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Sales tax is one of the most interesting, and challenging, taxes. It’s interesting because it involves clients in every possible industry. Every active business has potential sales tax exposure, no exceptions!  And unfortunately sales tax compliance is particularly difficult for two, specific reasons.  First, the tax is perhaps the most fact-dependent – seemingly inconsequential changes in the underlying facts can transform a nontaxable sale into a taxable one.  Second, these rules are constantly changing.  It’s tough enough to keep up with these changes in just one state.  But many vendors, especially those selling over the internet, have to keep abreast of these changes in multiple states.  So it’s easy to fall behind on sales tax compliance. 

With this blog, we hope to keep you up to date on impactful changes in the sales tax compliance, especially in New York State.  We’ll review legislative and administrative changes in the sales tax; we’ll discuss new sales tax case law; and we’ll highlight the enforcement initiatives and tactics we’re seeing while defending businesses in sales tax audits.  We hope you find this content as interesting as we do.  Please contact us with any questions. 

Secureworks, Inc.; Judge DiFiore; Division’s Rep.: Stephanie Scalzo; Petitioner’s Rep.: Charles Rice; Articles 28 and 29

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A fight might be brewing over the Division’s longtime conclusion that IT monitoring services can constitute taxable protective services. Here, Petitioner offered managed and monitored security services, giving customers information to prevent, detect, respond to, and predict cyberattacks. The question in the case was whether these services constituted either taxable protective and detective services or taxable information services.

Petitioner generally provided two broad services: (1) management (i.e., making changes to the hardware or software to help the customer keep its hardware or software operating properly), and (2) monitoring (i.e., reviewing the events that a device or software is producing and advising customers when they should investigate an event further). The ALJ looked to both the language of the Tax Law as well as the definition of “watch, guard or patrol agency” provided in the General Business Law to conclude that Petitioner’s managing, monitoring, and scanning services constituted protective services subject to tax. The ALJ did not cite to any case law to support this conclusion. Indeed, the only case discussed in detail regarding the “protective/detective” analysis was the Tax Appeals Tribunal case AlliedBarton Security Services Inc. cited by Petitioner. In AlliedBarton, the Tribunal concluded that checking visitors’ identification and issuing them passes to enter a building did not rise to the level of taxable protective and detective services. The ALJ distinguished this case by concluding that Petitioner’s services were more akin to alarm services, which are clearly taxable under the law and referenced as taxable in AlliedBarton. Though the Division has long treated IT monitoring services as taxable protective services (see TSB-A-15(47)S; TSB-A-10(14)S), there is a lack of binding interpretive authority and case law on the issue. So, we won’t be surprised to see this case on the Tribunal’s docket.

Though the Judge found Petitioner’s services to be taxable protective services, the Judge also addressed whether the services constituted taxable information services. Here, the Judge applied a primary function analysis to conclude that most of the services did not qualify as information services. A few of Petitioner’s charges: those for its Threat Intelligence Service, Attacker Database add-on and Enterprise Brand Surveillance, were deemed to be information services because they entailed access to – in most cases – public information regarding the current threat landscape.

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