Which of a bank data processor's computer services are taxable, and which are exempt information or bookkeeping services?

Plain-English summary

Northeastern Computer Services, Inc. runs on-line data processing for financial institutions — savings banks, S&Ls, and credit unions. Their tellers' terminals connect to Northeastern's central computer, which maintains depositor, loan, checking, and IRA/Keogh accounts and produces transaction reports, checks, customer notices, labels, microfiche, mortgage coupons, and more. Northeastern argued the whole package is an exempt information service under Tax Law § 1105(c)(1).

The Department broke the work into categories — some taxable, some not.

• Accounting/bookkeeping — not taxable. Preparing payrolls, tax forms, journals/ledgers, and financial statements is not a taxable information service (20 NYCRR § 527.3(b)(2); TSB Bulletin 1978-1(S), Computers). The Department extended this to depositor checks, auditor-confirmation letters, IRS reporting tapes, and customer account statements — all exempt. But if Northeastern mails the notices/statements, that mailing is taxable under the printer/mailer rules (Publication 842; TSB-A-86(15)S).
• Duplicating — extra copies are taxable. When a printout report isn't taxable, that covers all copies of the multi-carbon original. Additional copies are taxable — by rerun, looping, simultaneous printing, or copying to a different medium (disc, tape, microfiche, microfilm). If Northeastern supplies the medium, the charge is a taxable sale of tangible personal property (§ 1105(a)); processing on the customer's own property is taxable under § 1105(c)(2).
• Data conversion vs. information service. Merely changing data from one form/medium to another without creating new information is taxable — a § 1105(a) sale if Northeastern supplies the medium, or a § 1105(c)(2) fabrication service if the customer supplies it (Finserv Computer Corp. v. Tully). Initial data conversion, microfilm, labels, mortgage coupons, index cards, and name/address or zip/census listings are taxable. Only a report that processes data to produce new information can be an information service — and it must first qualify as one before the § 1105(c)(1) exclusion applies. The petition wasn't detailed enough to classify each item; that must be done by administrative procedure.
• Materials and supplies. Paper and envelopes used to perform nontaxable services are taxable to Northeastern. But materials actually transferred to the customer with a taxable service can be bought for resale with a Resale Certificate (Form ST-120) (§ 1101(b)(4)(i)(B)); Northeastern then collects tax from the customer on the service and the resold material.
• Data-line charges — not taxable. Accessing the CPU through a remote terminal isn't a taxable transfer of possession of the computer. Although electronic display of information can be taxable "furnishing of information," here the terminals show only the bank's own uniquely personal account data, to which the § 1105(c)(1) exclusion applies (per the New York Life / Metropolitan Life cases). So the data-line charges are not taxable.

What this means for you

A computer service bureau's bill is rarely all-taxable or all-exempt. New York sorts the work item by item: bookkeeping/accounting functions (payrolls, ledgers, financial statements, account statements) are exempt, while data conversion, extra copies, and tangible deliverables (microfiche, labels, coupons) are taxable. Map each line to the right bucket.

"Changing the form" of the customer's data is taxable; "creating new information" can be exempt. The Finserv line matters: reformatting or re-encoding data the customer already has is taxable, whether as a property sale or a fabrication service. Only genuine processing that yields new information is a candidate for the information-service exclusion — and it still has to qualify as an information service first.

Personal, account-specific data is the key to the exclusion. The § 1105(c)(1) exclusion protects information that is personal or individual and not incorporated into reports for others — like a bank's own depositor/loan records. That's why the real-time account terminal access (data-line charges) came out non-taxable.

Watch the traps: mailing and duplicates. Even exempt statements become taxable when you mail them for the customer, and extra copies beyond the original are taxable. And buy your paper/envelopes right — tax on supplies used for nontaxable jobs, resale certificate for materials handed to the customer with a taxable service.

Common questions

Q: We process banks' accounts and print their statements and reports. Is that a taxable information service?
A: Not the bookkeeping/accounting part. Maintaining accounts and producing statements, journals, ledgers, financial statements, checks, and IRS tapes is exempt. But data conversion, extra copies, tangible items like microfiche/labels/coupons, and mailing the statements are taxable.

Q: We just re-encode the client's own data onto tape or microfiche. Exempt?
A: No. Merely changing the form or medium of data the customer already has — without creating new information — is taxable (a property sale if you supply the medium, a fabrication service if the customer does), under Finserv v. Tully.

Q: Are the monthly data-line (CPU access) charges taxable?
A: Not here. Remote terminal access isn't a taxable transfer of possession, and the terminals display only the bank's own personal account data, which falls within the § 1105(c)(1) personal-information exclusion.

Q: How should we buy our paper, envelopes, and other supplies?
A: Pay tax on supplies used to perform nontaxable services. For materials you actually transfer to the customer with a taxable service, buy them for resale with Form ST-120 and collect tax from the customer on the service and the material.

