Is the per-transaction fee an ATM network operator charges member banks for processing electronic banking transactions subject to New York's tax on telephone service?

Plain-English summary

NYCE Corporation operates a shared ATM network connecting member banks and non-bank financial institutions. When a cardholder uses an ATM, NYCE's system does far more than just relay a message between the machine and the cardholder's bank: it identifies the "Acquirer Bank" (owner of the ATM) and "Issuer Bank" (where the cardholder's account is held), decrypts and re-encrypts the cardholder's PIN into each bank's own security format, translates the transaction message between each institution's different computer languages, edits and completes the message with additional data (like the cardholder's other same-day transactions or fraud "negative file" flags), routes the request for authorization, and -- if the Issuer Bank doesn't respond in time -- can even independently authorize smaller transactions itself using its own records. NYCE also handles denials, partial dispensing failures, transaction reversals, and end-of-day settlement between all its member banks via the Automated Clearing House. For all of this, NYCE charges member banks about 10 cents per transaction. Separately, NYCE arranges the telecommunications lines each member needs to connect to its network, but passes those costs (including sales tax already charged by the telecom carriers) straight through to members -- that pass-through charge wasn't the subject of this ruling. NYCE asked whether its 10-cent transaction fee itself is taxable as a telephone/telegraph service.

The Department said no. New York taxes intrastate telephone and telegraph service, but a service isn't treated as telephony or telegraphy if the communication element is merely incidental to some other, different service the customer is actually buying. NYCE's core business is coordinating and executing complete electronic banking transactions -- reading, translating, editing, authorizing, confirming, reversing, and settling -- not simply transmitting messages from point A to point B. The telecommunications links NYCE relies on are just the means by which it delivers that broader banking service, not the service itself. Because the substance of what NYCE sells is electronic banking transaction processing, not telephony, its transaction fees fall outside the telephone service tax entirely.

What this means for you

ATM networks, payment processors, and fintech companies charging per-transaction fees

If your service does substantive work on a transaction -- translation, authorization, fraud screening, settlement -- rather than simply carrying a message between two endpoints, your transaction fees likely aren't taxable telephone/telegraph service, even though telecommunications links are essential to how you deliver the service.

Banks and financial institutions paying network fees to process ATM or card transactions

Expect your network's core per-transaction processing fee to come without New York sales tax under this "incidental telephony" analysis, though a separately billed pass-through of the network's own telecommunications line costs (which already carry tax from the underlying carrier) is a different, unaddressed question.

Accountants and tax professionals

This ruling applies the "incidental element" test in 20 NYCRR § 527.2(d)(4), tracing back to Matter of Holmes Electric Protective Co. v. McGoldrick -- a service built around substantive processing, editing, and decision-making isn't converted into taxable telephony merely because it relies on telecommunications infrastructure to function.

Common questions

Q: Is an ATM network's per-transaction processing fee taxable as a telephone service?
A: No, when the network does substantive work on the transaction (translation, authorization, settlement) rather than merely relaying messages -- the telecommunications element is incidental to that broader service.

Q: Does relying on telecommunications lines to run a network automatically make the service taxable telephony?
A: No. What matters is whether communication is the actual service being sold, or just the incidental means of delivering some other service.

Q: Is a network's pass-through charge for its members' own telecommunications lines taxable?
A: This ruling doesn't decide that question -- it notes the pass-through charge (which already includes tax paid to the telecom carrier) wasn't at issue.

Q: Does this ruling apply to my payment network or ATM processing business?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Whether your specific service is "substantive processing" versus "mere transmission" depends on your own facts.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_86s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(86)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S971015D

