Is a company's electronic document-processing service (data conversion, merging, storage, and multi-format broadcast delivery, which happens to end with a transmission) a taxable telephone/telegraph service, or a non-taxable data processing service?

Plain-English summary

Diginet (formerly Graphnet) runs a New Jersey data-processing facility that its customers -- including some in New York -- reach by dialing into the nearest network "node" over their own local phone carrier (which separately bills them for that basic transmission). From there, Diginet's system does substantial work on the incoming data before it goes anywhere else: converting file formats, merging customer-specific information with general content (like assembling a periodic newsletter from a stored address list and updated news), storing files for anywhere from seconds to days, "broadcasting" a single document to many destinations simultaneously, generating custom cover pages and logos, and ultimately delivering the finished result as a fax, e-mail, telex message, or hard copy to recipients the customer specifies -- who may be inside or outside New York. Diginet asked whether all of this makes it a taxable telephone/telegraph service provider under Tax Law § 1105(b), the same way a fax service is treated.

New York's telephone/telegraph tax reaches transmission services like plain fax transmission (which the Department had already found taxable in an earlier Pitney Bowes ruling). But the Department's own regulations exclude a service from that tax category if the telegraphy/telephony element is "merely an incidental element of a different or other service" -- the classic example being a burglar-alarm company that transmits signals electronically but is really selling a protective service, not telegraphy (the Holmes Electric Protective case). Courts have applied the same "look at the real nature of the service, not just whether a transmission occurs somewhere in the process" logic to cable television (not telephony, despite involving electronic transmission) and to other data-handling businesses. Applying that framework here, the Department found Diginet's customers are really paying for clerical and electronic data-processing functions -- compiling information from multiple sources, merging and reformatting it, storing it, and distributing it to many destinations per the customer's distribution list -- not for basic point-to-point transmission. The transmission at the end is just how the processed result gets delivered, incidental to the real service being sold. So as long as Diginet bills these processing services as one all-inclusive charge (without separately stating a basic fax-transmission fee), the entire charge is a non-taxable, non-enumerated service. The one carve-out: if Diginet ever sells plain fax transmission or fax-mailbox service on its own, without the data-processing functions, that stand-alone service would be taxable under § 1105(b) (unless it qualifies as exempt interstate/international service).

What this means for you

Data processing, document management, and cloud fax/messaging companies

If your core value is genuine processing -- format conversion, merging, storage, multi-recipient distribution logic -- rather than simple point-to-point transmission, this ruling supports treating your service as non-taxable, even though a transmission necessarily happens somewhere in your pipeline. But keep your billing structure clean: bundle the charge as one all-inclusive fee for the processing service, and avoid separately itemizing a basic transmission or fax charge, which would be independently taxable.

Companies offering a mix of "plain" transmission and "value-added" processing services

Segregate your service offerings and your invoices carefully. A stand-alone basic fax-transmission or mailbox service (without the merge/convert/broadcast functions) is taxable on its own even if your broader processing service is not -- mixing the two on one bundled invoice is what keeps the whole charge non-taxable here.

Accountants and tax professionals

This ruling is a rich source of case law on the "incidental transmission" doctrine (Holmes Electric, NY State Cable TV Assn.) and pairs well with the same-era conference-management ruling (TSB-A-99(30)S) as two different applications of the same principle: a service built around genuine processing/coordination, where a taxed-category transmission is just one incidental step, escapes tax on the whole charge.

Common questions

Q: Is fax transmission taxable in New York?
A: Yes, on its own -- the Department has separately held that plain facsimile transmission is taxable telegraph service. The question here is whether Diginet's more elaborate processing service is the same thing, and the Department found it isn't.

Q: What's the key fact that kept Diginet's whole charge non-taxable?
A: That its charges are all-inclusive and it doesn't separately state a charge for basic fax transmission -- the processing and the delivery are billed and treated as one bundled non-taxable service.

Q: Would a company offering ONLY fax transmission, without any of Diginet's processing features, be taxable?
A: Yes -- the ruling explicitly says a sale of basic fax transmission or fax mailbox service without the described data-processing functions would be subject to tax under § 1105(b), unless it's exempt interstate or international service.

