Does a detective agency's shopping service owe sales tax on merchandise returned for full reimbursement and on the shipping charges for those returns?

Plain-English summary

Dale System Incorporated is a private detective agency that performs a shopping service for clients: it sends professional shoppers into retail stores to make cash purchases at the registers, in order to grade and report on how the cashier handled the transaction (did the cashier properly record the sale?). The purchased items are returned to Dale's office and then shipped to an address the client gives, with the invoices and reports (charging separately for the detective service and the reimbursement amount) sent later under separate cover. It asked three questions about the merchandise returns and shipping charges.

The Department's answer:

• Issue 1 — Returned merchandise reimbursement is not taxable. Under Regulation § 534.6, a vendor may treat a return of merchandise as a cancelled sale. So the amount of reimbursement Dale requests for the returned merchandise is not subject to state or local sales and use taxes.
• The shopping service is a taxable detective service. Under Tax Law § 1105(c)(8) (enacted by Chapter 190 of the Laws of 1990), protective and detective services — including detective-agency services, whether or not tangible personal property is transferred — are taxable.
• Issues 2 & 3 — Shipping charges follow the report's destination. Sales tax is a destination tax (Reg. § 525.2(a)(3)): the point of delivery controls both the tax incidence and rate. The shipping charges to return the purchased merchandise are deemed a component of the detective service. So, consistent with Publication 849 and Stanley Greenfield, TSB-A-90(35)S: if the reports are sent to locations outside New York, the charges are not taxable; if the reports are sent to locations inside New York, tax must be collected. The location where the reports are sent determines the taxability of the shipping charges for the returned merchandise.

What this means for you

Detective and security agencies

Your investigative and detective work — including a "shopping service" that tests cashier honesty — is a taxable protective and detective service under § 1105(c)(8), whether or not you hand over any property. But the merchandise your shoppers buy and return is handled as a cancelled sale, so the reimbursement for it isn't a taxable receipt.

Destination controls taxability

Because sales tax is a destination tax, where you deliver the report determines whether the associated charges are taxable. A report (and the related shipping of returned merchandise) delivered to an out-of-state client location is not taxable; delivered to a New York location, it is.

Separate your reimbursement from your service fee

Dale separately stated the reimbursement amount and the detective-service charge. Keeping the returned-merchandise reimbursement distinct from your taxable service fee supports treating the reimbursement as a nontaxable cancelled sale.

Accountants and tax professionals

Three holdings: (1) returned merchandise is a § 534.6 cancelled sale, so the reimbursement isn't taxable; (2) the shopping service is a § 1105(c)(8) protective/detective service; and (3) under the § 525.2(a)(3) destination rule, shipping charges are a component of the service and taxable only when the report is delivered in New York (Stanley Greenfield, TSB-A-90(35)S; Publication 849).

Common questions

Q: Is the reimbursement for returned merchandise taxable?
A: No. Under Reg. § 534.6 the return is treated as a cancelled sale, so the reimbursement amount isn't subject to sales or use tax.

Q: Is the shopping service itself taxable?
A: Yes. It's a protective and detective service under § 1105(c)(8), taxable whether or not any tangible personal property is transferred.

Q: Are the shipping charges to return merchandise taxable?
A: It depends on destination. The charges are a component of the detective service, so they're taxable when the report is delivered to a New York location and not taxable when delivered outside New York.

Q: Why does the report's destination matter?
A: Because sales tax is a destination tax — the point of delivery controls both whether tax applies and at what rate.

Q: Where do these rules come from?
A: Reg. § 534.6 (cancelled sales), § 1105(c)(8) (detective services), and the destination rule of Reg. § 525.2(a)(3), applied consistently with Publication 849 and Stanley Greenfield, TSB-A-90(35)S.

Citations and references

Statutes and authorities:

• Tax Law § 1105(c)(8) (tax on protective and detective services, enacted by Chapter 190 of the Laws of 1990)
• Sales and Use Tax Regulations § 534.6 (refunds and credits for cancelled sales and returned merchandise)
• Sales and Use Tax Regulations § 525.2(a)(3) (sales tax is a destination tax; point of delivery controls incidence and rate)
• New York State Publication 849, Sales Tax Information on Selected Services in New York City (1/89)
• Stanley Greenfield, Adv. Op. Comm. T&F, July 24, 1990, TSB-A-90(35)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_52s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92(52) S
Sales Tax
June 30, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920428B

On April 28, 1992, a Petition for Advisory Opinion was received from Dale System
Incorporated, 1101 Stewart Avenue, Garden City, New York 11530.
The issues raised by Petitioner, Dale System Incorporated, are:
1.

Whether the return of merchandise for a complete reimbursement, purchased as part
of Petitioner's shopping service, is subject to State and local sales and use taxes.

2.

Whether shipping charges on merchandise returned to locations outside New York
State as part of Petitioner's shopping service are subject to State and local sales and
use taxes.

3.

Whether shipping charges on merchandise purchased outside New York and returned
to locations inside New York as part of Petitioner's shopping service are subject to
State and local sales and use taxes.

