Sneaky Information Services Gambit

Here's a sneaky auditor trick that I've recently heard about. It's probably not legal; it certainly doesn't make any sense to me. So at least be suspicious of the auditor who pulls this one out of their hat.

In most states, information services aren't taxable. Information services are essentially the sale of third party information. In the olden days, these were delivered in hard copy. Which means tangible personal property.

But these days, the information is usually delivered by electronic means, usually by downloading. These include things like tax databases, stock photography, wire services, credit reports, mailing lists, etc. It's not so much an information service as the sale of intangible property. Note sales of intangible information aren't generally taxable.

However, all bets are off if we're talking about the actual delivery of tangible personal property. A convenient example would be a mailing list sent to you that has already been printed on self-adhesive labels. You are buying tangible personal property. It's not intangible. It's probably going to be taxable.

If you had merely downloaded the list though, in most states it's not taxable. It's not tangible. The sale is gonna be considered the sale of an information service.

In the last year, I've heard reports of sneaky auditors who will argue that, "Yeah, when you bought the information, it wasn't taxable. But then you printed the labels, and that made the information tangible and therefore you owe me use tax."

Which, to me, makes no sense. I can see their point. They'd like to get the tax that you've neatly dodged by downloading it as opposed to ordering it printed. But since the transaction was non-taxable, I don't see how they can make it taxable by a later event like this. You've essentially changed its form on your own. And you probably did pay tax on the CD, labels or paper you used. Using this logic, taking any information you've downloaded, and didn't have to pay tax on, would become taxable merely by printing out a backup copy.

So if you're downloading information and then printing it later, whether it be photographs, mailing lists, credit reports, music you burn onto a CD, , etc., be prepared for this gambit by the auditor. I'm fairly sure they're bluffing, but be prepared to call that sales and use tax expert I keep talking about.


Sales Tax Guy
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