Is an electronic message-transmission system for securities traders taxed as a telegraph service, and does the interstate exclusion apply?

Plain-English summary

Xerox Corporation's Autex division (based in Massachusetts) runs communication services that let brokers and financial institutions signal interest in buying, selling or lending large blocks of securities and bonds. Three services are involved: (1) transmitting messages among designated subscribers (plans to trade, new-issue announcements, confirmations, etc.) via Autex's computers, leased interstate telephone lines and electronic display/teleprinter terminals; (2) delivering a broker's government-securities offers to that broker's chosen customers; and (3) an Information Retrieval Service carrying a firm's internal data (holdings, trading history, positions) to its own branch offices. Autex asked whether the receipts are taxable.

The Department held all three are taxable telegraph service under § 1105(b) — but only the intrastate portion.

• It's telegraphy, not an information service. Section 1105(b) taxes "telephony and telegraphy and telephone and telegraph service of whatever nature" (except interstate/international). Autex acts as a mere conduit transmitting messages, which the courts treat as telegraph service — New York Quotation Co. v. Bragalini, Holmes Electric Protective Co. v. McGoldrick, and Quotron Systems, Inc. v. Gallman; N.Y. State Cable Tel. Ass'n v. State Tax Comm'n shows that reasoning applies to § 1105(b). That the customer may be both sender and receiver, and that Autex incidentally provides a recap of current and cancelled messages, doesn't change the conclusion.
• All three services are conduit transmission. The second service (broker's offers to its customers) and the third (internal data to branch offices) are likewise message transmission and reach the same result.
• The interstate exclusion limits the tax. Section 1105(b) expressly does not apply to "interstate and international" telephone/telegraph service. So the tax reaches only the receipts attributable to communications between two customers both located in New York.

What this means for you

Electronic message-transmission can be taxed as telegraphy — even if you'd call it "information." If your system's essence is carrying messages from a sender to designated recipients (acting as a conduit), New York can tax it as telegraph service under § 1105(b), rather than treating it as a nontaxable or differently taxed information service.

Only intrastate traffic is taxable. The statute carves out interstate and international telephone/telegraph service, so you tax only communications where both ends are in New York. That makes it essential to identify and separate intrastate from interstate receipts.

Incidental extras won't recharacterize the core service. Add-ons like a recap of recent and cancelled messages are incidental and don't move the service out of the telegraphy category.

Common questions

Q: Isn't a securities-messaging system an "information service" rather than telegraphy?
A: No. The Department followed New York Quotation, Holmes Electric and Quotron, which treat a service that merely transmits messages as telegraph service. Autex acts as a conduit, so it's taxed under § 1105(b), not as an information service.

Q: Are all of Autex's receipts taxable?
A: No — only receipts from communications between two customers both located in New York. Section 1105(b) excludes interstate and international telephone/telegraph service.

Q: Does the internal branch-office data service change the analysis?
A: No. That Information Retrieval Service also transmits messages (a firm to its branches) through Autex as a conduit, so it reaches the same result as the other two services.

Citations and references

Statutes, regulations and authority:

• Tax Law § 1105(b) — taxes receipts from telephony, telegraphy and telephone/telegraph service of whatever nature, except interstate and international service
• New York Quotation Co. v. Bragalini, 7 A.D.2d 586 — transmitting market information held to be telegraphy, not an information service
• Holmes Electric Protective Co. v. McGoldrick, 262 App. Div. 514, aff'd 288 N.Y. 635 — telegraph service is essentially the transmission of communications
• Quotron Systems, Inc. v. Gallman, 39 N.Y.2d 428 — a telegraph company functions as a conduit transmitting messages to third-party recipients
• N.Y. State Cable Tel. Ass'n v. State Tax Comm'n, 59 A.D.2d 81 — applies the sale-of-telegraphy analysis to the § 1105(b) sales tax

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/h81_87s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(87)S
Sales Tax
April 30, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S8008l4A

On August 13, 1980, a Petition for Advisory Opinion was received from Xerox
Corporation, Xerox Square - 867, Rochester, New York 14644.
The issue raised is whether receipts from certain services provided, by one
of Petitioner's divisions, to brokers and financial institutions engaged in
trading equity securities, bonds and other financial obligations, are subject to
the sales and use taxes imposed under Article 28 of the Tax Law.
Autex is a division of Petitioner, based in Wellesley, Massachusetts. It
provides services enabling brokers and financial institutions engaged in buying,
selling or lending large blocks of securities to communicate interest in such
transactions to others on a selective basis through a system of telephone and
computer equipment and electronic display screens (with a teleprinter attached
in some cases) owned by or leased to Autex. Autex provides the following three
services:

TP-8 (4/80)

1.

