Are a securities-quotation network's charges a taxable telephone service, a taxable information service, or an untaxed trade-execution service?

Plain-English summary

NASDAQ, Inc. runs a computerized system that collects, stores, and disseminates up-to-the-second over-the-counter stock quotations to broker/dealers over private telecommunication lines, and can also be used to execute securities trades. It asked whether the charges are subject to the telephone/telegraph tax under Tax Law § 1105(b).

The Department separated NASDAQ's activities into three:

• Not a taxable telephone service. NASDAQ does much more than act as a mere conduit transmitting others' messages, so telephony is only an incidental element of a different service (20 NYCRR § 527.2(d)(4)). It is therefore not providing telephony taxable under § 1105(b) — the same reasoning the Court of Appeals used in Quotron Systems, Inc. v. Gallman to hold a similar company was not furnishing telegraph service.
• A taxable information service. The stock-quotation service is a taxable information service under § 1105(c)(1) — collecting, storing, and disseminating quotes displayed on customers' terminals is furnishing information by electronic readouts/displays, and stock-market quotation/analysis is expressly an information service (§ 527.3(a)). The information is not personal or individual, so it's taxable. Because the sales tax is a destination tax, the rate follows the location of the customer's terminals.
• Trade execution isn't taxed. When the system is used to buy and sell securities, NASDAQ is not furnishing an information service, and executing trades is not one of the § 1105(c) enumerated services — so that part of the business is not subject to sales tax.

What this means for you

Doing more than transmitting means you're not a "telephone service"

If your system genuinely processes, stores, and adds value — not just carrying others' messages point-to-point — you're likely not providing taxable telephony under § 1105(b), because the transmission is incidental to the real service. The dividing line is the "mere conduit" test.

Delivering data to a screen is a taxable information service

Disseminating quotes, prices, or other data to customers' terminals is furnishing information by electronic display — a taxable information service under § 1105(c)(1) when the data isn't uniquely personal to one customer. Source it to where the customer's terminals are, since the tax is a destination tax.

Not every service in a bundle is taxable

The same platform can carry a taxable information service and an untaxed one. Executing securities trades isn't an enumerated § 1105(c) service, so it isn't taxed — even though it rides the same system as the taxable quotation feed. Separate the components.

Common questions

Q: We transmit data over phone lines — does that make us a taxable telephone service?
A: Not if you do more than act as a conduit. When the transmission is incidental to a larger service you provide, § 1105(b) doesn't apply (§ 527.2(d)(4)).

Q: Is our market-data/quotation feed taxable?
A: Yes, as an information service under § 1105(c)(1), when the data isn't personal or individual. Charge the rate for the location of the customer's terminals.

Q: What about the trade-execution part?
A: Executing securities trades isn't one of the enumerated § 1105(c) services, so it isn't subject to sales tax.

Citations and references

Statutes and regulations:

• Tax Law § 1105(b) — tax on telephony/telegraphy and telephone/telegraph service
• Tax Law § 1105(c)(1) — tax on information services
• 20 NYCRR § 527.2(d)(4) — a service isn't telephony/telegraphy if that's merely an incidental element of another service
• 20 NYCRR § 527.3(a) — information services include stock-market advisory/analysis reports; furnishing information by electronic readouts/displays

Cited authority:

• Quotron Systems, Inc. v. Gallman, 39 NY2d 428 — a similar data company was not furnishing telegraph service and not a utility

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a89_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-89 (31)S
Sales Tax
August 29, 1989

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890322A

On March 22, 1989 a Petition for Advisory Opinion was received from NASDAQ, Inc., 1735
K. Street, N.W., Washington D.C. 20006.
The issue raised by the Petitioner, NASDAQ, Inc., is whether any of the charges for the use
of private telecommunication lines to provide stock quotations and to execute trades in securities are
subject to the tax imposed by Section 1105(b) of the Tax Law.
NASDAQ was formed as a wholly-owned subsidiary of the National Association of
Securities Dealers, Inc. ("NASD") to be the owner and operator of a computerized data processing
and communications system ("NASDAQ System") that collects, stores, and disseminates
"up-to-the-second" quotations from a nationwide network of over-the-counter broker/dealers making
markets in stocks which have been approved for inclusion in the NASDAQ System. NASDAQ
operates two data centers, located in Trumbull, Connecticut and Rockville, Maryland, which are
designed to collect, process, store, and disseminate all the information relating to the stocks included
in the NASDAQ System. This information is transmitted to the various broker/dealers via private
telecommunication lines maintained by AT&T and the local telephone companies. In addition,
requests for information about traded securities from the various broker/dealers travel via these lines
to the data centers in Trumbull, Connecticut or Rockville, Maryland.
In addition, the NASDAQ System can also be used to access specialized systems for the
execution of trades in selected securities. These execution systems are owned and operated by a party
related to NASDAQ who reimburses NASDAQ for its use of the NASDAQ system. Such execution
systems generally fall into two categories: (1) automatic execution; and (2) execution requiring
acceptance by the market marker.
With automatic execution, a subscriber ("the order-entry firm") enters an order to buy or sell
an identified number of shares of one of the specified securities. That order travels over the
NASDAQ System to the Trumbull, Connecticut data center where the order is automatically
executed against a specified market maker at NASDAQ's "inside price" (i.e., the best bid or ask price
for that security as set by the various market makers). Both the order-entry firm and the market
maker are then notified by the Trumbull, Connecticut data center of the transaction.
As with the requests for information from the Trumbull, Connecticut data center, a buy or
sell order executed automatically within the Trumbull, Connecticut data center involves
communication between Trumbull, Connecticut and the order-entry firm.
TP-9 (9/88)

