A recent decision by the State of New York Court of Appeals (New York’s highest court), issued over a fiery and well-reasoned dissent, calls into question the continued viability of what has historically been an important exception to New York’s imposition of sales tax on otherwise broadly defined so-called “information services.” In the Matter of Dynamic Logic Inc., v. Tax Appeals Tribunal of the State of New York et al., 2025 NY Slip Op 02262 (N.Y. Apr. 17, 2025). New York’s current sales tax scheme, as enacted by the New York Legislature, is a tax on tangible property and a limited number of enumerated services mostly connected to the sale of tangible property. It may be time for the Legislature to step in to defend the sales tax scheme it has enacted, otherwise the state taxing authorities, with an assist from the courts, will continue to reinterpret New York’s sales tax scheme into a broad-based tax on services.

While an “information service” is broadly defined in New York as the service of “furnishing information” and includes “the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons,” New York law also provides for an exception to taxability when the information service involves “the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons….” NY Tax Law § 1105(c)(1).

Dynamic Logic Inc. (“Dynamic”) offers solutions to help its clients measure the effectiveness of their advertising campaigns and, specifically, at issue in the case was a solution offered by Dynamic known as AdIndex. Dynamic identified individuals who had been exposed to the client’s advertisements and then would survey those individuals along with a control group. The final deliverable was a report that Dynamic created for its client that included “survey data collected, an analysis of the ‘story’ the data tells, as well as client-specific ‘insights,’ ‘implications,’ ‘next steps,’ and ‘recommendations’ gleaned from the data.” One component of the report was a comparison of the client’s data “to broader market data” contained in a database maintained by Dynamic. Data collected for clients as part of the AdIndex solution would later be incorporated into the database where it would be “aggregated and anonymized” and become a part of the “broader market data” for use in future AdIndex reports.

On appeal, the parties agreed that the information at issue in the AdIndex reports was “personal or individual in nature,” but the Department of Taxation and Finance (“Department”) took the position, and the Tax Tribunal agreed, that the exception nonetheless did not apply because the information “was substantially incorporated into reports furnished to other people.”

The Court of Appeals first adopted a highly deferential standard of review stating that its job was only to determine whether the Tribunal’s decision was “rational” and “supported by substantial evidence.” The Court next found that the Tribunal’s decision had been “rational” because “every AdIndex report contains benchmark data, which, in turn, contains a meaningful amount of data generated from prior AdIndex reports.” While the Court acknowledged that the benchmark data was “a relatively small portion of each subsequent report[,] that reincorporation is qualitatively important to the analytical value of the report rendering it ‘substantial.’”

A powerful dissenting opinion found that the plain meaning of the exception, supported by the Department’s own regulation and its examples, “looks to whether the end product is substantially incorporated into reports furnished to others.” Here, there was never an instance where an AdIndex report for one client was substantially incorporated into the AdIndex report for another client. The dissent observed that by finding aggregated and anonymized background data is “substantially incorporated” into subsequent AdIndex reports because that background data adds “qualitative value” to the subsequent AdIndex reports, the Court’s interpretation “judicially nullifies the exclusion created by the [L]egislature.” 

The Legislature should take note!