“Qualitative Substantiality” and the Broad Reach of Sales-Tax on Information Services:
Commentary on Matter of Dynamic Logic, Inc. v. Tax Appeals Tribunal, 2025 NY Slip Op 02262

Introduction

On 17 April 2025 the New York Court of Appeals rendered its decision in Matter of Dynamic Logic, Inc. v. Tax Appeals Tribunal of the State of New York. The case pitted Dynamic Logic, Inc. (“Dynamic”), a marketing-analytics company, against the State Tax Appeals Tribunal (the “Tribunal”) over the taxability of Dynamic’s flagship “AdIndex” product under Tax Law §1105(c)(1). Dynamic contended that AdIndex was a customised consulting service, or—if an “information service”—one that qualified for the statutory exclusion for information “personal or individual in nature” that “is not or may not be substantially incorporated in reports furnished to other persons.” The Commissioner, the Tribunal, and ultimately the Court of Appeals disagreed, holding that AdIndex is a taxable information service and that the exclusion does not apply because the AdIndex data are “substantially incorporated” into other clients’ reports through Dynamic’s benchmarking database (“MarketNorms”). The precedential significance of the judgment lies in its adoption of a qualitative — rather than purely quantitative — understanding of what it means for information to be “substantially incorporated”, coupled with a reaffirmation of strong deference to the Tribunal’s tax interpretations.

Summary of the Judgment

1. The Court confirmed that AdIndex’s “primary function” is the “collection and analysis of information,” squarely placing it within Tax Law §1105(c)(1).
2. Any advisory or consultative elements were deemed “ancillary” to that dominant informational function.
3. The Court interpreted the phrase “substantially incorporated” to encompass qualitative value as well as volume. Because AdIndex data feed back into the MarketNorms benchmarks, later used in reports to other clients, the exclusion does not apply.
4. Applying the “substantial evidence” and “rational basis” standards, the Court held that the Tribunal’s findings were entitled to deference and were supported by the record.
5. The Appellate Division’s judgment confirming the tax assessment was therefore affirmed, with costs. Judge Troutman, joined by Chief Judge Wilson, dissented, arguing that the majority’s approach nullifies the statutory exclusion.

Analysis

A. Precedents Cited and Their Influence

• Matter of Great Lakes-Dunbar-Rochester v. State Tax Commission (1985) – Re-affirmed the standard that courts must confirm Tribunal determinations if supported by “substantial evidence.”
• Black v. NYS Tax Appeals Tribunal (2023) – Elaborated the deferential “substantial evidence” lens; quoted to emphasise that the reviewing court need not find the proof convincing.
• Matter of Wegmans Food Markets, Inc. (2019) – Last major Court of Appeals encounter with §1105(c)(1). Wegmans addressed the “personal or individual” component. Here the majority extends Wegmans’ pro-tax presumption to the second clause (“substantially incorporated”). Judge Troutman relies heavily on Wegmans’ dissents.
• Matter of 1605 Book Center (1994) – Quoted for principle that §1105 should be construed to “ensure the collection of all designated taxes where a supportable theory can be found.”
• Pierce v. Underwood (U.S. Sup. Ct. 1988), Haug (NY 2018), and Federal Rule references – Used comparatively to support a qualitative reading of “substantial.”
• Matter of Rich Products Corp. v. Chu (1987) – Applied by the majority to show that unique client reports generated from the same database can defeat the exclusion; relied on by the dissent for the opposite proposition (focusing on “significant and ultimate information”).
• Matter of Grace (1975) – Reinforced the taxpayer’s burden to prove entitlement to exclusions.