Petitioner is a private detective agency involved in performing a shopping service for its
clients. In performance of this service, Petitioner sends professional shoppers into retail
establishments to make cash purchases of merchandise sold by that store at the store's registers in
order to grade and report on the handling of the transaction. The object is to determine if the cashier
has properly recorded the sale.
The purchased items are returned to Petitioner's office by the shoppers and then shipped by
Petitioner to an address furnished by its client. No invoices or reports accompany the returned
merchandise. The invoices and reports are sent under separate cover at a later date. Charges for the
detective service and for the amount to be reimbursed are separately stated on the invoices.
Section 1105(c)(8) of the Tax Law as enacted by Chapter 190 of the Laws of 1990 imposed
sales tax upon:
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.

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TSB-A-92(52) S
Sales Tax
June 30, 1992
Section 525.2(a)(3) of the Sales and Use Tax Regulations provides:
The sales tax is a "destination tax," that is, the point of delivery or point at which
possession is transferred by the vendor to the purchaser or designee controls both the
tax incident and the tax rate.
Section 1105(c)(8) of the Tax Law is substantially similar to Section 1212-A(b)(2)(i)(B) of
the Tax Law allowing New York City to impose sales tax on protective and detective services.
New York State Department of Taxation and Finance, Sales Tax Information on Selected
Services in New York City, Publication 849 (1/89) in listing protective and detective services subject
to the New York City sales tax states at pages 7 and 8:
Q.

Are unannounced and undisclosed investigative inspections of businesses, for
a business owner to whom a report is provided, considered taxable services?

A.

These are detective services and when a report is delivered to a client in New
York City, it is subject to the 4% sales tax imposed by New York City.

Q.

If a private detective is hired by a New York City client to perform
investigative services in Arizona, are his services subject to the 4% sales tax
imposed by New York City?

A.

Yes. Investigative work is taxable when the bill is rendered to a client in New
York City and delivery of the report takes place in New York City, and not
according to where the services are rendered.

Q.

If an investigative report, due to its extreme confidential nature, is sent to an
executive's home outside New York City, but the main office is located in
New York City, is this report subject to the 4% sales tax imposed by New
York City?

A.

No.

Q.

If the same report is sent to an executive's home in New York City, although
the work is done outside the city limits and the main office is outside New
York City, is the report subject to the 4% sales tax imposed by New York
City?

A.

Yes.

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TSB-A-92(52) S
Sales Tax
June 30, 1992
Section 534.6 of the Sales and Use Tax Regulations provides, in part, as follows:
Reg. Sec. 534.6. Refunds and credits by reason of cancelled sales and
returned merchandise.-- (Tax Law, Sec. 1132(e), 1139(e)). (a) Cancelled sales and
returned merchandise. (1) Exclusion from return. Where a contract of sale has been
cancelled or the property returned within the reporting period in which the sale was
made, a vendor of tangible personal property or services. . .may exclude such
receipts. . .from his sales and use tax return.
(2) Credit where tax previously remitted. Where a contract of sale has been
cancelled or the property returned and the tax collected thereon refunded to the
customer, and such tax had been paid and reported on a return by the vendor of
tangible personal property. . .an application for refund or credit for the tax paid upon
such receipt. . . .shall be filed with the State Tax Commission within three years from
the date when the tax was payable by such person to the Tax Commission. The
applicant may, as part of the application for credit, take the credit on the return which
is due coincident with or immediately subsequent to the time such application is
filed. The application for refund or credit shall be subject to the provisions of
subdivisions (a), (b), and (c) of section 1139 of the Tax Law and section 534.2 of this
Part.
Charges for reports by a detective agency sent to a client located outside of New York State,
such as attorneys located in New Jersey, are not subject to sales tax pursuant to Section 525.2(a)(3)
of the Sales and Use Tax Regulations, Stanley Greenfield, Adv Op Comm T&F, July 24, 1990, TSBA-90(35)S.
Accordingly, concerning issue "1", pursuant to Section 534.6 of the Sales and Use Tax
Regulations the vendor of merchandise being returned may treat such return as a cancelled sale.
Therefore, the amount of reimbursement requested by Petitioner for the returned merchandise is not
subject to State and local sales and use taxes.
Regarding issues "2" and "3", the performing of a shopping service as described herein
constitutes a protective and detective service pursuant to Section 1105(c)(8) of the Tax Law.
Shipping charges to return merchandise purchased in performing Petitioner's detective service would
be deemed a component of such protective and detective service. Pursuant to Section 525.2(a)(2) of
the Sales and Use Tax Regulations, Publication 849 and Stanley Greenfield, supra, if the reports
relating to the handling of merchandise purchases are sent to locations outside New York State such

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TSB-A-92(52) S
Sales Tax
June 30, 1992
reports are not subject to sales and use taxes. Sales tax must be collected on reports sent to locations
within New York State. The locations where the reports are sent will determine the taxability of the
shipping charges for the returned merchandise.

DATED: June 30, 1992

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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