Are pre-employment background-check services performed by a licensed private investigator subject to New York sales tax?

Plain-English summary

A law firm asked, on behalf of a licensed private investigator, whether background-check services performed for school districts and private businesses on prospective employees are subject to New York sales and use tax. New York taxes "protective and detective services" broadly, but the statute itself doesn't define "detective services" or "detective agency."

The Department relied on a New York court decision (Compass Adjusters and Investigators, Inc. v. Commissioner of Taxation and Finance) holding that the taxable "detective services" category should be read using the broad statutory definition of "private investigator" in Article 7 of the General Business Law -- which explicitly covers investigating "the conduct, honesty, efficiency, loyalty or activities of employees" for a fee. Since the petitioner is a licensed private investigator performing exactly that kind of investigation (pre-employment background checks), and nothing in Article 7 carves the service out, the Department concluded the background-check services are taxable detective services under Tax Law § 1105(c)(8), citing a nearly identical 1997 opinion on a different background-check company (Resume Verification, Inc., TSB-A-97(14)S). The one carve-out: sales to organizations exempt under § 1116(a), or to government entities like school districts, are exempt if the investigator collects a proper exemption certificate or government purchase order within 90 days of delivering the service, and keeps that documentation on file.

What this means for you

Private investigators and pre-employment screening/background-check businesses

Your background-check services are taxable "detective services" under New York's protective-and-detective-services category, regardless of how routine or administrative the checks feel (verifying employment history, checking references, confirming credentials) -- the broad Article 7 "private investigator" definition, not the client's purpose for hiring you, drives the tax classification.

School districts and other government or exempt-organization buyers of background-check services

You can buy these services tax-free, but only if you give the investigator a properly completed Exempt Organization Certification (Form ST-119.1) or a government purchase order within 90 days of the service being delivered -- without that paperwork, the exemption doesn't apply even though you'd otherwise qualify.

Accountants and tax professionals

This opinion is a clean companion citation to Resume Verification, Inc. (TSB-A-97(14)S) for any client in the employee-screening or background-check industry, and it's a useful illustration of how New York fills a gap in an undefined taxable-service term (here, "detective services") by cross-referencing a separate licensing statute's definition (General Business Law Article 7, § 71).

Common questions

Q: Are all background-check services automatically taxable in New York?
A: Services that fit within the General Business Law's broad "private investigator" definition -- including checking a person's conduct, honesty, or activities for a fee -- are taxable detective services, unless a specific buyer exemption applies.

Q: How does a school district avoid paying sales tax on background-check services?
A: By providing the investigator with a government purchase order (or, for other exempt organizations, a completed Form ST-119.1) within 90 days of the service being delivered.

Q: Does it matter whether the checks are for private businesses or government entities?
A: The service itself is taxable either way; what changes is whether the buyer can present a valid exemption document (government purchase order or exempt-organization certificate).

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(8) (protective and detective services)
• Tax Law § 1110(a)(C) (compensating use tax on enumerated services)
• Tax Law § 1116(a) (exempt organizations)
• Tax Law § 1132(c) (exemption documentation)
• 20 NYCRR § 533.2 (recordkeeping for exempt sales)
• General Business Law Article 7, § 71 (definition of "private investigator")

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_3s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(3)S
Sales Tax
January 27, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S981204A

On December 4, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Hotchkiss, Stone & Longtin, LLC., 16 ½ No. Main St., PO Box 492, Jordon,
NY 13080.
The issue raised by Petitioner, Hotchkiss, Stone & Longtin, LLC., is whether the service of
performing background checks of potential employees of school districts and private businesses by
a private investigator is subject to sales and use tax.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is licensed as a private investigator pursuant to Article 7 of the General Business
Law. Petitioner will be performing background checks of potential employees of school districts
and private businesses.
Applicable Laws
Section 1105 of the Tax Law imposes sales tax, in part, upon:
(c) The receipts from every sale, except for resale, of the following services:
(8) 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 1110(a)(C) of the Tax Law imposes compensating use tax on "any of the services
described in paragraphs (1), (7) and (8) of subdivision (c) of section eleven hundred five."
Article 7 of the General Business Law states, in part:

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TSB-A-99(3)S
Sales Tax
January 27, 1999

§ 71. Definitions

1. "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; ... 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 with reference to the conduct, honesty,
   efficiency, loyalty or activities of employees, agents, contractors, and subcontractors;
   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 . . . 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.
   Opinion
   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.
   In the present case, the services performed by Petitioner fall within the scope of this
   definition. Moreover, Petitioner’s services are not expressly excluded from this definition by any
   of the provisions of Article 7 of the General Business Law. Accordingly, receipts from the sales of
   Petitioner’s background check services will be subject to State and local sales and use taxes under
   Section 1105(c)(8) of the Tax Law. See Resume Verification, Inc., Adv Op Comm T&F, March
   27, 1997, TSB-A-97(14)S.
   It is noted, however, that purchases made by organizations described in Section 1116(a) of
   the Tax Law are not subject to sales and use tax. Therefore, Petitioner's sales of its background
   check services to entities that have been designated as exempt organizations under Section 1116(a)

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TSB-A-99(3)S
Sales Tax
January 27, 1999

of the Tax Law, or to United States or New York State government entities (e.g., school districts),
will not be subject to sales tax provided Petitioner receives a properly completed Exempt
Organization Certification (Form ST-119.1), or, in the case of government entities, a government
purchase order, from the purchaser within 90 days of the date of delivery of the service. See Section
1132(c) of the Tax Law and Part 529 of the Sales and Use Tax Regulations. Petitioner must retain
such exemption documents in its records in order to prove exempt sales. See Section 533.2 of the
Sales and Use Tax Regulations.

DATED: January 27, 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.