On November 22, 2017, the Supreme Court of New York, Appellate Division, Third Department (the “Appellate Division”), issued its opinion and judgment in Wegmans Food Markets, Inc. v. Tax Appeals Tribunal of the State of New York.2 In a taxpayer victory, the Appellate Division overturned the decisions of the New York State Division of Tax Appeals (“DTA”) and Tax Appeals Tribunal (“TAT”), and held that the service purchased by Wegmans from RetailData, LLC was not a taxable information service as the service was personal and individual in nature, and was not capable of being incorporated into reports furnished to others.
Facts
The taxpayer, Wegmans Food Markets, Inc. (“Wegmans”), hired RetailData, LLC (“RetailData”) to provide competitor pricing information on items specified by Wegmans. RetailData conducted weekly audits of Wegmans’ competitors by dispatching data collectors to the desired store locations. The information was then compiled into a pricing report made available to Wegmans through Wegmans’ proprietary online software program. The reports contained only the information Wegmans requested, and were thereafter used by Wegmans to determine its own prices in accordance with its confidential pricing strategy.
The information RetailData gathered for Wegmans was not maintained in a database or repository maintained by RetailData, and could not be used for another customer. In the event the price of the same item was requested by more than one of RetailData’s customers, the data would be collected in separate work orders, in separate observations, and recorded at separate intervals.
The New York State Department of Taxation and Finance (the “Department”) conducted an audit of Wegmans’ sales and use tax (“Tax”) liability, and assessed additional Tax based on its determination that purchases from RetailData were taxable information services.3 Wegmans appealed the Department’s audit findings to the DTA.4
The Department’s Position
The Department asserted that Wegmans’ purchases from RetailData were properly classified as taxable information services, and did not qualify for the exclusion provided in Tax Law section 1105(c)(1) for information that is “personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons.” The Department’s position was premised on the assertion that because the source of prices and products was derived from a common source that was open to the public, i.e., taken from store shelves, the information was not personal or individual in nature, and that a substantial portion of the information gathered for Wegmans could have been furnished to other customers.
Taxpayer’s Position
Wegmans asserted that its purchases from RetailData were not taxable information services because the information in the reports it received was personal or individual in nature, and was not and could not have been substantially incorporated into reports furnished to others. In support of its position, Wegmans maintained that (i) it dictated the specific prices that RetailData would audit, and what locations that information would come from, (ii) the information was uniquely formatted for Wegmans, and RetailData did not incorporate the information it gathered for Wegmans into reports for other customers, and (iii) the information provided by RetailData was not taken from a common database.
Determination of the Division of Tax Appeals
The DTA held that Wegmans’ purchases from RetailData did not qualify for the “personal or individual” exclusion because the information used in the reports was culled from one general source, competitors’ stores, and the reports contained only those competitors’ prices.5 The DTA relied on ADP Automotive Claims Services in holding that the “fact that the reports were generated from a widely accessible common source that was not confidential has been consistently held by the Appellate Division not to be personal or individual in nature.”6 The DTA was also not persuaded by the fact that it was highly unlikely, and potentially even impossible, for a pricing report created for Wegmans to be identical to one produced for another customer.
Decision of the Tax Appeals Tribunal
In upholding the DTA’s determination, the TAT explained that the relevant question “is whether the information in the report is uniquely personal; it is not whether each report is the same.”7 Because the pricing information purchased from RetailData was obtained from products on the shelves of supermarkets that are open to the public, the TAT held that there is nothing “uniquely personal” about the information, and the process of compiling, interpreting, analyzing, formatting and verifying the information did not transform it into new, personal or individual information. The TAT also rejected the notion that the “common database” rule requires that the raw data used in reports must be extracted from a pool of information that was previously compiled into an electronic database or a published bulletin, and instead determined that a supermarket may be viewed as a widely accessible source for the purpose of obtaining prices, and as such, the information could be substantially incorporated into reports furnished to others.
Decision of the Appellate Division
In a surprising taxpayer victory, the Appellate Division reversed the findings of both the DTA and the TAT, holding that the information services purchased from RetailData were personal or individual, and only capable of being used in reports for Wegmans.8
The Appellate Division determined that the pricing data, in fact, did not derive from a “singular, widely accessible common source or database,” as that test had previously been applied and understood in reference to the exclusion from Tax, because there was no single, preexisting source of data that matched Wegmans’ data collection criteria. Wegmans provided RetailData with confidential collection criteria, including specific stores and pricing information to be audited, and the frequency of the audits to be conducted. RetailData physically sent data collectors to each location to manually record the requested information. There was no singular preexisting common source or data repository that RetailData could access to timely obtain the specified information. Accordingly, the Appellate Division held that the data could not be said to have been collected from one general source.
The Appellate Division also noted that once this information was collected, RetailData verified the information using its proprietary software and maintained the information in a separate database used only in preparing reports for Wegmans. There was no evidence in the record to indicate that the information was ever shared with other customers, or used for other customer reports.
Accordingly, the Appellate Division held that the services provided by RetailData were excluded from the imposition of Tax on information services, and that denying the exception “based solely on the fact that the information ultimately furnished derived from a public source would, under the circumstances presented, serve to defeat the purpose of the exclusion.”
Conclusion
This taxpayer victory not only represents the first court decision on the issue of what constitutes a “personal or individual” information service in many years, but it also expressly rejects the Department’s audit policy of treating the exclusion as inapplicable when the information originates from public or common sources. Taxpayers should be mindful of this when evaluating whether the exclusion applies, and should compare the relevant facts and circumstances reviewed in the Wegmans’ decision with their own. In particular, the Appellate Division placed great weight on the fact that: (i) the information gathered was unique to Wegmans’ specifications; (ii) there was no preexisting singular common source or data repository from which the requested information could be accessed; and (iii) the information retrieved was kept confidential. In addition, taxpayers should remain mindful of the requirement that the information must not only be personal or individualized in nature, but it also “may not be substantially incorporated in reports furnished to other persons.”
We can anticipate that this new decision will be cited frequently by taxpayers during audits. It remains to be seen how the Department will interpret and apply the Appellate Division’s decision. If the Department is strongly opposed to the court’s findings, it may request permission to file an appeal to the New York Court of Appeals at any time through January 22, 2018.9
- No. 523287 (3d Dept. Nov. 22, 2017).
- No. 523287 (3d Dept. Nov. 22, 2017).
- N.Y. Tax Law § 1105(c)(1).
- The Department also conducted a Tax audit of RetailData, and assessed additional Tax on RetailData for its failure to collect and remit Tax on the services it provided to New York customers. RetailData appealed the audit findings to the DTA, which found in favor of the Department. Matter of RetailData, LLC, DTA No. 825334 (N.Y.S. Div. Tax App., Jan. 22, 2015). RetailData thereafter appealed the adverse determination to the TAT, which upheld the DTA’s determination. Matter of RetailData, LLC, DTA No. 825334 (N.Y.S. Tax App. Trib., Mar. 3, 2016). No appeal was filed in state court.
- Matter of Wegmans Food Markets, Inc., DTA No. 825347 (N.Y.S. Div. of Tax App., Feb. 19, 2015).
- 188 A.D.2d 245 (3d Dept. 1993).
- Matter of Wegmans Food Markets, Inc., DTA No. 825347 (N.Y.S. Tax App. Trib., Mar. 10, 2016).
- Matter of Wegmans Food Markets, Inc. v. Tax Appeals Tribunal of the State of New York, No. 523287 (3d Dept. Nov. 22, 2017).
- CPLR § 5602, 5513(b), 5514(a).
Client Alert 2017-293
