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SALT TALK:  Watching the (Invisible) Detectives – Sales Tax on Protective and Detective Services Muddled Once Again

Posted by Wayne Berkowitz CPA, J.D., LL.M. on Jun 27, 2016 1:00:00 PM
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Readers, I’m sorry.  In my March 7, 2016 post, I couldn’t restrain my enthusiasm toward the fact that the New York State Tax Appeals Tribunal had clarified that receptionists are not trained security guards and accordingly, their services are not subject to the New York State Sales Tax imposed on protective and detective services. Just when I thought it might be time to relax, the New York State Department of Taxation and Finance has clubbed us over the head with its virtual night stick.

In a recent Advisory Opinion[1], the Department held that Portal and Trusted Identity Framework services are subject to sales tax as protective services. Very briefly, these services are provided by the vendor, protect their customers’ computer data from unauthorized access, and allow a mechanism for those who are authorized to utilize the data. Yes, we are dealing with virtual services and no human interaction.

The Department reasoned that these “electronic gatekeeper services” qualify as protective services because they prevent unauthorized persons from gaining access to customer data.  Very confident they are, especially in light of the Tax Appeals Tribunal decision in February[2] which clearly stated there is no definition of protective or detective services in the Tax Law.  As such, the Tribunal looked to the definition of “Private Investigator” contained in the General Business Law.

While artificial intelligence is a burgeoning field, I have yet to meet a virtual private investigator.  But here’s good news: the Department recognizes that the tax applies only to data residing on servers in New York. How does one identify where the data resides? The Department says a letter from the customer will suffice. 

And here’s more good news: Tax Appeals Tribunal decisions are binding authority and may be relied upon as precedent. Advisory Opinions are just that — the opinion of the Department.

Here’s the really bad news: I wouldn’t advise a client to ignore the Advisory if they were in the same or similar business. What I would rather see is for the client to collect and remit the tax and convince every last one of their customers to file for a refund claim.

And the really, really bad news:  this Advisory muddies the waters once again and makes it that much more difficult to make intelligent business decisions.

Should you have any questions about this sales tax issue, contact me at WBerkowitz@berdonllp.com or your Berdon advisor.

[1] TSB-A-16(20)S, May 27, 2016
[2] In the Matter of AlliedBarton Security Services LLC, DTA No. 825169 (February 16, 2016).

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, New York Accountants, advises on the unique requirements of governments and municipalities across the nation.

 

Topics: SALT TALK

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