Citations and references

Statute, regulation, and cases:

• Tax Law § 1105(c)(1) — taxes furnishing information/information services, but excludes information that is personal or individual and not substantially incorporated in reports to others
• Tax Law § 1105(c)(2) — taxes producing, fabricating, processing, printing, or imprinting tangible personal property furnished by the customer (not for resale)
• Tax Law § 1105(a) — taxes retail sales of tangible personal property (e.g., when the processor supplies the medium for copies)
• Tax Law § 1101(b)(4)(i)(B) — resale exclusion for materials transferred to the customer in connection with a taxable service (buy with Form ST-120, then collect tax from the customer)
• 20 NYCRR § 527.3(b)(2) — computer preparation of payrolls (and, by Department policy, tax forms, journals, ledgers, and financial statements — TSB Bulletin 1978-1(S), Computers) is not a taxable information service
• 20 NYCRR § 526.7 and § 527.3(a)(1) — remote CPU access is not a taxable transfer of possession, but electronic display of information can be "furnishing of information"; Matter of Murphy Heating Service v. Chu, 124 A.D.2d 907
• Finserv Computer Corp. v. Tully, 463 N.Y.S.2d 924, aff'd 61 N.Y.2d 947 — converting data from one form/medium to another without changing the intelligence is taxable, not an information service
• Matter of New York Life Ins. Co. v. State Tax Commission, 80 A.D.2d 675, aff'd sub nom. Matter of Metropolitan Life Ins. Co. v. State Tax Commission, 55 N.Y.2d 758 — the § 1105(c)(1) exclusion applies to uniquely personal information; also TSB-M-81(3)S, Publication 842, TSB-A-86(15)S (George Silver), Concept IV Computer Systems TSB-A-84(18)S, and Norstar Leasing TSB-A-87(12)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a88_33s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88(33)S
Sales Tax
June 24, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S871027B

On October 27, 1987, a Petition for Advisory Opinion was received from Northeastern
Computer Services, Inc., 6464 Ridings Road, Syracuse, New York 13206.
The issue raised is the tax status, under Article 28 and 29 of the Tax Law, of on-line
computer services and related processing of data provided by the Petitioner to financial institutions.
Petitioner's customers include savings banks, savings and loan associations and federal credit
unions. These organizations own or lease and maintain teller terminals and transmission lines for
accessing the central processing unit and peripheral devices owned by the Petitioner by means of
either interconnecting common carrier, telephone lines, cables or wireless transmission.
Petitioner's data processing agreement with a customer provides, initially, for data conversion
of customer records to meet processing specifications. Conversion charges include training of
customer's key personnel and out-of-pocket charges incurred by the processor, as well as an
additional charge for conversion if records are not in machine readable form. After conversion,
Petitioner provides, on-line with the customer's in-put terminals, main computer storage and
instruction programs for updating the stored data. Depositors' savings accounts, mortgage and
consumer loan accounts, checking accounts and IRA/Keogh deposits are maintained in this manner.
From this accumulation of data, Petitioner, with the aid of the appropriate computer
programs, daily, monthly, quarterly or annually prepares paper printouts of various transaction
reports including posting journals, account registers, trial balances and management reports and
analyses.
In addition to producing transaction reports, Petitioner periodically calculates and prints
checks for customer payments of interest earnings and vacation clubs.
Petitioner also prepares customer notices, such as earnings reports, mortgage escrow
analyses, delinquency notices, certificate maturity letters and, at the customer's request, auditor
confirmation letters.
Other special jobs performed at the customer's request include production of payment history
index cards, mailing labels, microfiche masters and copies, microfilm, and mortgage bills and
coupons.
It is the customer's responsibility to arrange and pay for delivery of data and pickup of
reports.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-88(33)S
Sales Tax
June 24, 1988

Processing charges are billed monthly; they are calculated by multiplying the total number
of accounts in computer storage at the end of the month for each account type by the rate set down
in the fee schedule for the applicable service. In addition the customer is billed, monthly, a data line
fee for access time to the central processing unit, and a separate charge for microfiche production.
Petitioner contends the services at issue are information services excludable from tax
pursuant to Section 1105(c)(1) of the Tax Law.
Sales tax is imposed on the receipts from every retail sale of tangible personal property,
except as otherwise provided in the statute. Tax Law §1105(a). Sales of services, however, are taxed
only if enumerated in Section 1105(c) of the Tax Law. Services so specified include (1) "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. . . " (2) "Producing, fabricating,
processing, printing or imprinting tangible personal property, performed for a person who directly
or indirectly furnishes the tangible personal property, not purchased by him for resale, upon which
such services are performed."
Accounting and Bookkeeping Services
The Sales and Use Tax Regulations explain that the preparation of payrolls for customers by
computer service companies is not a taxable information service. 20 NYCRR 527.3(b)(2), Example