On October 15, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from NYCE Corporation, 300 Tice Boulevard,
Woodcliff Lake, New Jersey 07675.
The issue raised by Petitioner, NYCE Corporation, is whether the fee it
charges members of its banking network per transaction for electronic banking
services performed through Automated Teller Machines (ATMs) and other similar
machines is subject to New York State and local sales taxes under Section 1105(b)
of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner operates and administers a network through which it handles
electronic banking transactions for members of the network. Members include both
"banks" and "non-banks." All members pay a one-time initiation fee to join the
network, but no annual fee thereafter. Each member participates in the network
through a contract with Petitioner that is called a "Participation Agreement."
The Participation Agreement incorporates by reference certain "Operating Rules."
Petitioner included with its Petition, a copy of the Participation Agreement and
the Operating Rules.
There are thousands of possible combinations of activities and functions
that Petitioner might perform with respect to an individual banking transaction.
Petitioner must react to each transaction depending on the circumstances
surrounding it. However, a "simple" transaction through the network from start
to finish would generally take the following steps.
Transaction Acquisition. In the most fundamental way, Petitioner allows
depositors at one of its member banks to use that bank’s services from a remote
terminal and conduct banking transactions electronically without the need for a
teller. The bank at which the cardholder (or depositor) holds the account is the
"Issuer Bank." The cardholder inserts his or her card into an ATM. The ATM is
viewed as having "acquired" the transaction request.
Thus, the financial
institution that owns the ATM is the "Acquirer Bank." The Acquirer Bank has a
computer driver which allows the ATM to function and read the magnetic strip on
the back of the card. From the strip, the ATM reads a series of numbers. The
series contains subsets consisting of an identifying number for the Issuer Bank
(for example, Issuer Bank ID Number ABC) and an identifying number for the
cardholder (for example, Cardholder ID Number 123). The ATM then requests the
cardholder to enter his or her Personal Identification Number (for example, PIN
QQQ). The ATM then requests information regarding the type of transaction the
cardholder would like to conduct and the specific details of that transaction.
For example, the cardholder might ask to withdraw $150 from his or her checking
account.

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The ATM then prepares a message to Petitioner, identifying itself as the
Acquirer Bank and indicating that Cardholder ID Number 123 is standing before one
of its terminals and would like to withdraw $150 from a checking account
maintained at Issuer Bank ID Number ABC. This message includes an encrypted
version of the PIN QQQ. The Acquirer Bank has no idea who Cardholder ID Number
123 is, what bank is Issuer Bank ID Number ABC, whether the cardholder has
entered his or her correct PIN, whether the cardholder has an account with the
Issuer Bank, whether there are sufficient funds in the account, or whether the
cardholder has initiated a transaction which the Issuer Bank will allow.
Message Editing and Translation. Petitioner receives this message in a
computer language that is consistent with the Acquirer Bank’s system.
As
indicated, the part of the message that pertains to the cardholder’s PIN is
encrypted; that is, it is scrambled in a code which requires a key to unscramble.
When Petitioner receives the message, it does a number of things.
First,
Petitioner identifies the ATM, and its driver, so that Petitioner can pull from
its files the identity of the language in which the message has been sent.
Second, once it knows who the Acquirer Bank is, Petitioner can identify the key
that will enable it to unscramble the encrypted PIN.
Petitioner’s system then translates the message into its own internal
computer language. Once the message is translated into Petitioner’s internal
computer language, its contents are edited to meet the specifications and
parameters of Petitioner’s system. After editing, the message is checked for
completeness and read. If the message does not contain all of the information
necessary, for example the PIN, Petitioner corresponds directly with the Acquirer
Bank to ascertain the missing information.
Network Confirmation/Authorization. By reading the message, Petitioner can
identify the Issuer Bank ID Number ABC, and confirm that the institution is a
member of Petitioner’s network.
This identification also serves to route
Petitioner’s request for transaction authorization to the appropriate source.
Two initial responses can result.
If the Issuer Bank is not a member of Petitioner’s network, a message is
prepared (first in Petitioner’s internal computer language and then translated
into a language that is compatible with the Acquirer Bank’s computer) that the
Issuer Bank is not a member of Petitioner’s network.
This message is then
transmitted to the ATM driver which, through its own internal processes,
instructs the ATM to return the cardholder’s card and to display a message
indicating that the Issuer Bank is not a member of the network.
Petitioner
monitors the ATM’s performance of this function and waits for confirmation from
the driver that it did, in fact, instruct the ATM to display the appropriate
message. If this confirmation is not forthcoming within a specified period of
time, Petitioner creates and then transmits a message to the ATM driver informing
it that a problem has developed. Petitioner also creates an internal message for
its own use to the effect that until it receives a reply message indicating that
the problem ATM has been fixed, no new transactions should be accepted from that

