Is encoding a TV commercial a taxable service the monitoring company must pay, and are the broadcast-monitoring reports it sells taxable?

Plain-English summary

VidCode Inc. helps advertisers confirm their TV commercials actually aired as contracted. It encodes a unique signature onto the master copy of each commercial (done by a contractor using VidCode's equipment, at about $35 per commercial), then uses automated equipment to monitor broadcasts and issue weekly activity reports noting when each commercial aired and whether there was any audio, color, or video error. VidCode asked about two charges: the encoding it pays for, and the monitoring it bills customers.

The Department split the answer:

• Encoding — taxable, and VidCode pays it. Encoding a signature onto a commercial master is a service performed on tangible personal property not held for resale, taxable under Tax Law § 1105(c)(2) (producing/fabricating/processing property furnished by the customer; see 20 NYCRR § 527.4). Because the encoding is just a preliminary step in VidCode's own monitoring service, VidCode is the consumer of the encoding and must pay sales tax on it (citing SOQ Broadcasting and Coopers & Lybrand).
• Monitoring reports — not taxable. The reports VidCode furnishes are an information service under § 1105(c)(1) (collecting, compiling, and analyzing information and furnishing reports). But they fall within that section's exclusion for information that is personal and individual in nature and not substantially incorporated into reports furnished to others — each report is unique to the customer's own commercials, like a private detective agency's report (and like the concrete-testing reports in Fortunato Sons). So the charges to VidCode's customers are not taxable, and no tangible property is conveyed.

What this means for you

A preliminary step you consume is taxable to you

When you buy a service that's an input to the service you sell — here, encoding as a step toward monitoring — you're the consumer of that input and owe tax on it, even though what you sell to your customer may not be taxable. The tax on the input doesn't disappear just because your end product is exempt.

Client-specific reports are a nontaxable information service

A report built from information you collect and analyze about one customer's own material, furnished only to that customer and not substantially reused in reports to others, is a personal and individual information service excluded from tax under § 1105(c)(1). What matters is that the information is unique to the client and not pooled into reports for others.

Watch the line between processing property and selling information

Doing something physical to a customer's tangible property (encoding a master tape) is a § 1105(c)(2) processing service; delivering analysis in a report is a § 1105(c)(1) information service. The same business can be on both sides of that line at once, with different tax results.

Common questions

Q: Our monitoring reports aren't taxable — so is the encoding we pay for also tax-free?
A: No. Encoding is a taxable processing service performed on tangible property, and because it's a step in the service you sell, you're the consumer and owe tax on it.

Q: Why aren't the reports we sell taxable?
A: They're a personal, individual information service under § 1105(c)(1) — unique to each customer's own commercials and not substantially incorporated into reports furnished to others.

Q: Does it matter that we deliver no tape or disc to the customer?
A: It reinforces the result. No tangible property is conveyed, and the report itself is an excluded personal/individual information service.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(2) — tax on producing, fabricating, processing, printing, or imprinting property furnished by the customer
• Tax Law § 1105(c)(1) — tax on information services; exclusion for personal/individual information not substantially incorporated in reports furnished to others
• 20 NYCRR § 527.4 — processing tangible personal property; services on property held for resale not taxable
• 20 NYCRR § 527.3 — sale of information services

Cited authority:

• SOQ Broadcasting Corp., Dec St Tax Comm, May 23, 1985, TSB-H-85(154)S — service performed on TPP not held for resale
• Coopers & Lybrand, Adv Op St Tax Comm, Oct. 24, 1986, TSB-A-86(43)S — processing service taxable
• Fortunato Sons Inc., Adv Op St Tax Comm, July 28, 1986, TSB-A-86(30)S — personal/individual reports not taxable

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_44s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (44)S
Sales Tax
November 16, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890621B