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Sales Tax
August 29, 1989

The other format for executing trades using the NASDAQ System consists of orders by an
order-entry firm that must be accepted or rejected by a market maker for execution to occur.
When an order-entry firm enters a buy or sell order that must be accepted by a market maker
before execution can occur, the order travels via the NASDAQ System to the Trumbull, Connecticut
data center. At the data center, the computer application which controls the execution performs the
following series of steps:
(1) the identity of the order-entry firm is determined;
(2) various validation checks are performed, including the following:
(a) determining whether the stock market is open for trading;
(b) determining whether the order-entry firm properly entered the offer;
(c) determining whether the number of shares subject to the offer is within
the appropriate size limits for that transaction;
(d) determining whether a valid price was entered;
(e) determining whether the market maker selected is an authorized market
maker in that security;
(f) determining whether the market maker accepts the type of order entered
against it;
(g) determining whether the market maker is presently active in the security;
and
(h) determining whether the market maker has an appropriate arrangement
with a clearing agency or NASDAQ member for the clearance and settlement of the
transaction;
(3) if the order is validated in step (2), the computer establishes a file for that order
with a system reference number;
(4) a message is then sent by the Trumbull, Connecticut data center to the market
maker which identifies, among other items, the identities of the market maker and the
order-entry firm, the date and time of the order entry, whether the order is a buy order or sell
order, the number of shares subject to the order, the identity of the security, the price, the
system reference number, and a designation whether partial orders are acceptable;

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Sales Tax
August 29, 1989

(5) the market maker then has two minutes to accept the order by informing the
Trumbull, Connecticut data center of its acceptance by reference to the system reference data
center given the order by Trumbull, Connecticut data center;
(6) the acceptance is transmitted back to the Trumbull, Connecticut data center,
where the transaction is confirmed by the computer, confirmations are sent to the order-entry
firm and market maker, clearing information is delivered to the appropriate clearinghouse.
Section 1105(b) of the Tax Law imposes a tax upon "[T]he receipts from every sale other
than sales for resale, .... of telephony and telegraphy and telephone and telegraph service of whatever
nature except interstate and international telephony and telegraphy and telephone and telegraph
service."
Section 527.2(d)(4) of the Sales and Use Tax Regulations provides that "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 customer."
Petitioner as part of its activities collects, processes, stores and disseminates all the
information relating to the stocks included in the NASDAQ System. In addition it provides services
that executes trades in securities. While the transmission of information is certainly an integral part
of its business, its transmissions cannot be likened to that of an ordinary telephone company since
the services provided are more than that of a mere conduit that only transmits to third party recipients
messages given it by various originators. Therefore in accordance with Section 527.2(d)(4) of the
Sales and Use Tax Regulations, Petitioner is not engaged in providing the service of telephony and
thus the services provided by it are not subject to the tax imposed by Section 1105(b) of the Tax
Law. A similar rationale was adopted by the Court of Appeals in Quotron Systems, Inc. v Gallman
39 NY2d 428 where the court concluded that a company engaged in similar activities to that of
Petitioner was not engaged in the furnishing of telegraph services and thus was not a utility subject
to the corporation tax imposed by Section 186-a of Article 9 of the Tax Law.
However, the issue is then whether Petitioner's services in providing stock quotations and
in executing trades in securities are subject to sales tax under Section 1105(c)(1) of the Tax Law.
Section 527.3(a) of the Sales and Use Tax Regulations provides that:
(1)
Section 1105(c)(1) of the Tax Law imposes a tax on the receipts from the
service of furnishing information by printed, mimeographed or multigraphed matter or by
duplicating written or printed matter in any manner such as by tapes, discs, electronic
readouts or displays.

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Sales Tax
August 29, 1989

(2) The collecting, compiling or analyzing information of any kind or nature and the
furnishing reports thereof to other persons is an information service.
(3) Among the services which are information services are credit reports, tax or
stock market advisory and analysis reports and product and marketing surveys.
Petitioner states that it operates a "communication system ("NASDAQ System") that collects,
stores, and disseminates 'up-to-the-second' quotations from a nationwide network..." Petitioner sells
and delivers its information over telecommunication lines. The quotes are displayed on terminals
generally located at its customer's premises.
Section 527.3(a)(1) of the regulations imposes a tax on receipts from furnishing information
"... in any manner such as by ........ electronic recordants or displays." (Emphasis supplied)
Therefore Petitioner is selling an information service which is not personal or individual in
nature and thus is subject to sales tax.
Because the sales tax is a destination tax, the point of delivery controls the rate of tax to be
collected. The point of delivery of Petitioner's service would be the location of the computer
terminals used by its customers.
However when the NASDAQ system is used to purchase and sell stocks and other securities,
Petitioner is not providing an information service. The execution of trades in securities is not one
of the services taxed pursuant to Section 1105(c) of the Tax Law and thus this aspect of Petitioner's
business is not subject to the imposition of sales tax.

DATED: August 29, 1989

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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