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machine. This "handshake" and "standing by" for confirmation is an aspect of
Petitioner’s service which applies to all situations where Petitioner transmits
a message to an end-point that is outside of its internal system. Every time
Petitioner sends a message out, whether it is to an ATM or an Issuer Bank, it
awaits confirmation that the message was received and the instructions were
carried out.
If, after reading the translated message from the ATM, Petitioner
determines that the Issuer Bank is a member of Petitioner’s network, Petitioner
consults its database and identifies the language that the Issuer Bank’s computer
uses. Petitioner then consults its database to determine what key the Issuer
Bank’s encryption system uses.
Petitioner will then translate its internal
message into the Issuer Bank’s computer language and translate the encrypted PIN,
as received from the Acquirer Bank, into the encrypted PIN that meets the Issuer
Bank’s key. Petitioner also edits the translated message to fit the ordering and
content parameters of the Issuer Bank. Finally, Petitioner edits the message to
add records of transactions conducted by that same cardholder through Petitioner
earlier that day, as well as any information regarding the cardholder that
Petitioner maintains in its "negative file," for example, that the card was
reported stolen. The Issuer Bank might use the transaction records to determine
whether any daily maximum withdrawal amount has been exceeded or whether the
level of activity indicates that the card is being used in an unauthorized
manner.
Issuer Authorization. When the message is transmitted to the Issuer Bank,
Petitioner stands by for authorization. At this juncture, there are three basic
responses from the Issuer Bank: a positive response, a negative response, and no
response. (See Stand-In Authorization, infra, in the case of no response.)
If there is a positive response from the Issuer Bank, Petitioner prepares
an internal log entry in its own computer language documenting the transaction
and indicating that the Issuer Bank has authorized the transaction. This entry
is used to settle accounts at the end of the banking day. The Issuer Bank will
debit the cardholder’s account on its own, in the case of this example, $150.
Petitioner then prepares and transmits a message in the Acquirer Bank’s computer
language instructing it to dispense the cash. Petitioner waits for confirmation
from the Acquirer Bank that the cash has, in fact, been dispensed.
If the Issuer Bank responds with a negative, Petitioner reads the denial
for any specific details and prepares an internal message indicating this denial.
If for example, the authorization is negative because the Issuer Bank has
indicated that the cardholder’s card was reported stolen, Petitioner will prepare
a message to the Acquirer Bank instructing it to "capture" the card. If the
negative is simply because the cardholder’s account has insufficient funds,
Petitioner will prepare a message to the Acquirer Bank informing it that the
request has been denied because of insufficient funds. Again, Petitioner will
wait for confirmation from the Acquirer Bank that the instructions conveyed were,
in fact, carried out.

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Stand-In Authorization. If the Issuer Bank, after a specified time period,
does not respond with any authorization information, Petitioner consults its own
databases to determine whether it has secondary authorization powers on behalf
of the Issuer Bank. With respect to some members, Petitioner has permission to
"authorize transactions" on its own if the Issuer Bank’s system is down or
unresponsive. In the usual case, Petitioner reviews its internal file of lost,
stolen, inactive or otherwise unauthorized cards (its "negative file") to
determine whether the card is still active.
If stand-in authorization is
negative, Petitioner prepares its own message handling the transaction as if it
had received a negative authorization directly from the Issuer Bank.
For
example, a "capture card" message might be prepared if the card was reported
stolen. Petitioner then translates its internal message into the Acquirer Bank’s
computer language informing it of its decision -- in this case, instructing the
ATM to capture the card. As is the case with all messages sent by Petitioner,
the Petitioner’s computer will stand by and wait for confirmation from the end­
point.
If the cardholder’s card is not contained on the "negative file,"
Petitioner prepares an internal message that the transaction has been authorized.
In this example, Petitioner has secondary authorization powers, but only up to
$100 per transaction. Accordingly, the amount of the withdrawal is limited to
$100.
Petitioner then sends instructions in the Acquirer Bank’s computer
language to dispense $100.
Petitioner also instructs the Acquirer Bank to
display a message explaining why the withdrawal amount is limited. Like all
transmissions, Petitioner stands by and waits for confirmation from the Acquirer
Bank that it dispensed the $100 to the cardholder. The Issuer Bank in this case
needs to be informed that the transaction took place, because Petitioner
authorized the transaction. As a result, Petitioner prepares a message to the
Issuer Bank which will be queued (i.e., stored) until the Issuer Bank comes back
on-line. This message informs the Issuer Bank that Petitioner authorized a $100
withdrawal from the cardholder’s account and instructs the Issuer Bank to debit
the account.
Transaction Confirmation/Reversal. After a message to dispense cash (based
on a positive authorization) has been transmitted, if the Acquirer Bank does not
confirm that it dispensed the cash to the cardholder, Petitioner prepares and
transmits a follow-up message to the Acquirer Bank. If that message also goes
unanswered, Petitioner will "reverse" the transaction.
To reverse the
transaction, Petitioner prepares and transmits a message to the Acquirer Bank
that Petitioner has not been able to confirm that it dispensed the $150 as
directed, and that Petitioner assumes that it did not dispense the funds.
Petitioner also prepares and transmits a "reversal" message to the Issuer Bank,
instructing it to "reverse" the debit it just made to the cardholder’s account
because the ATM did not actually dispense the funds.
Also, the possibility exists that the Acquirer Bank was only able to
complete a portion of the transaction. For example, the ATM may only have $50
cash left, but the cardholder’s full withdrawal request of $150 has been
authorized. In this case, the Acquirer Bank would respond that it was only able

