Sales Tax Issues for Wall Street Firms

One of the more interesting state tax issues we get to deal with as state and local tax practitioners involve questions in the sales tax area. One of the reasons is because the answer to every sales tax question is the same: “it depends.” State sales tax statutes have so many ins and outs, exemptions and exclusions, ifs, ands, ors, and buts that there rarely is a clear answer. And even if there is a clear answer, it often depends on the application of a variety of different facts and circumstances. This usually results in articles every year about the different tax consequences that can arise in silly circumstances, such as the taxability of bagels depending on whether or not they are sliced or not; candy bars being taxable based on whether or not they are in the candy or cookie aisle, etc.

But the other interesting aspect of sales tax is that it touches everybody: every business, every taxpayer, every industry. A couple of years ago, we started to learn this firsthand when a lot of my income tax clients in the Wall Street area started contacting me about sales tax issues. Sales tax on Wall Street? What can that be about? 

We quickly learned that the New York Tax Department had been starting to apply its tax on information services to the purchase or sale of investment research by Wall Street firms. Normally you would think a firm on Wall Street that provides trade execution services, investment management, and consulting would have little or no sales tax associated with its operations, other than basic things such as the tax on the purchase of computers, software, etc. But so much of this industry operates around information and research. And in this 2011 article I wrote for my monthly column in State Tax Notes called Noonan's Notes, I outlined the nature and extent of all these issues and the types of things taxpayers need to be looking out for when subject to one of these audits. 

That was a few years ago, but we continue to see these issues arise in our practice. Just a few weeks ago I posted this “Note to Self” article in State Tax Notes with a further explanation surrounding the continued enforcement in this area. As I have worked these many cases, not only do I learn different areas and issues that can be addressed to minimize a taxpayer’s liability, but I’ve also recently begun to question the whole application of this tax on information services to the types of research that gets thrown around in Wall Street circles. Specifically, while some of the “research” is simply the presentation and delivery of data, so much more of what’s being provided by these investment research providers is experience, skill, expertise, and investment advice. None of these services would constitute something we think is subject to sales tax in New York, or really anywhere else. But the New York Tax Department takes the position that when this advice or expertise is presented to a client in the form of a report it goes to many clients, it is somehow transitioned into a taxable information service. The jury is still out, however, as to whether or not that’s a legitimate argument. In one recent case, an administrative law judge in New York rejected the idea that a report containing advice and expertise could constitute the sale of an information service. As the Tax Department continues its enforcement push in this area, I expect to see other taxpayers making the same argument.

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