New York Advisory Opinion TSB-A-96(22)S: Are a merchant-services company's charges for its "check guarantee" service -- where it agrees, for a fee, to buy a dishonored check from a subscribing merchant at face value -- subject to New York sales tax?

Plain-English summary

TeleCheck Services, Inc. is a Texas-based company that offers retail merchants two separate check-related services, sold independently of each other: a check "verification" service (not at issue in this opinion) and a check "guarantee" service. Under the guarantee service, before a merchant accepts a customer's check, it contacts TeleCheck's data center electronically (through a point-of-sale terminal or a touch-tone phone system) with information like the check writer's bank account number or driver's license, the check amount, and the check number. TeleCheck's system checks that information against a database of previously dishonored, unpaid checks and its own confidential risk-management criteria, then sends back a code either declining to guarantee the check or agreeing to guarantee it. If TeleCheck guarantees a check and it's later dishonored, TeleCheck generally buys the check from the merchant at face value, up to a warranty limit individually negotiated with that merchant. Merchants pay three separately stated charges: a 10-cent transaction fee for each guarantee inquiry, an extra 75-cent fee for calls made by live phone (to encourage terminal use instead), and the main "guarantee charge" of roughly 1% to 3.5% of each guaranteed check's face amount, subject to a negotiated monthly minimum (about $30) that's credited only against the guarantee charge, not the other two fees.

The Department ruled that none of TeleCheck's check-guarantee charges are subject to New York sales tax. Tax Law § 1105(c) imposes sales tax only on services that are specifically enumerated in the statute -- it's not a general tax on all services. Because a check guarantee service isn't one of the services listed in § 1105(c), the receipts from it -- the transaction fees and the guarantee charge alike -- fall outside the sales tax entirely.

What this means for you

Check guarantee / payment-risk service providers

Fees charged for guaranteeing that a dishonored check will be purchased at face value -- along with related per-transaction inquiry fees -- aren't subject to New York sales tax, because this type of financial risk-management service isn't among the services enumerated for tax under § 1105(c).

Retail merchants using check guarantee services

You shouldn't be charged, or need to pay, sales tax on check guarantee or check inquiry fees billed by a service provider like TeleCheck, since the Department has ruled these charges fall outside New York's enumerated-services sales tax.

Common questions

Q: Why is New York's services tax limited to specific enumerated services rather than all services?
A: Under Tax Law § 1105(c), New York taxes services on a list-based ("enumerated") system -- only services the statute specifically names (like certain installation, maintenance, or information services) are taxable; anything not on that list, like check guarantee services here, isn't reached by the sales tax at all.

Q: Does this ruling also cover TeleCheck's check verification service?
A: No -- the opinion expressly states the check verification service (where TeleCheck just tells a merchant whether a check meets certain standards, without any purchase guarantee) is not at issue in this ruling.

Q: Does the way the fees are structured (per-transaction vs. percentage-of-check-value) affect the outcome?
A: No -- the ruling treats all three charge types (the 10-cent inquiry fee, the 75-cent live-call fee, and the percentage-based guarantee charge) the same way: none are taxable, because the underlying service itself isn't an enumerated taxable service, regardless of how the fee is calculated.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c) (imposition of tax on enumerated services)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_22s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (22)S
Sales Tax
April 19, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940906A

September. 6, 1994, a Petition for Advisory Opinion was received from TeleCheck Services,
Inc., 5251 Westheimer, Houston, TX 77056-5404.
The issue raised by Petitioner, TeleCheck Services, Inc., is whether Petitioner's receipts for
its check guarantee service paid by its New York customers are subject to the tax imposed by Section
1105(c) of the New York State Tax Law.
Petitioner presents the following facts. Petitioner is a Delaware corporation headquartered
in Houston, Texas. First Financial Management Corporation, a Georgia corporation ("FFMC"),
directly or indirectly has owned all of the outstanding stock of Petitioner since July 1992, when
FFMC acquired all of the outstanding shares of Petitioner, then a Hawaii corporation.
Petitioner's customer base consists of retail merchants of various sizes (from national retail
chains to "Mom and Pop" operations). Petitioner offers two specific types of services to merchants
with respect to customers who wish to pay by check. The first service is a check "verification"
service. For a fee calculated per transaction, a merchant who subscribes to the check verification
service receives information (i.e., "verification" or "nonverification") from Petitioner as to whether
a customer offering a check in payment to the merchant meets certain predetermined standards for
accepting the check. The second service is a check "guarantee" service. Under this service, Petitioner
generally will purchase a check from a subscribing merchant at its face amount if a check
"guaranteed" by Petitioner is subsequently dishonored. These two services are sold separately and
Petitioner's customers are free to purchase either the check verification service and/or the check
guarantee service. The check verification service is not at issue in this Advisory Opinion.
The check guarantee service allows a subscribing merchant, before accepting a check from
a customer, to obtain a "guarantee" electronically from Petitioner that should the check ultimately
be dishonored, Petitioner will purchase the check from the merchant at face value. (The maximum
amount which Petitioner will pay for any dishonored check is established by negotiations between
Petitioner and the merchant.) When a merchant uses the check guarantee service, it contacts
Petitioner prior to accepting the check. Petitioner then decides, based on its own criteria, whether
to accept ("guarantee") or reject (not "guarantee") the check. Petitioner communicates its decision
to the merchant by electronically indicating whether the check has been "guaranteed". If Petitioner
guarantees the check, Petitioner, in effect, agrees to purchase the check from the merchant at its face
amount should the check ultimately be dishonored. If Petitioner does not guarantee the check,
Petitioner will not purchase the check from the merchant. The same charge is imposed for the check
guarantee service of a particular check about which the merchant inquired, whether or not Petitioner
guarantees that check.