On June 21, 1989 a Petition for Advisory Opinion was received from VidCode Inc., Suite
240, 55 Williams St., Wellesley, MA, 02181.
The issues raised are whether charges, incurred by Petitioner, VidCode Inc., for encoding
television commercials and the charges to Petitioner's customers for monitoring television
commercials is subject to sales tax.
Petitioner has been organized to enable television advertisers to more accurately and
efficiently determine whether television commercials they have purchased have been broadcast at
the time and in the form and market agreed to under contract. To this end, Petitioner has obtained
from the Federal Communications Commission an exclusive right to use one line of the 525 that
appear on a television screen, and it has developed a device that encodes on this line a signature
which is unique to each commercial. This line appears above the visible portion of the screen. An
independent party has been contracted to do the actual encoding on the master copy of the
commercial, using Petitioner's equipment, at a cost to the company of $35.00 per commercial.
Petitioner has also developed a device that can monitor all television broadcasts in a given
market and record exactly what commercials have been broadcast, the time they were broadcast and
the audio and visual quality of the commercial. Once set up, these monitoring devices operate
automatically, without an operator on the premises. A central computer will be used to coordinate
the information captured by these monitoring devices. Petitioner will earn its revenues by charging
its customers a fee for the monitoring of the commercials. Petitioner furnishes its customers with
weekly activity reports, containing the results of its monitoring activities. The reports indicate
whether there was audio error, color error, video error, etc. in commercials when they were
broadcast.
Petitioner makes no sales of tangible personal property, but in conjunction with its sale of
monitoring services it must have the customer's commercial individualized by having a unique line
of information encoded on the master copy. This encoding makes it possible for Petitioner's
monitoring equipment to recognize the particular commercial. The charge made by Petitioner to its
customers is for the monitoring of broadcast commercials and the issuance of reports to the
customers indicating the results of such monitoring. No tangible property is conveyed.
Section 1105(c)(2) of the Tax Law imposes a tax on the receipts from every sale, except for
resale, of the services of "[p]roducing, 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."
TP-9 (9/88)

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TSB-A-89 (44)S
Sales Tax
November 16, 1989

Section 527.4 of the Sales and Use Tax Regulations in relevant part states:
(d) "Processing is the performance of any service on tangible personal property. . .which
effects a change in the nature, shape or form of the property."
*
*
*
(f) "When services enumerated in this section are rendered on property held for resale, the
services are not taxable."
The service of encoding upon television commercials is a service upon tangible personal
property not held for sale and is therefore subject to the tax imposed under Section 1105(c)(2) of the
Tax Law. See: SOQ Broadcasting Corp., Dec St Tax Comm, May 23, 1985, TSB-H-85(154)S;
Coopers & Lybrand, Advisory Op St Tax Comm, Oct. 24, 1986, TSB-A-86(43)S. Since petitioner
is selling a monitoring service of which the encoding is a preliminary step, it is the consumer of the
encoding service and is required to pay the sales tax on such service.
Section 1105(c) of the Tax Law imposes a tax on the receipts from every sale, except for
resale, of the following services:
"(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...
(Emphasis added).
Section 527.3 of the Sales and Use Tax Regulations in relevant part states:
"(a)...(2) The collecting, compiling or analyzing information of any kind or nature and the
furnishing reports thereof to other persons is an information service."
"(b)...(2) The sales tax does not apply to the receipts from the sale of information which is
personal or individual in nature and which is not or may not be substantially incorporated into reports
furnished to other persons by the person who has collected, compiled or analyzed such information.
"Example 1. The report submitted by a private detective agency to its clients is a personal
report, the charge for which is not taxable."
The reports furnished by petitioner constitute collecting, compiling and analyzing information
within the meaning and intent of Section 1105(c)(1) of the Tax Law. However, the reports furnished
are both personal and individual in nature and may not be substantially incorporated in reports

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TSB-A-89 (44)S
Sales Tax
November 16, 1989

furnished to other persons, and therefore the charges to Petitioner's customers for said reports are not
subject to the tax imposed under Section 1105(c)(1) of the Tax Law. (See: Furtunato Sons Inc.
Advisory Op St Tax Comm., July 28, 1986, TSB-A-86(30)S.)

DATED: November 16, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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