When an affiliate produces computer reports for a company, who owes sales tax on the paper — and does it depend on whether the reports are taxable?

Plain-English summary

Norstar Leasing Services, Inc. receives computer reports (on printout paper) from its affiliate, Data Company, which performs recordkeeping and prints reports for Norstar and related companies. Data Company recovers its costs — including the computer paper — by allocating them via a CPU-hourly charge (its only charge), and it pays sales tax on the paper and treats that tax as a cost. Norstar asked whether it owes sales tax on the paper.

The Department held the answer depends on whether Data Company's service is a taxable information service.

• The service determines the tax on the paper. Under § 1105(c)(1), furnishing information — collecting, compiling, or analyzing data and furnishing reports — is a taxable information service, unless it is personal/individual and not substantially incorporated in reports to others.
• If the reports are taxable. If Data Company performs a taxable information service (examples: credit-status reports, stock-quotation services), it may buy the paper for resale with a Resale Certificate (Form ST-120); Norstar then pays sales tax on the taxable service, including the amount attributable to the paper; and Data Company may request a refund (20 NYCRR 534.5) of tax it paid on paper incorporated into those taxable reports.
• If the reports are exempt. If Data Company performs a nontaxable service (examples: payrolls, accounts receivable/payable, tax reports, 527.3(c)(1)), then Data Company is the final consumer of the paper and pays the tax on its own purchase — no liability falls on Norstar, even though that tax cost may factor into what Data Company charges.
• Watch distribution to associates. Reports produced for one customer become taxable if Data Company also distributes them, in whole or part, to the customer's associates.
• No expense deductions from a taxable receipt. Once a receipt is taxable, the law allows no deduction for the seller's expenses — including sales tax the seller paid on operating costs (§ 1101(b)(3); 20 NYCRR 526.5(e)).

What this means for you

"Who pays the tax on the supplies" follows the taxability of the service. If a service bureau's reports are a taxable information service, it buys its consumables (paper) for resale and the customer pays tax on the whole service. If the reports are an exempt service, the bureau is the end user and pays tax on its own supplies.

A cost-allocation among affiliates doesn't rewrite the tax. Recovering the paper's cost through a CPU-hourly charge to related companies doesn't shift the tax. The question is still whether the underlying service is taxable — and the seller can't deduct its own expenses (or the tax it paid) from a taxable receipt.

Sharing a client's report with its associates can flip it to taxable. An otherwise-exempt report prepared for one customer becomes a taxable information service if it's also distributed to the customer's associates. Mind who receives the output.

Common questions

Q: An affiliate prints our reports and bills us by CPU hour. Do we owe tax on the paper?
A: Only if the reports are a taxable information service — then you pay tax on the service, including the paper. If the service is exempt (payroll, A/R, tax reports), the affiliate pays tax on the paper as the consumer.

Q: Which report types are taxable?
A: Information services like credit-status reports and stock-quotation services are taxable; payrolls, accounts receivable/payable, and tax reports are exempt.

Q: Can the service company deduct the sales tax it paid on paper from what it charges us?
A: No. Once a receipt is taxable, no deduction is allowed for the seller's expenses, including sales tax it paid on operating costs. (It may instead claim a refund on paper resold in a taxable report.)

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(1) — taxes furnishing information; personal/individual exclusion
• Tax Law § 1101(b)(3) — "receipt" allows no deduction for expenses
• 20 NYCRR 526.5(e) — expenses of making a sale are not deductible from receipts
• 20 NYCRR 527.3(c)(1) — taxable vs. exempt information services
• 20 NYCRR 534.5 — refund for tax paid on property resold as part of a taxable service

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a87_12s.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-87(12)S
Sales Tax
February 25, 1987

