Is an employment-background investigation firm's work taxable as 'detective services' under New York City's tax, or exempt as an information service?

Plain-English summary

Fidelifacts/Metropolitan New York Inc. is an investigative agency that prepares employment-background reports on its clients' job applicants. The reports cover the applicant's education, employment, financial standing, personal habits, and recreational activities. They verify information the applicant listed, but they also add information gathered by interviewing prior employers, neighbors, and references and by searching police files and court records (with the applicant's advance notice and written authorization under the Fair Credit Reporting Act). Fidelifacts argued its reports are information services — like the insurance-company reports held nontaxable in Metropolitan Life / Mutual Life — and not taxable "detective services."

The Department held the work is taxable detective services.

• The tax at issue. § 1212-A(h)(2)(i)(B) lets a city of one million or more (New York City) impose a tax up to four percent on the receipts from protective and detective services of every nature.
• Background investigation is "detective services." § 1212-A applies to detective services of every nature, including investigations to obtain information about the identity, habits, conduct, movements, and whereabouts of persons. The kind of investigation Fidelifacts conducts qualifies.
• The insurance-report decision doesn't help here. Fidelifacts could not rely on Metropolitan Life / Mutual Life, because it did more than merely verify information listed on an application — it actively investigated through interviews and record searches.
• Result: Fidelifacts' services are subject to the § 1212-A(h)(2)(i)(B) detective-services tax.

What this means for you

Investigating goes beyond "information," into taxable detective services. If your reports are built by interviewing sources and searching records to develop information about a person, New York City treats that as detective services subject to the § 1212-A tax — not a tax-free information service.

Mere verification may be different from investigation. The line the Department drew was that Fidelifacts did more than verify what an applicant listed. A service limited to confirming supplied facts may be analyzed differently — but active investigation of a person's conduct and background is detective work.

This is a New York City tax layer. The § 1212-A tax on protective and detective services is a city-level tax; providers operating in New York City should account for it separately from the statewide sales tax analysis.

Common questions

Q: We run employment background checks that include interviews and record searches. Is that taxable?
A: Yes. The Department held that such investigations are "detective services" under § 1212-A(h)(2)(i)(B), subject to New York City's tax on detective services.

Q: Aren't our reports just information services like the ones insurance companies buy?
A: Not on these facts. Because the agency did more than merely verify application information — it investigated through interviews and record searches — it could not rely on the decision holding certain insurance reports nontaxable.

Q: What makes something "detective services" here?
A: Investigations to obtain information about the identity, habits, conduct, movements, and whereabouts of persons — among other protective/detective work — fall within § 1212-A.

Citations and references

Statutes:

• Tax Law § 1212-A(h)(2)(i)(B) — authorizes New York City's tax (up to 4%) on protective and detective services of every nature

Determination cited:

• Metropolitan Life Insurance Co.; Mutual Life Insurance Co., Decision of the State Tax Commission, Apr. 15, 1985, TSB-H-85(129)S — reports limited to verifying application information held not taxable (distinguished)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a86_50s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86(50)S
Sales Tax
December 4, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S851011A

On October 11, 1985, a Petition for Advisory Opinion was received from
Fidelifacts/Metropolitan New York Inc., 50 Broadway, New York, New York 10004.
The issue raised is whether services performed by Petitioner as described below are
"protective services and detective services" within the meaning of Section 1212-A (h)(2)(i)(B) of the
Tax Law.
Petitioner is an investigative agency whose services include the performance of investigations
of applicants for employment with Petitioner's clients. The reports prepared by Petitioner include
information regarding the job applicants' education, employment, financial standings, personal habits
and recreational activities. Petitioner's reports contain verification of information listed on the
applicants' job applications. However, they also contain information obtained by interviewing
previous employers, neighbors and references and by searching police files and court records. In
compliance with the Fair Credit Reporting Act, job applicants are always notified in advance that
they will be the subject of inquiries and give written authorization for such reports to be furnished
to prospective employers.
Section 1212-A(h)(2)(i)(B) of the Tax Law authorizes any city having a population of one
million or more to impose a tax at a rate not to exceed four percent on the receipts from:
(B) Protective services 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, whether or
not any tangible personal property is transferred in conjunction
therewith, except to the extent otherwise taxable under article twenty­
eight of this chapter.
Petitioner contends that its reports should be classified as "information services" rather than
detective services and thus not subject to the 4% tax on detective services imposed by New York
City. Petitioner argues that its reports are similar to those purchased by insurance companies. These
reports were held not subject to tax. See: Metropolitan Life Insurance Co; Mutual Life Insurance
Co. Decision of the State Tax Commission, April 15, 1985, TSB-H-85(129)S.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-86(50)S
Sales Tax
December 4, 1986

Section 1212-A of the Tax Law is intended to apply to protective and detective services of
every nature, including but not limited to personal or business protection; divorce work; suspect
surveillance; the finding of missing persons or stolen funds; the investigation of actual or suspected
thefts; the location of missing property; the handling of criminal cases and the performance of
polygraph tests and electronic sweeps. Detective services also include investigations for the purpose
of obtaining information with reference to the identity, habits, conduct, movements and whereabouts
of persons. (see: 32 NY Jur, Investigators and Private Detectives 1). Therefore, the type of
investigation conducted by Petitioner qualifies as detective services within the meaning of section
1212-A of the Tax Law. Petitioner may not rely upon the Decision of the State Tax Commission in
Metropolitan Life Insurance Co., Mutual Life Insurance Company, cited above, since Petitioner did
more than merely verify information listed on an application.
Accordingly, Petitioner's services, as described above, are subject to the tax imposed under
section 1212-A(h)(2)(i)(B) of the Tax Law.

DATED: December 4, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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