Citations and references

Statutes, regulations, and case law:

• Tax Law § 1105(b) (tax on telephony/telegraphy and telephone/telegraph service)
• Tax Law § 1105(c) (enumerated taxable services)
• 20 NYCRR § 527.2(d) (telephone and telegraph service; incidental-transmission exclusion)
• Pitney Bowes Management Services, Inc., TSB-A-93(10)S (fax transmission service is taxable telegraphy)
• Holmes Electric Protective Company v. McGoldrick, 262 App Div 514, affd 288 NY 635
• New York State Cable Television Assn. v. State Tax Commn., 88 Misc 2d 601, affd 59 AD2d 81
• Matter of Sprint International Communications Corporation, TSB-D-95(5)C
• Ernst & Young LLP, TSB-A-97(19)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_18s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(18)S
Sales Tax
April 8, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980128B

On January 28, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Diginet, Inc.(f/k/a Graphnet, Inc.), 329 Alfred Avenue, Teaneck, NJ 07666.
The issue raised by Petitioner, Diginet, Inc., is whether the services it provides to New York
customers are telephone or telegraph services subject to sales tax under Section 1105(b) of the Tax
Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner, a Delaware corporation, maintains its principal office in New Jersey. Petitioner
performs electronic services for its clients including data file conversion, data storage, and
information merge, followed by the worldwide transmission of processed documents. Petitioner
maintains its extensive network system and computer installation and data processing facility (the
"Facility") in New Jersey.
Petitioner's customers, some of which have offices in New York State, access Petitioner's
network by dialing into the nearest "node." The transmissions, some of which originate in New
York State, are sent to the nearest "node" through the customer's local carrier, e.g., NYNEX, and the
customer is invoiced by the carrier, not Petitioner, for such transmission. The transmission is then
sent from the "node" to Petitioner’s Facility in New Jersey, and the customer is billed by Petitioner
for such transmission. All transmissions received at the Facility are "processed," as described below,
and receive "value added" services through the Facility.
Petitioner's transmissions that originate in New York receive the "value added" services
outside of New York, i.e., at Petitioner's New Jersey Facility, and a portion are subsequently
retransmitted, or redelivered, via a second transmission or series of transmissions, to a destination
in New York. Additionally, a substantial portion of the transmissions handled by Petitioner that
originate in New York ultimately result in retransmissions to recipients, designated by the customer,
who are located outside of New York.
The "value added" services provided by Petitioner are extensive. They include "automatic
broadcast" of documents to a list of recipients that is stored and maintained on Petitioner's network
using customized client software provided by Petitioner. The documents for broadcast are delivered
from the database created and residing on Petitioner's network. All broadcast transmissions from

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the Facility are accomplished through time delayed re-transmissions. Accordingly, the receipt of
the electronic data from the customer and the ultimate transmission to the customer's designated
recipient(s) is not one continuous transmission, but a series of storage and processing functions
followed by a separate and distinct transmission, or series of transmissions, of processed data to the
ultimate destination or destinations by and through the Facility. Customized information such as
the updated news for a periodic newsletter can be stored for seconds, hours or days until it is
processed and retransmitted, while more general information such as an address list or the format
of the newsletter are stored for long periods of time. A single message may be delivered by
Petitioner to various destinations, including an electric mailbox (e-mail), a telex terminal, a fax
machine, or may be delivered as a hard copy document.
Petitioner also provides an accumulation function for its customers, compiling the customer's
information from the customer's various origination points and sources and merging such
information from such sources into one document to be delivered to the ultimate destination or
destinations.
In the "Telex" arena, Petitioner provides "store and forward" features, such as "alternate
destinations," automatic redial on busy and other interruption signals and redelivery, delivery
confirmations, telex mailboxes and automatic rerouting of otherwise undeliverable messages via fax,
or transfer to a hard copy with delivery by mail.
In certain instances, Petitioner must convert the format of a particular electronic file as sent
by the customer to allow the information to be sent to the destination and must offer a "bridge"
between otherwise incompatible stations. This involves conversion of files from analog signals to
digital signals for transmission over data network lines (Packet Switching) and then conversion back
to analog for transmission over standard telephone lines. The "value added" feature of Petitioner’s
service means that the customer sends a very basic, or raw, data file to Petitioner for merger,
conversion, processing and other services, and Petitioner's system then processes the data and
converts the customer's file format to the appropriate format for delivery, be it facsimile, telex, e­
mail or hard copy. This processing is extremely CPU (central processing unit) intensive, requiring
the use of Petitioner's Facility.
A summary of certain of the unique features and services provided by Petitioner is as follows:
1.

