New York – Taxability of Fees for Litigation and Electronic Discovery Services

SALT Report 2583 – The New York Department of Taxation and Finance issued an advisory opinion regarding monthly fees for litigation and electronic discovery services. The Taxpayer in this case, provides litigation support services which require it to collect paper and electronic documents, process the data and then securely store it on behalf of its customers. As a part of its service, the Taxpayer will upload, organize, and save the information on its web server according to the customer’s specific requirements.

The customers can access their documents and perform various functions, such as tagging words for redaction, highlighting, and making annotations on the document being reviewed by logging on to the Taxpayer’s website. The Taxpayer charges its customers a monthly fee which allows them to retrieve and view the documents in their original form and to make electronic document modifications.

In its opinion, the Department referred to New York Tax Law § 1105(c)(1) which imposes tax on the receipts from sales of, “furnishing information by printed, mimeographed or multigraphed matter, or by duplicating written or printed matter in any other manner…but excluding the furnishing of information which is personal or individual in nature and which is or may not be substantially incorporated into reports furnished to other persons, and excluding the services of…persons acting in a representative capacity.”

Based on that law, the Taxpayer’s litigation support services were deemed information services because they include analyzing, compiling, and organizing the clients’ information. However, the Taxpayer’s services are excluded from the imposition of tax on information services because they are personal and individual in nature.

The Department noted that these services are individual in nature because the Taxpayer organizes and analyzes the clients’ own documents and does not provide the original documents, the analysis, the compilation, or the organization aspects to any party other than the client. This applies even if the client, in the process of litigation discovery, subsequently provides the original documents to a third party. However, if the Taxpayer separately charges for document production these would be taxable sales of tangible personal property.

Finally, the Department noted that although the customer has the ability to mark and redact documents stored online, which in some cases would be considered the taxable use of software; the ability to do so is a single feature of a more comprehensive service provided by the Taxpayer. Because of this, the Department noted that the primary function of the Taxpayer’s service is the provision of a nontaxable information service, and not the sale of prewritten software.

For Further Information

New York Commissioner of Taxation and Finance – TSB-A-13(13)S