Does a business owe sales tax on what it pays a service like Telecredit for guaranteeing the funds on its customers' checks?

Subject

Penn Machinery, is whether the purchase by it of a service that guarantees the funds of its customers' checks is subject to sales tax.

What this means for you

A business bought a service from Telecredit Service Corporation that guarantees the funds on its customers' checks, using equipment and methods similar to a Visa/Mastercard system. The petitioner didn't provide much more detail about exactly what the service included.

New York taxes "information services" -- collecting, compiling, or analyzing information and furnishing reports of it -- with credit reports specifically listed as an example of a taxable information service. A check-guarantee service, standing alone, is different: it's the guarantor agreeing to make the business whole (replace the funds) if a customer's check bounces, which isn't an enumerated taxable service at all. Because the Department wasn't given enough detail to know exactly what Telecredit was providing, it gave a conditional answer:

• If Petitioner is buying only a check-guarantee service (fund replacement for bad checks), that's not taxable.
• If Telecredit is also providing credit information (or a combination of credit information and check-guarantee), the charge for that credit-information component -- or the entire combined charge, if the two can't be purchased separately -- is taxable as an information service.

This tracks a broader rule the Department has applied before: when a bundled service's components can't be separately purchased, the whole bundle is treated as one taxable transaction if any part of it is taxable, even if the price could technically be broken out or estimated component-by-component.

Q&A

Q: We pay a company like Telecredit to guarantee our customers' checks -- is that taxable?
A: If that's genuinely all you're buying (fund replacement on bad checks), no -- it's outside the scope of New York's enumerated taxable services. But if the same charge also includes a credit-information/credit-report component, that part (or the whole charge, if it's not separable) is taxable.

Q: What if our vendor bundles credit checking and check guarantee into one inseparable fee?
A: Then the whole fee is treated as a single taxable purchase, following the Department's established rule that components which can't be separately purchased are taxed as one combined transaction even if they could be separately itemized on the invoice.

Q: How do we find out which situation applies to us?
A: Ask your vendor exactly what services are bundled into the fee and whether any component (like credit information) can be purchased on a standalone basis. That distinction is what determines the tax result.

Citations

• Tax Law § 1105(a) -- imposes sales tax on retail sales of tangible personal property.
• Tax Law § 1105(c) -- taxes certain enumerated services, including information services under § 1105(c)(1).
• 20 NYCRR 527.3(a) -- defines taxable information services (collecting/compiling/analyzing information and furnishing reports), listing credit reports as an example.
• Morton L. Coren, P.C., Adv Op Comm T&F, June 29, 1990, TSB-A-90(33)S -- components of a bundled sale that can't be separately purchased are taxed as one combined transaction, even if separately stated or estimated.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a95_26s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (26)S
Sales Tax
June 29, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S941031D

On October 31, 1994, a Petition For Advisory opinion was received from H.O. Penn
Machinery Co., Inc., 100 Business Park Drive, Armonk, New York 10504.
The issue raised by Petitioner, H.O. Penn Machinery, is whether the purchase by it of a
service that guarantees the funds of its customers' checks is subject to sales tax.
Petitioner purchases from Telecredit Service Corporation a service that guarantees the funds
on a customer's check using the same method and physical equipment as Visa/Mastercard. Other
than the above statement, Petitioner did not submit any further information concerning the
transaction.
Section 1105(a) of the Tax Law imposes a tax upon the receipts from the sale of tangible
personal property with certain exceptions. Section 1105(c) imposes a tax upon certain enumerated
services.
Section 527.3 of the Sales and Use Tax Regulations provides, in part, as follows:
(a) Imposition. (1) Section 1105(c) 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, electronic readouts or displays
(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.
In Morton L. Coren, P.C., Adv Op Comm T&F, June 29, 1990, TSB-A-90(33)S, the
Commissioner advised that even though the components of a particular sale could be separately
stated, calculated or estimated, that if such components could not be separately purchased, the
combination of items listed must be considered as one and subject to sales tax as a single purchase.
In the instant case, it is not clear from the information provided by the Petitioner as to
whether Petitioner is purchasing a credit information service, a check guarantee service or a
combination of both. Provided Petitioner is purchasing a check guarantee service only, which
consists of the check guarantor providing Petitioner with funds to replace a bad check, such service

-2­
TSB-A-95 (26)S
Sales Tax
June 29, 1995

would be outside the scope of Section 1105(c) the Tax Law and thus exempt. However, if Telecredit
Service Corporation is providing Petitioner with credit information or a combination of credit
information and a check guarantee service, its charges would be subject to sales tax in accordance
with sections 1105(c)(1) or 1105(c)(9) of the Tax Law and Section 527.3(a) of the Sales and Use Tax
Regulations.

DATED: June 29, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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