Electronic file or data storage for future retrieval, including remote electronic storage
that is accessible at a later date. For example, the overall format of a newsletter and
an address list of recipients are stored until a periodic update of the news information
is ready to be disseminated. The newsletter is then assembled and formatted in
Petitioner’s system and when completed it is addressed and disseminated.

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2.

Electronic storage of data files (electronic documents) that will be sent as required
by the customer and/or at the most cost effective time to take advantage of reduced
rate schedules.

3.

Forwarding electronic data to Internet mailboxes.

4.

Forwarding one originating communication, customized or otherwise, to multiple
destinations (i.e., "broadcast" of documents).

5.

Fax and Internet mailboxes, allowing a customer to dial into the Facility from any
location in the world and "pick up" their electronic mail at their convenience and
with a degree of confidentiality not afforded by standard fax transmissions. These
mailboxes also allow the simultaneous uninterrupted receipt of fax transmissions
from numerous sources.

6.

"Form overlay" which allows a customer to send data to Petitioner for
reconfiguration and generation of a standard form communication. For example, the
customer may store and maintain a standard form invoice or statement on Petitioner's
system. As required, the customer will send the necessary information to generate
the specific, customized invoice or statement to Petitioner's Facility and an electronic
invoice or statement is generated that is customized for, and forwarded to, each
respective recipient.

7.

"Mail merging" which allows a customer to combine specific information with
general information, customizing a communication for the end user. For example,
if a major brokerage company produces customized account reports for its clients,
a file with information of general interest for all readers must be merged with files
containing specific historic information for a particular customer's account.

8.

Customized "packaging" allowing, for example, specialized cover pages for fax
transmissions, including incorporation of customized logos and messages, or
insertion into electronic documents of different components depending on the various
destinations of a single originating transmission, allowing a single input to result in
many customized deliveries.

Applicable Law and Regulations
Section 1105(b) of the Tax Law imposes a sales tax upon the receipts "from every sale, other
than sales for resale, of . . . telephony and telegraphy and telephone and telegraph service of

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whatever nature except interstate and international telephony and telegraphy and telephone and
telegraph service and from every sale, other than sales for resale, of a telephone answering service."
Section 1105(c) of the Tax Law imposes tax upon the receipts from every sale, except for
resale, of certain enumerated services.
Section 527.2(d) of the Sales and Use Tax Regulations provides, in part:
Telephony and telegraphy; telephone and telegraph service. (1) The
provisions of section 1105(b) of the Tax Law with respect to telephony and
telegraphy and telephone and telegraph service impose a tax on receipts from
intrastate communication by means of devices employing the principles of telephony
and telegraphy.
(2) The term telephony and telegraphy includes use or operation of any
apparatus for transmission of sound, sound reproduction or coded or other signals.
*

*

*

Example 4: Facsimile transmission services are telegraph services subject to
the tax imposed under section 1105(b) of the Tax Law.
*

*

*

(4) A service is not considered telegraphy or telephony if either of these
services is merely an incidental element of a different or other service purchased by
the consumer. (Emphasis added)
Example 6: A company offers its customers a protective service using a
central station alarm system, which transmits signals telegraphically. The customer
is purchasing a protective service.
Opinion
The provisions of Section 1105(b) of the Tax Law impose sales tax on receipts from
intrastate communication only, by means of devices employing the principles of telephony and
telegraphy. Facsimile transmission services are considered to be receipts from telephone and
telegraph services and are subject to the tax imposed under Section 1105(b) of the Tax Law (see
Pitney Bowes Management Services, Inc., Adv Op Comm T&F, January 25, 1993, TSB-A-93(10)S).
However, it is apparent in the instant case that Petitioner provides services which make its overall