3. Furthermore, Tax Department policy has interpreted the same exclusion to apply to the preparation
   of tax forms, the keeping of journals, accounts and ledgers and the rendering of financial statements,
   whether manual or computer assisted. See Technical Services Bureau Bulletin 1978-1(S),
   Computers. Charges for depositor payment checks, auditor confirmation letters, IRS reporting tapes
   and customer account statements qualify for exemption under the regulations and rules quoted in this
   paragraph.
   If the customer notices and statements are mailed by the Petitioner, charges for this service
   are subject to tax according to the rules for printers and mailers set down in Department of Taxation
   and Finance Publication 842 (4/84). See also George Silver, State Tax Commission Advisory
   Opinion, April 24, 1986, TSB-A-86(15)S.
   Duplicating
   When computer printout reports and tabulations are not taxable, the exemption includes all
   copies of a multi-carbon original printing. Additional copies are taxable, whether prepared by
   rerunning or continuous running (looping) the same program or by printing similar programs
   simultaneously or by duplicating onto a medium different from the original (e.g., disc, tape,
   microfiche, microfilm). When the Petitioner supplies the medium for copies, the charge for

-3­
TSB-A-88(33)S
Sales Tax
June 24, 1988
the job is taxable as the sale of tangible personal property (Tax Law §1105[a]), while processing
upon the property of the customer is taxable under Tax Law §1105 (c) (2).
Data Conversion - Information Services
The tax status of documents prepared by the Petitioner that are not considered accounting
books or records, because they are not required for the preparation of financial statements, depends
on whether the completed job constitutes data conversion or the furnishing of information.
If data are arranged to the purchasers specifications on cards, discs, tapes or paper printouts
without creating new information but merely a change in form, the taxability is as follows:
1.

When the vendor furnishes the medium on which the purchaser's source data is
recorded, the sale is of tangible personal property taxable in accordance with the
provisions of Section 1105(a) of the Tax Law.

2.

When the customer supplies the medium upon which the printing or encoding is
performed, a sale of a fabrication service is made and the service is taxable pursuant
to Section 1105(c)(2) of the Tax Law. See, Taxability of Major Data Entry
Techniques, TSB-M-81(3)S.

Thus, Petitioner is selling tangible personal property rather than an information service when
information already in the customer's possession is merely converted from "one form or medium to
another, without interpreting or recasting it, so that the form of the information changes but not the
intelligence contained therein". (Finserv Computer Corp. v. Tully, 463 N.Y.S. 2d 924, affd 61
N.Y.2d 947). Such taxable jobs would include the furnishing, on a medium supplied by the
Petitioner, of the initial data conversion, microfilm, labels, mortgage coupons and index cards, as
well as reports by census tract and zip code or alphabetical name and address listings. With respect
to the latter, see Concept IV Computer Systems, State Tax Commission Advisory Opinion, April 26,
1984, TSB-A-84(18)S.
Conversely, the preparation of a report is deemed an information service if it requires the
Petitioner to process data through a computer system under the control of a program for new
information, rather than merely render back information supplied by the customer in a more
convenient form.
A report must qualify as an information service before its eligibility for the exclusion
contained in Tax Law §1105(c)(1), supra, can be established.
The Advisory Opinion function is limited to setting forth the applicability of pertinent
statutory and regulatory provisions to a specified set of facts. The information contained in the
Petition is not sufficiently detailed for a final classification, for tax purposes, of each report,
tabulation or product Petitioner furnishes under a data processing agreement. This determination
must necessarily be made by administrative procedure.

-4­
TSB-A-88(33)S
Sales Tax
June 24, 1988
Materials and Supplies
It is further noted that Petitioner's monthly customer billings show a charge for "paper use"
and for envelopes. When purchasing such materials, Petitioner must pay sales tax if they are to be
used to perform nontaxable services. However, purchases of materials actually transferred to the
customer in connection with a service subject to tax are not taxable if Petitioner gives a properly
completed Resale Certificate (Form ST-120) to the supplier. Tax Law § 1101(b)(4)(i)(B). See also
Norstar Leasing Services, State Tax Commission Advisory Opinion, February 25, 1987, TSB-A­
87(12)S. Under the latter circumstances, Petitioner must collect tax from the customer on the taxable
service and on the material resold in conjunction with it, whether or not a separate charge is made
for each of these components.
Data Line Charges
Petitioners customers also pay a data-line charge, billed monthly, based on the time their
terminals are connected to the central processing unit (CPU). Access to a CPU through a remote
terminal is not considered a taxable transfer of possession of the computer. 20 NYCRR 526.7(4) and
(5). However, since electronic readout or display of intelligence is furnishing of information "in any
other manner" within the meaning of Tax Law §1105[c][1], (20 NYCRR 527.3[a][1]), Matter of
Murphy Heating Service, Inc., et al. v. Chu, et al., 124 AD2d 907, 908, all or part of an access charge
may be taxable according to the type of information provided.
Petitioner's customers' terminals are used for real-time updating of depositor and loan
accounts and for retrieval of previously stored data concerning these same accounts. Thus, the visual
display of data received at a customer's terminal contains only the uniquely personal information to
which the exemption in Tax Law §1105(c)(1) has been held to apply (e.g. Matter of New York Life
Ins. Co. v. State Tax Commission, 80 AD2d 675, affd sub nom. Matter of Metropolitan Life Ins. Co.
v. State Tax Commission, 55 NY2d 758. Accordingly, the data-line charges are not subject to tax.

DATED: June 24, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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

.