B. The Court’s Legal Reasoning

1. Nature of the Service. The Court parsed §1105(c)(1), which taxes “collecting, compiling or analyzing information … and furnishing reports thereof.” It concluded that AdIndex fits that description: it collects survey data, analyses it, and furnishes a written report.
2. Ancillary vs. Primary Functions. Dynamic argued that its strategic recommendations transformed the offering into a non-taxable consulting service. The Court, echoing prior case law, held that where advice flows directly from the data and is inseparable from the informational component, it remains taxable.
3. Defining “Substantially Incorporated.”
   • The statutory phrase is ambiguous; dictionary definitions suggest both quantitative (“great extent”) and qualitative (“of real worth”) possibilities.
   • Looking at other legal uses of “substantial,” the Court adopted a minimal qualitative threshold—information is “substantially incorporated” if it constitutes a valuable, meaningful element of later reports.
   • Because each AdIndex data-set becomes part of the MarketNorms benchmark, and benchmarking is essential to every later AdIndex report, the prior information is “substantially” reused.
   • Dynamic therefore cannot invoke the “personal or individual” exclusion, having failed to carry the taxpayer’s burden of proof.
4. Standard of Review and Deference. Under Great Lakes and Black, the Tribunal’s findings are upheld if rational and supported by any substantial evidence.

C. Impact of the Judgment

The decision has a wide potential sweep:

• Expanded Tax Base for Analytics & SaaS Companies. Businesses that integrate individualised client data into multi-client benchmarking, machine-learning models, or aggregated dashboards now face heightened sales-tax exposure.
• Qualitative Test Offers Flexibility to the Department. By eschewing a numeric threshold, the Court allows the Department of Taxation & Finance to argue “substantial incorporation” wherever reused data play a material analytical role, even if they represent a tiny percentage of the ultimate report.
• Burden of Proof Reinforced. Taxpayers must not only show their information is personal/individual but also prove lack of substantial incorporation—an evidentiary hurdle that may be difficult where proprietary databases continually evolve.
• Continuing Debate on Deference. The dissent forecasts that the majority’s approach risks “nullifying” the statutory exclusion entirely—an argument likely to resurface in future challenges.
• Administrative Guidance Will Need Updating. Existing regulations (20 NYCRR 527.3) give “Example 3” (payroll computation) as non-taxable. The Court’s qualitative test may prompt the Department to revisit these examples for consistency.

Complex Concepts Simplified

• Information Service (§1105(c)(1)). A business activity is an “information service” if the seller gathers data of any type, analyses or compiles it, and delivers the results in a tangible medium (paper, PDF, slide deck).
• Personal or Individual Exclusion. Even an information service escapes tax if the information:
  1. Relates uniquely to the customer (personal/individual), and
  2. Is not or may not be reused (substantially incorporated) in later reports for other customers.
• Substantial Evidence Review. A deferential judicial standard: if any reasonable interpretation of the facts can uphold the agency decision, the court must affirm—even if judges would weigh the evidence differently.
• Qualitative vs. Quantitative “Substantiality.”
  • Quantitative: focuses on size or percentage; large overlap required.
  • Qualitative (adopted here): focuses on importance or value; even a small subset is “substantial” if it drives core analytics.
• Benchmarking. Comparing a client’s performance metrics against aggregated, anonymised historical data to judge relative success.

Conclusion

Matter of Dynamic Logic cements a pivotal precedent: the reuse of client-specific data in any manner that adds material analytical value to future reports suffices to defeat the statutory exclusion, regardless of volume. By framing “substantial incorporation” qualitatively, the Court broadens the sales-tax net over modern data-driven services and underscores the judiciary’s deference to specialised tax agencies. Businesses that collect customer data and recycle it—even in anonymised, aggregated form—should re-evaluate their sales-tax posture and consider structural or contractual changes (e.g., segregation of benchmarking services, separate charges for advisory components). Future litigation will likely test the limits of this qualitative approach, the continuing viability of the §1105(c)(1) exclusion, and the tension—highlighted by the dissent—between tax-maximising interpretations and legislative intent. For now, the operative lesson is clear: in New York, “substantial” means “meaningful,” not “large,” and the taxpayer carries the heavy load of proving otherwise.