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Sales Tax
April 19, 1996

When a consumer offers a check in payment for goods or services, a subscriber to the check
guarantee service contacts Petitioner's data center located in Houston, Texas by means of either a
"point-of-sale terminal" or a touch-tone telephone. The subscriber initiates an inquiry by keying
information into the point-of-sale terminal or, if contact is made by touch-tone telephone, by pressing
touch-tone keys in response to oral prompts generated by Tabitha, a "talking" computer. The
information requested by. Petitioner includes the bank account number or driver's license of the
check writer, the amount of the check, and the check number. Within a few seconds after the
subscriber has furnished the necessary information, Petitioner's data center conveys one of the three
following codes to the subscriber:
First Code: Petitioner's data center requests the subscriber to call one of
Petitioner's operators because Petitioner's computer tentatively has
determined that the identification offered previously has been used to write
a bad check that remains unpaid. To provide this service effectively,
Petitioner maintains in its databases, among other items, a list of
identification numbers previously used for checks that were dishonored and
remain unpaid. In order to maximize the number of checks that it guarantees,
Petitioner will proceed to decline to guarantee payment on a check only upon
oral confirmation by Petitioner's operator of the identity of the check writer.
Second Code: Petitioner's data center will decline to guarantee payment on
a check if the check writer's risk profile exceeds certain parameters contained
in Petitioner's risk management system. These parameters are determined in
the sole discretion of Petitioner and are not communicated to the subscribers.
Third Code: If the check writer is not included in Petitioner's negative data
base and satisfies Petitioner's risk parameters, Petitioner sends a confirmation
code to the subscriber agreeing to guarantee the check should it be
dishonored to the extent set forth here.
Petitioner generally reimburses a subscribing merchant for the face amount of any bad check
that Petitioner previously has authorized, up to a preestablished warranty limit, which applies on a
check-by-check basis. Petitioner generally does not reimburse subscribers for payment on a check
that has been stopped due to a dispute over goods or services. The preestablished warranty limit is
negotiated separately with each subscriber and depends upon the risk profile of the subscriber.
Factors taken into account by Petitioner in determining the warranty limit include the nature of the
subscriber's business and the average check amount in its business. If Petitioner subsequently collects
from the merchant's customer an amount in excess of the warranty limit, then Petitioner remits the
excess amount to the merchant.
Merchants purchasing the check guarantee service are subject to three separately calculated
and separately stated charges. The first charge is a transaction fee of 10¢ for each check for which

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April 19, 1996

Petitioner receives a guarantee request. The second charge is an additional transaction fee of 75¢ per
call when a merchant initiates a "live" telephone call with Petitioner. This additional fee is to
encourage customers to use the point of sale terminal equipment. The third charge, the "guarantee
charge", is a fee imposed at a rate that generally ranges between 1% and 3 1/2% of the face amount
of each check (subject to a monthly minimum charge) for which a merchant requests Petitioner's
"guarantee". The guarantee charge is negotiated between Petitioner and the merchant at the time the
merchant subscribes to the service. The minimum monthly charge is approximately $30.00 per
month. This monthly minimum fee is credited against the per check "guarantee charge", but is not
credited against the 10¢ "inquiry" transaction fee or 75¢ "live" telephone call transaction fee.
Section 1105(c) of the Tax Law imposes tax on receipts from the sale of certain enumerated
services. The check guarantee service provided by Petitioner is not an enumerated service subject
to tax under Section 1105 of the Tax Law. The charges for the service, i.e., the transaction fees and
the "guarantee charge", therefore, are not subject to sales and compensating use taxes.

DATED: April 19, 1996

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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