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S860926B

On September 26, 1986, a Petition for Advisory Opinion was received from Norstar Leasing
Services, Inc,. One Norstar Plaza (P.O. Box 1667), Albany, New York 12201.
The issue raised is whether Petitioner is liable for sales tax on computer printout paper it
receives from its affiliate - a separate entity - in the form of reports.
Petitioner's computers are used by Data Services Company ("Data Company"), an affiliate,
for performing record keeping services and printing reports for the Petitioner and its associates.
Data Company recovers its operating expenses, including the computer paper purchases, by
allocating them to the Petitioner and the related companies. The allocation factor is the number of
hours the central processing unit ("CPU") is used within a billing period for each associate. The
CPU hourly rate is the only charge Data company makes for its services.
Data company pays sales tax on all purchases of computer paper and treats the tax as an
allocable expense. Thus, the tax becomes an element of cost in the receipts Data Company collects
from the Petitioner and the other affiliates.
Section 1101(b)(3) of the Tax Law defines the term "receipt" as "[t]he amount of the sale
price of any property and the charge for any service taxable under this article, valued in money, . .
without any deduction for expenses."
The Sales and Use Tax Regulations of the State Tax Commission explain that, for application
of the sales and compensating use tax, "[a]ll expenses . . . incurred by a vendor in making a sale,
regardless of their taxable status and regardless of whether they are billed to a customer, are not
deductible from the receipts." 20 NYCRR 526.5(e).
Additionally, the Tax Law contains the following definitions:
Sale, selling or purchase. Any transfer of title or possession or both, exchange or
barter, rental, lease or license to use or consume, . . . including the rendering of any
service, taxable under this article, for a consideration or any agreement therefor.
Retail sales. (i) A sale of tangible personal property to any person for any purpose,
other than (A) for resale as such or as a physical component part of tangible personal
property, or (B) for use by that person in performing the services subject to tax under
[Tax Law 1105(c)(1)] where the property so sold becomes a physical component part
of the property upon which the services are performed or where the property so sold

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

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TSB-A-87(12)S
Sales Tax
February 25, 1987

is later actually transferred to the purchaser of the service in conjunction with the
performance of the service subject to tax. Tax Law §1101(b)(4)(i), (5).
Section 1105(c)(1) of the Tax Law imposes a tax on receipts from every sale, except for
resale, of "[t]he 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."
Accordingly, the nature of the services performed by Data Company determines whether it
must pay sales tax on purchases of computer paper. If the paper is used to perform a taxable
information service, no tax is due on the paper if Data Company issues a Resale Certificate (Form
ST-120) to its supplier. When the service rendered by Data Company to Petitioner is not subject to
tax under Tax Law 1105(c), the purchase of computer paper by Data Company is a taxable purchase.
Credit status reports issued by credit bureaus and stock quotation services are examples of
taxable information services. Exempt services would include the preparation of payrolls, accounts
receivable/payable and tax reports. 20 NYCRR 527.3(c)(1); see also Computers, Department of
Taxation and Finance, Technical Services Bureau Bulletin 1978-1S, p4. However, accounting
reports produced for one customer will become taxable if also distributed by Data Company, wholly
or in part, to associates of the customer. See Tax Law 1105(c)(1), supra.
The Sales and Use Tax Regulations further provide that on invoices containing charges for
both taxable and exempt goods or services the taxable amounts must be stated separately. If such
amounts are not so separately designated, tax must be collected on the entire amount billed. 20
NYCRR 533.2(a)(1);(b)(2).
Once a receipt is determined taxable, the Tax Law allows no deduction for expenses
(including sales tax the seller may have paid on operating expenses) except for charges specifically
excluded from taxation under the Tax Law and Regulations, for instance certain amounts billed for
interest and transportation. Tax Law 1101(b)(3), supra; 20 NYCRR 526.5(g),(h).
In conclusion, Petitioner is liable for payment of State and local sales tax on its purchases of
taxable information services including any amounts attributable to computer paper. Data Company
may request a refund for sales tax paid on computer paper incorporated in such taxable reports. 20
NYCRR 534.5. However, when performing a nontaxable information service for the Petitioner, Data
Company - not the Petitioner - is considered the final consumer of the computer paper and therefore
the person required to pay the tax on its purchase.

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TSB-A-87(12)S
Sales Tax
February 25, 1987

Although this tax expense may be a factor in calculating the rate of compensation Data Company
will charge for services, no liability for its payment is imposed on the Petitioner under the Tax Law.

DATED: February 25, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.