In one of its operations Autex transmits messages between
subscribers. Autex transmits messages only to those subscribers who
have been designated to receive them by the subscriber sending the
messages. Subscribers may want to inform other subscribers of their
plans to buy, sell or lend large blocks of equity securities or
bonds. Other matters with respect to the trading of bonds and
securities, including announcements of new issues, syndication
allotments, delivery instructions, and trade confirmations on a
subscriber's standard form may also be communicated. In addition,
any subscriber can have announced to all other subscribers any trade
which the subscriber wishes to have so announced. The messages and
instructions of New York subscribers are communicated to Autex in
Massachusetts via interstate telephone lines leased by Autex from
the telephone company. Such communication may be made orally to
Autex by telephone or, for those subscribers having such equipment,
by means of a computer terminal supplied by Autex, to be used
exclusively in connection with services provided by Autex. In
Massachusetts, the information is entered in Autex's computer and
from there transmitted via telephone lines leased by Autex to the
display or teleprinter terminal supplied by Autex in the office of
the subscriber or subscribers to whom Autex has been directed to
transmit the message, or, if a subscriber does not have such
equipment, orally, by telephone. As requested, Autex will provide a
subscriber with a recapitulation of the current (and recently
cancelled) communications which Autex has received for delivery from
or to such subscriber, organized in accordance with the subscriber's
request.

2.

Pursuant to a contract with Fundamental Brokers, Incorporated
(F.B.I.), Autex delivers offers on government securities from F.B.I.
to F.B.I. customers through the use of computers, interstate
telephone facilities and electronic display screens. F.B.I.
determines both the terms of the offer and the customer or customers
to whom the offer is to be communicated by Autex.

JAMES H. TULLY, JR., COMMISSIONER
LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-H-81(87)S
Sales Tax
April 30, 1981

3.

Autex provides an internal communication system, termed the
Information Retrieval Service, for a few large brokerage firms.
Subscribers to the service feed information into Autex's computer
located in Massachusetts by means of terminal equipment in their
offices and interstate telephone lines leased by Autex. The
information involved relates to a brokerage firm's holdings, trading
history, research recommendations, investment positions and its
customers' interests. The purpose of this service is to allow
brokerage firms to provide their branch offices with timely
information concerning block trading transactions. Autex's computer
distributes information only in accordance with a subscriber's
instructions and the service is used by firms for the sole purpose
of transmitting data to their branch offices.

The first service described above comes within the ambit of the terms of
section 1105(b) of the Tax Law, whicn imposes a tax on "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." This view is
supported by New York Quotation Company v. Bragalini, 7A.D. 2d 586. In that case
the Petitioner provided its customers with stock market information transmitted
to it by the New York Stock Exchange. The court there held that the service
constituted not an information service, as was contended by the Petitioner, but
telegraphy. The court utilized a definition of telegraph service set forth in
Holmes Electric Protective Co. v. McGoldrick, 262 App, Div. 514, aff'd no op 288
N.Y. 635, as a service consisting "...essentially in the mere transmission of
communications, the service of the telegraph company being completed when the
message has been transmitted." Id. at 517. The court went on to state, in New
York Quotation, that "Telegraph service in the ordinary sense envisions a sender,
a transmitter, and a receiver, with the sender delivering a message to the
transmitter for transmission. Normally the sender purchases the transmission
service. Here the receiver purchases the service. This difference does not change
the nature of the service involved." Id. at 589.
In the present case, of course, the customer may be both sender and
receiver, in different instances. A similar definition, similarly applicable in
the present instance, appears in Quotron Systems, Inc. v. Gallman, 39 N.Y. 2d
428, wherein the court stated that, "It is common knowledge that a telegraph
company normally functions as a mere conduit, transmitting to third-party
recipients messages given it by various originators." Id. at 432. While the the
New York Quotation and Quotron decisions dealt with the tax on utilities imposed
under section 186-a of the Tax Law, and not with the sales tax imposed under
section 1105(b) of the Tax Law, the determinative issue in such cases, as defined
by the court, "was whether the taxpayer was engaged in the sale of telegraphy or
the furnishing of telegraph service." N.Y. State Cable Tel. Ass'n v. State Tax
Com'n, 59A.D. 2d 81, 84. This case demonstrates the applicability of the New York
Quotation and Quotron opinions to section 1105(b) of the Tax Law. It should be
noted that the incidental service of providing its customers with a
recapitulation of current and recently cancelled communications in no way
warrants a conclusion contrary to that arrived at herein.
Finally, while it is here determined that the service in question comes
within the rubric of "telephony and telegraphy and telephone and telegraph
service of whatever nature," within the meaning and intent of section 11105(b)
of the Tax Law, the tax imposed thereby is explicitly rendered inapplicable to
"interstate and international telephony and telegraphy and telephone and
telegraph service." Therefore, the tax would apply only to receipts attributable
to communications between customers both of whom are located in New York.

3
TSB-H-81(87)S
Sales Tax
April 30, 1981

The foregoing considerations are equally applicable to the second service
described above, and lead to identical conclusions.
The third service described above, the Information Retrieval Service, also
involves the transmission of messages, and thus comes within the category of
"telephony and telegraphy and telephone and telegraph service of whatever
nature." This conclusion is mandated by a consideration of the fact that Autex
acts as a conduit of messages between a customer and the branch offices of such
customer. Accordingly, the considerations controlling with respect to the first
two services described above are equally applicable hereto, and lead to identical
conclusions.

DATED: April 15, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau