Is a loss-consulting firm's investigative reports, built from subcontracted private investigators and other experts, subject to sales tax as protective and detective services?

Plain-English summary

Marvin Rosenthal petitioned on behalf of a client (the "Taxpayer") that sells loss-consulting services -- individualized investigative reports about specific incidents, accidents, or litigation -- to insurance companies, self-insurers, third-party administrators, attorneys, and others, both in New York and worldwide. The Taxpayer retains subcontractors (licensed private investigators, court/public record search firms, security experts, handwriting experts, forensic experts) who work under the Taxpayer's management and report to it, but aren't its employees; their reports get folded into the Taxpayer's own reports delivered to clients. The Taxpayer itself is not licensed as a private investigator under General Business Law Article 7 or as an insurance adjuster under Insurance Law Article 21, and its reports are individualized (of no value to anyone besides the requesting party) rather than sold or distributed publicly.

The Department held that this work -- including sample reports showing surveillance and detailed background investigation -- falls squarely within the broad statutory definition of "private investigator" services under General Business Law § 71(1), and is therefore a taxable "protective and detective service" under Tax Law § 1105(c)(8). The Department relied on the Compass Adjusters appellate case, which drew a sharp line: work requiring a private investigator's license (under GBL Article 7) is taxable, while work that specifically requires an independent insurance adjuster's license (under Insurance Law Article 21) is not -- since Article 21-licensed adjusting work is a different, non-enumerated category. Because whether any of the Taxpayer's specific work requires an Article 21 adjuster's license is a factual question, the Department couldn't resolve that piece in an advisory opinion; the burden of proving any particular receipt isn't taxable falls on the Taxpayer and its clients. One practical note: the Taxpayer can buy its subcontractors' reports tax-free if those reports are purchased exclusively for resale as part of its own taxable investigative reports.

What this means for you

Loss-consulting, investigation, and litigation-support firms

If your work includes surveillance or detailed background investigation of people, organizations, or the causes of losses/accidents -- the kind of activity General Business Law Article 7 defines as private investigation -- expect it to be taxable as a detective service, regardless of whether you or your subcontractors formally hold a private investigator's license. The one carve-out is work that specifically requires an independent insurance adjuster's license under Insurance Law Article 21; that determination turns on the specific facts of each engagement, not a blanket rule.

Firms using subcontracted investigators, search firms, or experts

You can generally buy your subcontractors' reports tax-free under a resale certificate if they're purchased exclusively to be incorporated into your own taxable investigative reports -- worth confirming this resale-certificate mechanic is in place if you rely on a network of specialist subcontractors.

Accountants and tax professionals

The Compass Adjusters "GBL Article 7 licensed work is taxable / Insurance Law Article 21 licensed work is not" distinction is the controlling framework here -- and note the Department explicitly declined to resolve which category applies to which specific engagement, leaving that a fact question the taxpayer bears the burden of proving.

Common questions

Q: Does the firm need to actually hold a private investigator's license for this rule to apply?
A: No -- the taxability turns on whether the work falls within the broad statutory definition of private investigation activity, not on whether a license was actually obtained.

Q: Is insurance-adjusting work ever exempt under this rule?
A: Yes -- work that specifically requires an independent adjuster's license under Insurance Law Article 21 is not taxable as a protective/detective service, but that's a fact-specific determination the Department can't make in an advisory opinion.

Q: Can another loss-consulting or investigation firm rely on this ruling?
A: No. This advisory opinion binds the Department only as to the specific petitioner's client and the sample reports/facts described.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(8) (protective and detective services)
• Tax Law § 1132 (burden of proving nontaxability)
• General Business Law Article 7, § 71(1) (definition of private investigator)
• Insurance Law Article 21, § 2102(a)(1) (independent adjuster licensing)

Prior rulings and cases referenced:

• Compass Adjusters and Investigators Inc. v Commissioner of Taxation and Finance, 197 AD2d 38
• Steven J. Boyko, Adv Op Commr T&F, June 29, 1995, TSB-A-95(24)S
• Robert M. Bridges, Adv Op Commr T&F, June 29, 1995, TSB-A-95(25)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_02s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(2)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S961105C

On November 5, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Marvin Rosenthal, 88 Sunnyside Boulevard,
Plainview, New York 11803. Petitioner, Marvin Rosenthal, submitted additional
information pertaining to the Petition on November 14, 1996.
The issue raised by Petitioner is whether receipts from the sales of
certain services represented by investigative reports are subject to sales tax.
Petitioner submitted the following facts as the basis for this Advisory
Opinion. Petitioner also submitted samples of investigative reports that have
been redacted for confidentiality.
Petitioner’s client (hereafter "Taxpayer") sells loss consulting services
resulting in investigative reports to foreign and domestic insurance companies,
self-insurers, third party administrators, attorneys, and other individuals and
corporations. Taxpayer retains licensed private investigators, court and public
record search firms, security experts, handwriting experts, forensic experts and
other search firms on a regular basis (hereafter subcontractors).
The
subcontractors’ work products (i.e., their reports) are incorporated into
Taxpayer’s reports which are provided to the clients. These subcontractors are
located in New York State and throughout the world. The subcontractors are under
Taxpayer’s management and report directly to Taxpayer, but they are not employees
of Taxpayer. They bill Taxpayer for their fees together with any applicable tax.
Taxpayer’s investigative reports and stationery advertise "Agents In Principal
Cities Throughout The World."
The investigative reports are individualized, investigative reports
concerning specific incidents, accidents or litigation. They may be used in
specific cases being litigated in the federal, state or local courts and in
various administrative hearings. The reports are not sold or disseminated to the
public because they are of no value to anyone other than the persons requesting
them.
Taxpayer is not licensed as a private investigator under Article 7 of the
General Business Law or as an insurance adjuster under Article 21 of the
Insurance Law.
Applicable Law
Section 1105(c)(8) of the Tax Law imposes sales tax upon the receipts from
every sale, except for resale, of the following services:

