Is an electronic bulletin-board service that lets banks and warehouse lenders transmit loan data and files to each other's private mailboxes taxed as telephony/telegraphy, and are its interstate messages exempt?

Subject

Issue raised by Petitioner, Kathleen Carey, is whether the sale of its client's software product and services are subject to sales tax.

What this means for you

A New York software firm built a system electronically linking banks and warehouse lenders to transmit loan-application data, eliminating double data entry. Each bank gets its own account ("mailbox"); warehouse lenders input loan data that flows electronically to the firm's main computer until the relevant bank retrieves it and transmits back an accept/reject decision. Different file types (requests, reports, documents, spreadsheets, data) can move through the system. It's not a shared database -- each customer can only access its own proprietary information, not other banks' or lenders' data. The firm billed monthly licensing fees plus usage/file-transfer charges, and did NOT generate any reports itself or otherwise analyze the data -- it functioned purely as a transmission conduit.

New York taxes "telephony and telegraphy" services broadly -- covering "use or operation of any apparatus for transmission of sound, sound reproduction or coded or other signals," with message-switching services specifically identified as a taxable telegraph service. Because the firm's system merely stores and relays customers' own messages/data between each other's mailboxes, without adding information or reprocessing it into a new form, the Department found the whole arrangement is a taxable telephony/telegraphy service under § 1105(b) -- covering both the licensing fees and the usage-based charges.

The one carve-out: New York's telephony/telegraphy tax specifically excludes interstate and international service. So transmissions between a New York-located provider and out-of-state banks/lenders (or between two out-of-state parties routed through the system) that qualify as interstate communications are exempt, even though the same system's in-state transmissions are taxable.

Q&A

Q: We run an electronic data/message-relay platform between customers (each accessing only their own data) -- is that taxed as telephony/telegraphy rather than as a software or information service?
A: Based on this opinion, yes, if you're purely transmitting/relaying customer data without adding new information or analysis -- that functions as "message switching," a specifically taxable telegraph service, rather than an information service (which requires you to compile or analyze data yourself) or an exempt software license.

Q: Are all our transmission charges taxable, including licensing fees?
A: In this opinion, yes -- both the licensing fees and the usage/file-transfer/other charges relating to the software were treated as part of the same taxable telephony/telegraphy service.

Q: What about transmissions to or from customers outside New York?
A: Interstate and international telephony/telegraphy service is specifically exempt from this tax -- so transmissions crossing state or national lines escape the tax that otherwise applies to the New York-based service.

Citations

• Tax Law § 1105(b) -- taxes telephony and telegraphy and telephone/telegraph service, excluding interstate and international service.
• 20 NYCRR 527.2(a)(2) -- confirms the tax reaches enumerated services broadly, regardless of utility-company regulation, including continuously-supplied services.
• 20 NYCRR 527.2(d)(2) -- defines "telephony and telegraphy" to include transmission of sound or coded/other signals; message-switching services over leased lines are a taxable telegraph service.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_8s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (8)S
Sales Tax
February 23, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S941014A

On October 14, 1994, a Petition for Advisory Opinion was received from Kathleen Carey,
Freed Maxick Sachs & Murphy, P.C., 800 Liberty Building, Buffalo, New York 14202.
The issue raised by Petitioner, Kathleen Carey, is whether the sale of its client's software
product and services are subject to sales tax.
Petitioner's client has developed a software product which it is marketing to banks and
warehouse lenders. This system will electronically link the banks and the warehouse lenders for the
purpose of transmitting loan information and data. The link is provided by an electronic bulletin
board service provided by Petitioner's client. Each of the banks will have an account (mailbox). The
software will enable the banks to transmit information between themselves. This software is
designed to automate the process of inputing financial information relating to a loan application.
Eliminating the double data entry required by both banks and warehouse lenders for loan
applications substantially improves the bank's ability to process funding requests and saves time in
labor costs.
The warehouse lenders will access the client's software and input financial information
related to a particular applicant's loan information. This information will then be transferred
electronically to the client's main computer until such time as the banks would access the
information. The banks will either accept or reject the loan applications and will transmit that
information electronically back to the warehouse lenders. The warehouse lenders will print any
reports at their locations.
The transmission of information is not a shared database. The warehouse lenders and the
banks have no capability of accessing information from other warehouse lenders or banks. They can
only access their own proprietary database.
There are different types of files which can be transmitted through Petitioner's client's
software including loan requests, reports, word processing documents, spreadsheets and data.
Petitioner's client is located in New York State. The banks and warehouse lenders are located
throughout the country. Petitioner's client bills monthly in advance for licensing fees; and in arrears
for usage charges, file transfer charges and other charges relating to the software.
Petitioner's client does not generate any reports, either for the bankers or the warehouse
lenders. It acts strictly as an electronic bulletin board service.

-2­
TSB-A-95 (8)S
Sales Tax
February 23, 1995
Section 1105(b) of the Tax Law imposes a tax upon: "The receipts from every sale, other
than sales for resale. . . .of telephony and telegraphy and telephone and telegraph service of whatever
nature except interstate and international telephony and telegraphy and telephone and telegraph
service."
Section 527.2(a)(2) of the Sales and Use Tax Regulations state:
Although this tax is generally known as the "consumer's utility tax," the intention of
the statute is to tax the enumerated sales and services whether or not rendered by a
company subject to regulation as a utility company. The words "of whatever nature"
indicate that a broad construction is to be given the terms describing the items taxed.
The inclusion of the word "service" indicates an intent to tax, under this provision,
items that are furnished as a continuous supply while the vendor-vendee relationship
exists. (Emphasis supplied)
Section 527.2(d)(2) of the Sales and Use Tax Regulations provides, in part, as follows:
The term 'telephony and telegraphy' includes use or operation of any
apparatus for transmission of sound, sound reproduction or coded or other signals.
Example 3:

Message switching services, transmitted to a computer over lines
leased from a communications carrier are telegraph services subject
to the tax imposed under section 1105(b) of the Tax Law.

Petitioner's client is providing, inter alia, a network upon which its customers can
communicate by computer or electronically with one another by entering and retrieving messages.
Petitioner's client does not provide any additional information to its customers nor does it manipulate
or otherwise process its customers' information into another form; rather, Petitioner's client stores
its customers' information so that its customers may later retrieve the same information.
Accordingly, Petitioner's client is providing a "telephony or telegraphy service" in accordance
with the meaning and intent of Section 527.2(d)(2) of the Sales and Use Tax Regulations the receipts
from which are subject to sales tax in accordance with Section 1105(b) of the Tax Law and Section
527.2(a)(2) of the Sales and Use Tax Regulations. Those messages that are interstate or international
are exempt from the sales tax.

DATED: February 23, 1995

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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