Are fees for an electronic B2B catalog platform, EDI document exchange, and inventory-replenishment forecasting subject to New York sales tax?

Plain-English summary

Deloitte & Touche's client, a California-based technology company with no New York offices (just periodic marketing visits), runs three related services connecting wholesalers and retailers, and asked whether fees for each are taxable in New York.

Scenario 1 -- electronic catalog platform. Wholesalers post product catalogs on the client's California computer system; retailers browse them, pull universal product codes, and place orders directly with the wholesalers. The client charges wholesalers and retailers monthly trading-partnership fees plus per-code download charges, but takes no commission on the underlying sales. The Department found this service isn't among the enumerated taxable services, and to the extent it's advertising-like in nature, it's specifically excluded from tax as long as the client doesn't transfer any tangible property along with it -- so these fees aren't taxable.

Scenario 2 -- EDI document exchange. The client's network lets already-connected wholesalers and retailers exchange standardized purchase orders, invoices, and delivery confirmations directly with each other, with the client only providing the network pipe. The Department classified this as "telephony and telegraphy" service under Tax Law § 1105(b). That means fees for transmissions that both originate and terminate in New York are taxable -- even if the data happens to route through other states along the way -- while fees for genuinely interstate or international transmissions are excluded from tax.

Scenario 3 -- inventory replenishment. The client analyzes a retailer's daily sales data, forecasts future inventory needs, and generates purchase orders to send to wholesalers. The Department characterized this as a record-keeping/management service, which isn't one of the enumerated taxable services -- so these fees aren't taxable regardless of where the retailer or wholesaler is located.

What this means for you

B2B platforms, marketplaces, and EDI network providers

Don't assume all your electronic services are treated the same way for New York tax purposes. A platform that merely hosts postings or facilitates browsing (without transferring tangible property) can be treated like advertising and escape tax, while a network that actually carries the customer's own document traffic between two parties is treated as a taxable telephony/telegraphy service whenever both ends are in-state -- the routing path through other states doesn't change that.

Out-of-state technology vendors serving New York wholesalers and retailers

Even without a New York office, your fees can be taxable if the underlying service functions as intrastate telephony/telegraphy. Review each revenue stream separately -- catalog hosting, document transmission, and analytics/forecasting services can land in different tax buckets even when sold to the same customer as part of one platform.

Accountants and tax professionals

This ruling is a useful three-way split for electronic B2B services: (1) advertising-like catalog/posting services excluded under § 1105(c) if no tangible property changes hands, (2) document-transmission network services taxed as telephony/telegraphy under § 1105(b) based on origin/destination rather than routing path, and (3) record-keeping/management analytics services falling outside the enumerated list entirely.

Common questions

Q: Is an EDI transmission taxable if it happens to route through other states before arriving back in New York?
A: Yes, if it both originates and terminates in New York -- the routing path doesn't change the intrastate classification. Only genuinely interstate or international transmissions (originating or terminating outside New York) are excluded.

Q: Does hosting a product catalog online make a company a taxable seller of tangible personal property?
A: Not by itself. If the platform only facilitates postings and browsing without transferring tangible property, the service can be treated like advertising and fall outside the enumerated taxable services.

Q: Does this ruling apply to my B2B platform or EDI service?
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. It shows how the Department reasons, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law § 1105(b) (tax on telephony and telegraph service; interstate exclusion)
• Tax Law § 1105(c) (tax on enumerated services)
• Tax Law § 1110(a) (compensating use tax)

Prior rulings referenced: Mike Levy, Adv Op Comm T&F, August 14, 1995, TSB-A-95(33)S; Ski Soft, Inc., Adv Op Comm T&F, June 25, 1997, TSB-A-97(35)S; Mary B. Letter Shop, Adv Op St Tax Comm, July 17, 1981, TSB-A-81(3)S; Florafax International, Inc., St Tax Comm Decision, January 28, 1986, TSB-H-86(45)S.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a98_26s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(26)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S971118B

On November 18, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Deloitte & Touche LLP, 60 South Market Street,
San Jose, California 95113-2303. Petitioner, Deloitte & Touche LLP, provided
additional information pertaining to the Petition on February 20, 1998.
The issues raised by Petitioner are whether the fees charged by its client
for the services described in the three scenarios that follow are subject to New
York State sales or compensating use taxes.
Petitioner submitted the following facts as the basis for this Advisory
Opinion.
Petitioner’s client is headquartered in California, where it maintains all
of its facilities and computer equipment. The client has no business offices in
New York State; however, marketing representatives make periodic visits into New
York to solicit new customers. The client does not manufacture any products of
its own nor does it inventory products for others. Occasionally, Petitioner’s
client sells third party prewritten software to its customers to assist them in
communicating and placing orders as described herein. (Petitioner is aware of
the imposition of New York State sales and compensating use taxes on prewritten
computer software, as defined in Section 1101(b)(14) of the Tax Law. This matter
is not an issue in this Advisory Opinion.)
Each of the chargeable activities described in the scenarios is invoiced
as a separate line item.
All data is currently transmitted over leased
telecommunication lines that are provided by IBM Global Network (IGN).
Scenario 1
Petitioner’s client enters into business arrangements whereby wholesalers
post lists (i.e., catalogues) of goods available for sale on the client’s
computer node in California. The wholesalers transmit this data to the node from
their computers located within and outside of New York State.
The client
monitors and maintains the data and provides an arena for the posting and reading
of this information.
It does not actively collect or disseminate the
information, but it does dictate the format of the information for consistency
purposes.
Retailers located within and outside of New York State establish
trading partnerships with these wholesalers by accessing the catalogues
electronically and placing orders with the wholesalers. The retailers download
the universal product codes (UPCs) of the products from the catalogues as the
products are ordered.
These codes are used by the retailers to accurately
reference the products in their purchase orders, which are sent to the
wholesalers either electronically or via the mail (see, for example, Scenario 2).
The client stores the retailers’ purchase activities on backup storage tapes.