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Protective and detective services, including, but not limited to,
all services provided by or through alarm or protective systems of
every nature, including, but not limited to, protection against
burglary, theft, fire, water damage or any malfunction of industrial
processes or any other malfunction of or damage to property or
injury to persons, detective agencies, armored car services and
guard, patrol and watchman services of every nature other than the
performance of such services by a port watchman licensed by the
waterfront commission of New York harbor, whether or not tangible
personal property is transferred in conjunction therewith.
Section 71(1) of the General Business Law provides:
"Private investigator" shall mean and include the business of
private investigator and shall also mean and include, separately or
collectively, the making for hire, reward or for any consideration
whatsoever, of any investigation, or investigations for the purpose
of obtaining information with reference to any of the following
matters, notwithstanding the fact that other functions and services
may also be performed for fee, hire or reward; crime or wrongs done
or threatened against the government of the United States of America
or any state or territory of the United States of America; the
identity, habits, conduct, movements, whereabouts, affiliations,
associations, transactions, reputation or character of any person,
group of persons, association, organization, society, other groups
of persons, firm or corporation; the credibility of witnesses or
other persons; the whereabouts of missing persons; the location or
recovery of lost or stolen property; the causes and origin of, or
responsibility for fires, or libels, or losses, or accidents, or
damage or injuries to real or personal property; or the affiliation,
connection or relation of any person, firm or corporation with any
union, organization, society or association, or with any official,
member or representative thereof; or with reference to any person or
persons seeking employment in the place of any person or persons who
have quit work by reason of any strike; or with reference to the
conduct, honesty, efficiency, loyalty or activities of employees,
agents, contractors, and sub-contractors; or the securing of
evidence to be used before any authorized investigating committee,
board of award, board of arbitration, or in the trial of civil or
criminal cases. The foregoing shall not be deemed to include the
business of persons licensed by the industrial commissioner under
the provisions of section twenty-four-a or subdivision three-b of
section fifty of the workmen’s compensation law or representing
employers or groups of employers insured under the workmen’s
compensation law in the state insurance fund, nor persons engaged in
the business of adjusters for insurance companies nor public
adjusters licensed by the superintendent of insurance under the
insurance law of this state.

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Sales Tax

Opinion
Taxpayer, through its subcontractors acting on its behalf, conducts
activities that fall within the meaning and intent of protective and detective
services under Section 1105(c)(8) of the Tax Law. For example, as evidenced by
the sample investigative reports submitted, Taxpayer’s agents conduct
surveillance activities as well as detailed background investigations.
In Compass Adjusters and Investigators Inc. v Commissioner of Taxation and
Finance (197 AD2d 38) the Court indicated that "among the detective and
protective services covered by Tax Law §1105(c)(8) are those provided by
detective agencies, but the Tax Law contains no definition of detective services
or detective agency." In this regard, the Court found it appropriate to equate
the terms "detective services" and "detective agencies" to the "broad definition
of private investigator" found in Section 71 of Article 7 of the General Business
Law, supra. The Court concluded "that the term protective and detective services
contained in Tax Law §1105(c)(8) does not include those services which cannot be
performed without the license required by Insurance Law §2102(a)(1)" (the service
of investigating and adjusting claims, arising under certain insurance
contracts). The Court stated:
When they [the plaintiffs] are performing activities that require a
license pursuant to the provisions of General Business Law article
7, plaintiffs are acting as private investigators for which no
independent adjuster license is required, and they concede that the
fees they charge for those detective services are subject to the
sales tax under Tax Law §1105(c)(8). When plaintiffs are performing
activities that require a license pursuant to the provisions of
Insurance Law article 21, they are acting as independent adjusters,
for which no private investigator’s license is required, and the
fees charged for those services are not subject to the sales tax.
Accordingly, receipts from the sales of Taxpayer’s services culminating in
the investigative reports are subject to sales tax under Section 1105(c)(8) of
the Tax Law unless Taxpayer is performing services that either require a license
pursuant to the provisions of Article 21 of the Insurance Law or are otherwise
expressly excluded from Section 71(1) of the General Business Law (e.g.,
representing self-insurers before the Workers' Compensation Board). See, Steven
J. Boyko, Adv Op Commr T&F, June 29, 1995, TSB-A-95(24)S; Robert M. Bridges, Adv
Op Commr T&F, June 29, 1995, TSB-A-95(25)S. Whether Taxpayer performs services
that require a license pursuant to Article 21 of the Insurance Law cannot be
determined in an Advisory Opinion rendered by the Commissioner of Taxation and
Finance. Moreover, in accordance with Section 1132 of the Tax Law, the burden
of proving that any of Taxpayer’s receipts from the sales of these reports are
not subject to sales tax under Section 1105(c)(8) of the Tax Law is upon Taxpayer
and its clients.
It is noted that Taxpayer may purchase the reports of its subcontractors,
such as the reports of licensed private investigators, without payment of sales

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Sales Tax

tax if the subcontractors’ reports are purchased exclusively for resale as part
of Taxpayer’s taxable investigative reports.

DATED: January 24, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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