New York Rules that Employment Screening Services are Exempt from Sales Tax

By: Jess Johannesen, SALT Senior Manager

At a glance

• The main takeaway: The New York Division of Tax Appeals concluded that the taxpayer’s employment screening services met the exclusion from taxable information services that are personal or individual in nature.
• Assess the impact: While this case recognizes information services that are personal or individual in nature as nontaxable, other states may interpret information services like these differently.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help you interpret these types of services and their exclusions to determine whether your products or services are subject to sales tax.

Schedule a free consultation today to learn more!

The full story:

The New York’s Division of Tax Appeals issued a determination in which an administrative law judge (ALJ) determined that the taxpayer’s employment screening service was not taxable as an information service since it qualified under the state’s exemption for information services that are “personal or individual in nature.”[1]

Take a closer look at the case

In the case, the taxpayer operates an employment screening business based in New York that provides verification services and drug screening services to its clients. Specifically, the taxpayer verifies a client’s prospective employee’s social security number, name, address, criminal record and education. To verify such information, the taxpayer accesses databases maintained by various New York state agencies. Additionally, the taxpayer maintains a database of all the information that it collects. To the extent that two different clients request verification of the same applicant, the taxpayer would perform two separate searches.

For New York sales tax purposes, information services are taxable and include, in part, services of collecting, compiling, or analyzing information of any kind or nature and furnishing reports thereof to other persons. However, New York excludes “the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons.”[2] While it may seem that the taxpayer’s information is personal or individual in nature because it involves, for example, social security numbers, states generally do not consider the private nature of the information but instead whether the information is the type that may be provided to multiple consumers of information services.

In addressing the scope of this exclusion, the ALJ explained that based on prior guidance that it is the source of information that controls whether the report will be considered “personal or individual in nature.” For example, the ALJ notes that if the information is derived from a single data repository that itself is not confidential and is widely accessible, then it will not be considered personal or individual in nature. However, in this case, the taxpayer uses information from a variety of sources. The ALJ highlights that some of the information the taxpayer uses is widely accessible, such as criminal record histories, while information such as social security traces, employment histories and education histories is not.

The ruling explained

The ALJ concluded that reports generated by the taxpayer are tailored and customized based on the specific applicant, and this makes the information, by definition, individual and personal in nature. New York argued that the information in the reports could be furnished to another client involving the same job applicant. However, the ALJ noted, based on prior guidance, that the denial of an exclusion because a situation “could” or “might” occur would render the exclusion futile. In this case, the likelihood of having information in one report substantially incorporated into another client’s report is minimal.

The bottom line

For the reasons detailed above, the ALJ reversed the state’s assessment and held that the taxpayer’s information services fell within the exclusion for information that is personal or individual in nature. To the extent that states recognize information services as a specific type of service subject to sales tax, many states similarly consider information services to be nontaxable when the information is personal or individual in nature. The ALJ’s reference to the source of the information controlling the nature of the information, however, may be different from how other states interpret such exclusion. 

Aprio’s SALT team has experience with how states interpret these types of services and their exclusions.  We can assist your business to determine whether your products or services are subject to sales tax and where, to ensure that you are in compliance with your sales tax obligations and do not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT Senior Manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the December 2022 SALT newsletter.

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[1] Matter of Employment Screening Services, LLC, New York Division of Tax Appeals Determination No. 829702, 10/06/2022.

[2] New York Tax Law §1105(c)(1)

Disclosure

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.