-2­
TSB-A-98(26)S
Sales Tax

The wholesalers and retailers are charged monthly based on the number of
trading partnerships established, plus an incremental charge based on the number
of UPCs downloaded. The incremental charges are basic fees charged by the client
and are not considered commissions or other consideration for the products sold.
Petitioner questions whether charges by its client to New York based wholesalers
for posting to the California node, access charges to New York based retailers
for browsing the postings on the California node and incremental item charges to
New York wholesalers and retailers are subject to New York State sales or
compensating use taxes.
Scenario 2
Petitioner’s client uses the IGN network and messaging facility to
electronically connect wholesalers and retailers via their own computers. Once
connected, wholesalers and retailers are able to complete transactions by
electronically exchanging all of the necessary business documentation (e.g.,
purchase orders, receiving documentation, sales invoices, delivery confirmations,
etc.). These electronic business forms are industry standardized Electronic Data
Interchange (EDI) formats. The client does not perform any services on the
documents other than to provide a network to facilitate the exchange.
Wholesalers and retailers who have established trading partnerships are
aware of each other’s identities and contact each other directly through the
exchange of business documents. Normally, when both parties are located in New
York, the EDI transmission will originate and terminate within New York State
through a direct path between the two parties. However, the EDI transmission may
leave New York passing through one or more states prior to terminating in New
York. The routing of the transmission is dependent on the availability of the
IGN transmission lines. The client is unable to identify whether an intrastate
transmission has left New York State in the routing process.
The wholesalers and retailers are charged based on the number and size of
the documents transmitted. Petitioner questions whether the charges to New York
based wholesalers and retailers for providing the service of electronically
exchanging business documents are subject to New York State sales or compensating
use taxes.
Scenario 3
Petitioner’s client provides an inventory replenishment service for
retailers. The service consists of analyzing daily sales information for each
retailer location, forecasting future inventory requirements and generating
purchase orders for transmission to wholesalers. The fees for this service are
based on the number of locations serviced and the number of individual products
ordered.

-3­
TSB-A-98(26)S
Sales Tax

Petitioner questions whether these charges are subject to New York State
sales or compensating use taxes if the wholesalers or retailers are located in
New York State or have a presence in the State.
Applicable Law
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 ....
Sections 1105(c) and 1110(a) of the Tax Law impose sales and compensating
use taxes, respectively, on certain enumerated services.
Opinion
The electronic catalogue services provided by Petitioner’s client and
described in Scenario 1 are not included among the enumerated services that are
taxable under Sections 1105(b), 1105(c) or 1110(a) of the Tax Law. Moreover, to
the extent that any of these services are of an advertising nature, such services
are specifically excluded from tax under Section 1105(c), provided the client
does not sell or otherwise transfer any tangible personal property to its
customers in conjunction with such services. (See, Mike Levy, Adv Op Comm T&F,
August 14, 1995, TSB-A-95(33)S; Ski Soft, Inc., Adv Op Comm T&F, June 25, 1997,
TSB-A-97(35)S.) Accordingly, the fees charged by Petitioner’s client for these
services are not subject to New York State sales or compensating use taxes.
(Where Petitioner’s client makes taxable sales of prewritten computer software
to customers in New York State, the receipts from these sales must be reasonable
and separately stated on any invoice or other statement of price given to the
customers.)
The client’s service of providing a network to facilitate the exchange of
EDI documents, as described in Scenario 2, is considered “telephony and
telegraphy” under Section 1105(b) of the Tax Law. Accordingly, the fees charged
by Petitioner’s client for the transmission of documents that both originate and
terminate in New York State (regardless of the routing process) are subject to
sales tax.
Fees charged by the client for interstate or international
transmissions of documents are specifically excluded from tax.

-4­
TSB-A-98(26)S
Sales Tax

The inventory replenishment service provided by Petitioner’s client, as
described in Scenario 3, is of a record keeping/management character and is not
included among the taxable services enumerated in the previously mentioned
sections of the Tax Law. (See, Mary B. Letter Shop, Adv Op St Tax Comm, July 17,
1981, TSB-A-81(3)S; Florafax International, Inc., St Tax Comm Decision, January
28, 1986, TSB-H-86(45)S.) Thus, the fees charged by the client for this service
are not subject to New York State sales or compensating use taxes.

DATED: April 14, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.