable services.

Q: We also tweak the customer's own software to talk to ours. Taxable? A: No — charges to modify software for compatibility are exempt under § 1115(o).

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

• Tax Law § 1105 (services subject to sales tax)
• Tax Law § 1105(c)(1) (tax on information services; exclusion for information that is personal or individual in nature)
• Tax Law § 1115(o) (exemption for charges to modify software for compatibility)
• Finserv Computer Corp. v. Tully, 94 AD2d 197 (3d Dept. 1983), aff'd 61 NY2d 947 (1984)
• ADP Automotive Claims Services, Inc. v. Tax Appeals Tribunal, 188 AD2d 245 (3d Dept. 1993); TSB-A-16(19)S; TSB-A-16(31)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/a20-62s.pdf

Original ruling text

New York State Department of Taxation and Finance
Office of Counsel

TSB-A-20(62)S
Sales Tax
November 17, 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 its sales of digital document services are subject to sales and compensating use tax (tax). We conclude that Petitioner’s sales of digital document services are not subject to tax. Facts Petitioner provides digital document services for document intensive business processes. Petitioner typically provides its services with respect to invoices for accounts payable departments. Petitioner’s services include: on- and off-site document scanning and data extraction and capture, delivery of customer data and electronic documents through digital workflow, and hosting of customer data and electronic documents in a digital repository (detailed below). Petitioner does not license or provide software to its customers. However, Petitioner may charge the customer to modify the customer’s own software to render that software compatible with Petitioner’s software. Product A Product A includes document capture and scanning and delivery of customer data back to the customer. Product A handles all varieties of document formats and delivery channels including: USPS (PO Box), courier, email, fax, secure file transfer protocol (SFTP), digital media, and direct attachments to digital workflows. Product A is integrated with Product B and Product C (described below) for delivery of electronic documents and extracted data to the customer. Petitioner provides the ability to upload electronic documents directly via its upload portal for customers that use electronic or scanned documents. Petitioner accepts any attachment format for documents that are entered into the system via web portal, fax or email. Each customer is assigned an email box for email attachment processing and email boxes are automatically checked through the day and night, on a schedule specific to each customer's needs. Attachments are converted to a common file format (PDF) and processed. Petitioner’s employees monitor the processing stage of each email batch throughout the conversion process.

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TSB-A-20(62)S
Sales Tax
November 17, 2020

If there is an issue during processing, the employee can immediately remedy the problem. Physical documents are scanned as part of Product A’s process and scanning can be done at Petitioner’s location or on-site at the customer’s location. Petitioner uses its own employees to manually open physical mail, scan physical documents, and enter data. The PDFs created by Product A are either returned to the customer—usually through SFTP—or hosted on Product D (described below). Product B Product B uses advanced data extraction and capture technologies while incorporating Petitioner’s own subject matter experts (SMEs) to capture customer data. Customer specific data is extracted from the documents and entered in Petitioner’s quality assurance (QA) application that programmatically performs data validation and flags potential errors. Petitioner validates the captured data against the customer supplied data file, for example, the customer’s accounts payable file, as well as Petitioner’s internally developed data files. Petitioner’s QA operators review all suspected errors and issues that cannot be resolved and cleared by the primary level of Petitioner’s capture process. Only if the QA operator determines a customer exception exists will it be presented to the customer via Product C for resolution. Petitioner’s SMEs review all exceptions and can clear most exceptions without involving the customer. Captured data is returned to the customer directly through the customer’s own system or through Product C or Product D. Product C Product C is a 100% digital process for document approval and exception handling. Product C integrates with customer business and accounting systems to validate documents and shepherd documents through the review and approval process. Records that exceed a certain threshold can be automatically diverted to Petitioner’s threshold approver to identify potential duplicates and other discrepancies. Each document process is automatically recorded in Product C’s database, providing a comprehensive audit trail of all actions performed. Completed documents, along with the supporting documentation, can be automatically forwarded to Product D––a hosted document repository that provides customers the ability to store and access their electronic document archives electronically via the web. Product C and Product D both offer full search capabilities that can be filtered according to customer specific user rights. Product D Product D hosts customer document images on-demand in its own secure cloud. A customer can access its documents at any time from any location through a password-protected website equipped with a customized document search engine. Because Product D stores the

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TSB-A-20(62)S
Sales Tax
November 17, 2020

customer’s document images in Petitioner’s cloud, the documents are available to the customer in the event of a disaster or disruption to the customer’s facilities. Petitioner ensures the security of the customer’s electronic documents through full backup of the repository to a secure off-site location every 24 hours. Products A, B, and C are integrated and sold together. Product D also is typically integrated and sold with the other products, but could be sold separately, depending on the customer’s need. Petitioner’s charges for each service are per document page serviced. Analysis The Tax Law imposes tax on sales of tangible personal property and specific enumerated services. See Tax Law § 1105. As relevant here, Tax Law § 1105(c)(1) imposes tax on the receipts from every sale, except for resale, of: The furnishing of 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 not or may not be substantially incorporated in reports furnished to other persons. Product A receives and converts a customer’s digital or tangible documents to PDFs and returns those PDFs to the customer—typically via secure file transfer protocol (SFTP)—or hosts the PDFs on Product D. Converting information from one form to another without changing its intelligence is not a taxable information service and is not an otherwise enumerated taxable service. See Finserv Computer Corporation v. Tully, 94 AD2d 197 (3rd Dept. 1983) aff’d 61 NY2d 947 (1984). This service is not taxable whether the PDFs are delivered to the customer tangibly or electronically. See TSB-A-16(31)S. Products B and C are both information services because each goes beyond changing the format of the customer’s information to include compiling, analyzing and organizing the information and providing that value-added information to the customer. Product B captures customer specific subsets of data from the customer’s documents, validates that data, and flags and resolves potential errors in the data, before returning that data to the customer. Product C validates the customer’s documents and identifies and resolves duplicates and other discrepancies within the documents and provides an audit trail of all actions taken. These refinements all add to the intelligence contained in the original information and constitute an information service. See Id. at 199; ADP Automotive Claims Services, Inc. v. Tax Appeals Tribunal, 188 AD2d 245 (3rd Dept. 1993). However, Products B and C are excluded from the tax on information services because the service is performed on customer information that is personal and individual in nature and is never provided to persons other than the customer. Petitioner captures, analyzes, and refines the

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TSB-A-20(62)S
Sales Tax
November 17, 2020

customer’s own documents and provides the refined documents and captured data to the customer only. Product D—electronic data storage—is not an enumerated service and is not subject to tax. See TSB-A-16(19)S. Thus, whether these products are sold separately or together, the receipts would not be subject to tax. Finally, Petitioner’s charges for customizing a customer’s existing software to make it compatible with Petitioner’s software are exempt from tax. See Tax Law § 1115(o). DATED: November 17, 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.