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to dispense $50 of the authorized $150. Petitioner, in response, would prepare
a message to the Issuer Bank informing it that the transaction was only partially
completed and that it should change the debit of $150 it just entered on the
cardholder’s account to $50. This is referred to as a "partial reversal."
Settlement. Because the transactions handled by Petitioner are banking
transactions, they must be settled at the end of each day. Thus, at the end of
each day, Petitioner retrieves its internal log of authorized and confirmed
transactions for settlement. Settlement is the method of managing the net flow
of funds daily between the member banks. At the time of an ATM transaction, the
cardholder’s account is debited or credited. At the end of each banking day,
funds must be settled between the Issuer Bank and the Acquirer Bank. Petitioner
records all transactions and then adjusts the net financial position of each of
its members according to their net transactions for the day. Netting is required
because an Issuer Bank might also be an Acquirer Bank.
The two amounts
(typically debits for transactions as Issuer, and credits for transactions as
Acquirer) are netted and summed, resulting in a posting total. The net posting
total for each member is then settled by Petitioner who communicates with the New
York Automated Clearing House which, using the Federal Reserve Bank, debits
and/or credits the cash positions of the various members to reflect their net
settle amounts.
The settlement procedure is performed by Petitioner for all network
members. Transactions are funded by and to Petitioner’s own settlement account,
with the aggregate transaction amounts passed through Petitioner’s account that
day equalling zero. Thus, at the end of the day, assuming that the cardholder’s
$150 withdrawal was transacted without the need for secondary authorization or
any reversal and that it was the only transaction involving these two banks,
Petitioner would use the Automated Clearing House to create a debit of $150 for
the Issuer Bank and a credit of $150 for the Acquirer Bank.
Fee.
For this entire
approximately 10 cents.

transaction,

Petitioner

imposes

a

charge

of

Telecommunications.
Petitioner requires and uses a telecommunications
interface with its members through which all transactions flow. The Operating
Rules provide that each member must establish and maintain the telecommunications
link between itself and Petitioner.
These telecommunication lines are the
members’ financial responsibilities. As a practical matter, however, Petitioner
orders the lines on behalf of its members so that it may monitor the lines’
performance and ensure that they meet the standards of quality and responsiveness
necessary for the network to function properly. When Petitioner receives the
invoices for the telecommunication lines, Petitioner is charged by and pays sales
tax to the telecommunication carriers. Since Petitioner is merely arranging for
the lines on its members’ behalf, Petitioner passes through the charge (sales tax
as well) to its members. This charge is not included in the 10 cent transaction
fee and is not at issue in this Opinion.

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Petitioner actively participates in executing banking transactions -- all
the way through settling the transaction among and between the institutions at
issue. Petitioner does not simply redirect calls between two members of the
network. It reads the messages, reformats the messages, edits the messages, adds
to the messages, prepares entirely new messages, and acts upon the messages.
Applicable Law and Regulations
Section 1105(b) of the Tax Law imposes sale tax, in part, upon:
The 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, in part:
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.
Opinion
The transaction fees received by Petitioner from members of its banking
network for electronic banking services performed through Automated Teller
Machines, and other similar machines, are not subject to New York State and local
sales taxes. Section 1105(b) of the Tax Law imposes sales tax on the receipts
from certain sales of telephony and telegraphy, and telephone and telegraph
services. Petitioner’s services, as described in this Opinion, are not included
within the meaning and intent of Section 1105(b). The telephony and telegraphy
services that Petitioner describes furnish the means by which Petitioner provides
its electronic banking services to the members of its banking network and are
incidental to Petitioner’s electronic banking services. (See, Matter of Holmes
Electric Protective Co. v McGoldrick, 262 AD 514, aff’d 288 NY 635.)

DATED: December 29, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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