iDynamic Logic v. NYS Tax Appeals Tribunal, adds a new, and very concerning, wrinkle to the “primary function test.” In New York, the “primary function test” is used to determine whether a service is subject to sales and use tax when certain aspects of the service fall within the enumerated taxable services and others do not. When and how to apply the “primary function test” has been the source of debate in New York as of late.
Simply put, in determining the “primary function” of a service the question should be “what does the customer really want from the service provider?” If that is the nontaxable component of the service, the service is not subject to sales and use tax. But, in Dynamic Logic, the Appellate Division, upholding the Tax Appeals Tribunal, instead asked “is the taxable component of the service the basis for the nontaxable component?”
The service at issue in Dynamic Logic contained (1) an arguably taxable component - data gathering and reporting regarding the effectiveness of the customer's advertising and (2) a nontaxable component - recommendations to improve the effectiveness of the advertising. The Appellate Division upheld the Tribunal's determination that Dynamic Logic's service was taxable because the data was the basis for the recommendations. This reasoning is flawed. Dynamic Logic presented evidence that its customers hire the company for the recommendations for improving advertising. Thus, the recommendations should be considered the primary function of Dynamic Logic's service. It should be irrelevant if the recommendations are based upon the data collected.
The typical consulting firm collects and analyzes data during the course of an engagement, compares that data with benchmarks devised from information gathered from other clients, and then uses that data and the comparison to advise the client. The fact that the consulting firm’s advice is based upon information collected, analyzed, and provided to the client should have no bearing on the fact that the client is hiring the consulting firm for advice and not the underlying information.
Dynamic Logic's new spin on the primary function test is troubling, particularly for those in the consulting and advisory space.
Although AdIndex reports also include certain advice and/or recommendations to improve the effectiveness of the client's ad campaign — which, according to petitioner's witnesses, was the primary reason why its clients purchased the service — the record reflects that such recommendations are, for the most part, drawn directly from the data collected. Thus, as the Tribunal observed, without the data there would be no basis for the recommendations.
