Two New York Administrative Law Judges Reject Imposition of Sales Tax Where “Primary Function” is Not an Information Service

The BR State + Local Tax Spotlight

Two recent New York State decisions illustrate the importance of the “primary function” test for determining taxability under the New York State sales tax, in both cases involving the tax on information services. Applying that test, two separate Administrative Law Judges (“ALJ”) held that New York State could not impose sales tax on, in one case, an online loan marketplace and, in another, on reports evaluating potential environmental risks to real property. In re LendingTree, Inc. (N.Y. Div. of Tax App. DTA No. 829714, Dec. 9, 2021); In re Lender Consulting Servs., Inc. (N.Y. Div. of Tax App. DTA No. 829198, Dec. 2, 2021).

Taxability of Online Loan Marketplace

In re LendingTree, Inc. involved an online loan marketplace that enabled prospective borrowers seeking mortgages and other loans to be connected with participating lenders seeking qualified borrowers. Through its online platform, LendingTree obtained loan request forms from borrowers, which it then verified and performed a limited credit score inquiry of the borrower. That information was transmitted to participating lenders.  The lender could then communicate a conditional offer to the prospective borrower.

LendingTree charged lenders a “match fee” for matching a lender with a prospective borrower, as well as “closed loan fees” for loans that actually closed, although it did not charge “closed loan fees” for mortgages and home equity loans. Borrowers were not charged a fee. The Tax Department took the position that Lending Tree’s online loan marketplace services were subject to New York sales tax as taxable information services. 

The ALJ concluded, however, that the “primary function” of the service—its “true object”—was to facilitate the writing of loans by participating lenders, notwithstanding that information was being provided to match lenders. He found that the lending institution was not paying a fee for information, but rather a commission for the closed loan. Therefore, the ALJ held that LendingTree was not providing an information service, and therefore was not required to collect sales tax on its charges.

Taxability of Environmental Reports

In re Lender Consulting involved the taxability of reports provided to banks and other financial institutions making loans secured by commercial real property that needed to know of potential environmental impairments regarding the property. The environmental reports included a review of government environmental database records. Each level of environmental report included a government database search, with certain environmental reports having as attachments information reports that Lender Consulting purchased from others.

The Tax Department argued that the environmental reports constituted a taxable information service, contending that their primary function was the underlying information accompanying the environmental reports, and not the summary and opinion portion of the environmental reports.  

The ALJ held that looking at the environmental reports in their entirety, their “primary function” was to provide financial institutions with an environmental professional’s review and opinion regarding potential environmental risks, and not information. The ALJ held that Lender Consulting was not providing a taxable information service and cancelled the sales tax assessment. 

The Takeaway

While both In re LendingTree and In re Lender Consulting are subject to appeal, they are an important reminder that the furnishing of some information does not necessarily convert a nontaxable service into a taxable information service. Only where the “primary function” of what is being sold involves the furnishing of non-personal or non-individual information—for example, sales of pricing data or customer lists—should sales tax apply. While the controversial New York Court of Appeals decision in Wegmans Food Markets, Inc. v. Tax Appeals Tribunal of the State, 33 N.Y.3d 587 (2019), held that a sales tax “exclusion” should be interpreted against the taxpayer, the application of the “primary function” test does not involve questions of statutory interpretation, but rather an analysis of what is being provided. Sellers should always evaluate whether the “primary function” of what is being sold is truly a taxable service. So, too, should customers that are being charged sales tax on what may not be taxable in the first place.

This article is one in a series of articles written for the January 2022 edition of The BR State + Local Tax Spotlight.

© 2022 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.