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service different from a fax service as contemplated in Pitney Bowes, supra. Customers utilize
Petitioner’s services when they want to assemble and send specialized documents to multiple
recipients in different parts of the world. All such transmissions are processed, and receive "value
added" services through Petitioner’s New Jersey Facility.
Also, Petitioner offers a variety of customized messaging services to its customers including
electronic mail, fax, telex, packet switching and hard copy document delivery. The customer sends
the initial document over local telephone connections to Petitioner’s computer and switching
facilities where it is stored in Petitioner’s vast electronic database for future retrieval when required.
Storage periods may be seconds, hours or days for customized information such as periodic updates
for a newsletter, or they may be longer for more general information such as recipient address lists
and letter formats. Petitioner assembles and processes the customer supplied data for (worldwide)
transmission, and converts the customer’s file format to the appropriate format for delivery
(facsimile, telex, e-mail or hard copy). Petitioner’s "value added" services include such unique
features as mail merging, form overlay, and automatic broadcast. These services result in enhanced,
customized communications, which are very different from the original electronic data supplied by
the customer, being sent to multiple destinations and recipients simultaneously. Once the
documents are prepared, they are faxed or sent based upon the recipient list provided by the
customer. The destinations include fax machines, electric mailboxes, telex terminals and hard copy
document delivery.
In addition to these processes, Petitioner personalizes the documents for its customers by
providing customized cover pages for fax transmissions, including incorporation of customized logos
and messages. Petitioner also provides computer access and storage in the form of an electronic
mailbox to its customers which allows the simultaneous uninterrupted receipt of fax transmissions
from numerous sources. The mailbox may be used by the customer to access a file from any location
in the world to obtain a message or document at their convenience.
In Holmes Electric Protective Company v. McGoldrick, 262 App Div 514, affd 288 NY 635,
New York City sought to impose a retail sales tax on what was claimed to be the sale of telegraphic
service. The company’s business was the protection of its customers’ premises against burglary and
unlawful entry through the use of certain electrical signaling devices. The court held that the
legislative intent of New York City’s local sales tax on telegraph service was to tax telegraphic
services as they are ordinarily understood, and the company was not selling telephone or telegraphic
services as ordinarily understood. Instead, the company was engaged in the sale of protective
services and the transmission of electronic signals was merely an incident to the protective services.
In determining whether a cable television company was engaged in the service of telephony,
the court in New York State Cable Television Assn. v. State Tax Commn., 88 Misc 2d 601, affd 59
AD2d 81, focused on the nature of the service provided by the company and not whether as an

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incident of providing that service there was a telegraphic or telephonic transmission of a signal. The
opinion stated in part, "While both telephony and telegraphy on the one hand, and cable television
service on the other, involve dissemination by electronic means of communications as the latter term
is used in its broadest sense, we do not believe it is commonly understood that the former includes
the latter." The customers, it was held, were not purchasing telephone or telegraph service.
The services provided by Petitioner encompass several activities. The customer is paying
Petitioner to provide clerical and electronic data processing functions, i.e., the compiling of customer
information from various origination points and sources, the merging and formatting of the data
provided by the customer and the simultaneous distribution of the data to multiple destinations and
recipients based on distribution lists stored by Petitioner, as required by the customer. These
services are not among the enumerated services upon which sales or compensating use tax is due.
Petitioner is not a provider of telecommunication services because it is not furnishing or selling
telecommunication services to its customers. Rather, the activities of Petitioner constitute
nontaxable services which merely include the transmission of documents in Petitioner’s efforts to
provide the services that the customer has requested (see Matter of Sprint International
Communications Corporation, Tax Appeals Tribunal, July 27, 1995, TSB-D-95(5)C; Ernst & Young
LLP, Adv Op Comm T&F, August 6, 1997, TSB-A-97(19)C). Provided Petitioner’s charges for the
nontaxable services described above are all inclusive and Petitioner does not separately state charges
for basic fax transmission on the invoice to its customers for such services, the transmission of
documents by Petitioner will be considered an incidental activity to the overall nontaxable service
Petitioner provides and the entire charge for Petitioner’s service will not be subject to tax (Holmes
Elec. Protective Co., supra; New York State Cable Tel. Assn., supra; Ernst & Young LLP, supra).
Any sales by Petitioner to its customers of basic fax transmission service or fax mailbox service,
which does not include the data processing functions described above, would be subject to tax under
Section 1105(b) of the Tax Law unless the service was an interstate or international service.

DATED: April 8, 1999

NOTE:

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

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