20 December 2016 ALJ finds New York City general corporation tax receipts factor allocated based on where service of expert knowledge is rendered An Administrative Law Judge (ALJ) of the New York City Tax Appeals Tribunal ruled In the Matter of the Petitions of Gerson Lehrman Group, Inc., that a consulting firm's receipts from providing expert knowledge, analysis and views to clients through its consultants and research managers (collectively expert services) are allocated based on where the service is rendered for purposes of the General Corporation Tax (GCT) of New York City (City).1 Based on this finding, the ALJ cancelled the New York City Department of Finance's (Department) Notice of Determination for the consulting firm's 2003 tax year and issued a refund, plus interest. The Department's denial of the consulting firm's refund claims for 2004-2010, however, was sustained. For 2004 and for one of two alternative refund claims for 2005-2010, the ALJ determined that the taxpayer's analysis regarding which services should be included in the receipts factor was incorrect when it included only the receipts derived from services provided by the consultants because the services were actually performed by the consultants and the research managers. In addition, the ALJ sustained the Department's disallowance of the taxpayer's alternative refund claim for 2005-2010, finding that, although the consulting firm included the fees from the services for both the consultants and the research managers in the computation, it failed to substantiate the claim. For the 2003-2010 tax years, Gerson Lehrman Group, Inc. (GLG) provided consulting services to its clients. Its headquarters and major sales office was located in the City. Other offices were located throughout the US and the world. GLG engaged subject matter experts (Consultants) as independent contractors who provided the expert knowledge to GLG's clients. GLG's employee salespeople found the clients; once clients signed the subscription agreement, the salespeople's function was generally limited to assessing the client's satisfaction with the service, soliciting enhanced subscriptions, and obtaining subscription renewals (while all of the work was actually performed by the non-employee Consultants). In performing the service of providing expert knowledge, GLG's identified the appropriate Consultant and worked with the client and the Consultant to obtain the required information in the desired form, including through oral consultations, answers to written survey questions incorporated into a report by research managers, and appearances at seminars and meetings. GLG also engaged and paid the Consultants. The fees paid by the client to GLG were for the services within the package of focused expert knowledge provided by the Consultants and elicited with the research managers' assistance in identifying and communicating with the Consultants. GLG's business occurred both inside and outside the City from 2003-2010. On its original City GCT returns for 2003 and 2004, GLG allocated its business receipts based on the office locations of its salespeople. GLG filed amended City GCT returns for 2003 and 2004, however, claiming refunds by relying upon an amended receipts factor that assigned its business allocation percentage based on the locations of its Consultants, employee research managers, employee Consultant managers, and employee information technology (IT) personnel (but excluding its salespeople). The amended computation significantly reduced GLG's receipts factor and business City allocation percentage. GLG used the same receipts allocation methodology for its original GCT returns for the years 2005-2010. The Department issued a Notice of Disallowance of GLG's refund claims. In issuing the deficiency, the Department disregarded the fees from the work of the Consultants (who again were independent contractors), arguing that GLG did not itself provide the expert information, but instead merely identified the appropriate Consultant. The Department further argued that City regulations2 consider the efforts of independent contractors in the receipts factor "only [when] an independent contractor or a subcontractor generates receipts for the taxpayer." In this case, the Department concluded that the Consultants generated receipts for themselves. The Department argued that the taxpayer's generation of receipts was from employee salespeople selling subscriptions to clients that gave them access to the Consultants' expertise and that such receipts are sourced to the location of the employee salespeople who were in the City. The only issue before the ALJ for consideration was how to calculate GLG's receipts factor. For corporations doing business both within and outside the City during the years at issue, the GCT was allocated on a three-factor formula consisting of a property, payroll and receipts factor. The Administrative Code based the receipts factor on the business receipts within the City compared with total business receipts.3 For GCT receipts allocation purposes, the ALJ focused on the services GLG provided to the client, which individuals provided them, and where they were provided. The ALJ determined that the subscription agreements were lump-sum payments, which were to be allocated "on the basis of the relative values of, or amounts of time spent in performance of, such services within and [outside] New York City, or by some other reasonable method."4 The Department disputed that the service receipts should be allocated based on the location of the Consultants and research managers, arguing instead that: (1) the client pays for the subscription at the outset, requiring the focus of the receipts analysis to be on the location of the salespeople who solicit and receive the subscription payment; and (2) the Consultants work on their own behalf and not on behalf of the GLG, the provider, so their efforts should be eliminated from the receipts factor. The ALJ found irrelevant the fact that the client pays for the service through a subscription agreement at the inception of the generally nonrefundable engagement under the regulation to determine what the service is and who provides it. The location of payment is expressly excluded from the receipts analysis, and the timing of the payment is equally irrelevant, according to the ALJ. Further, the applicable regulation considers salespeople's activities only when the salesperson is a commissioned sales agent. Because GLG's salespeople are not commissioned sales agents, the City's regulation did not apply.5 Moreover, those salespeople, the ALJ noted, did not provide the service. Finally, the ALJ indicated that Regulation Section 11-65(b)(1) provides that receipts include services provided by subcontractors. Accordingly, the ALJ concluded that the Consultants' services were appropriately included in the receipt-factor analysis because they were an integral part of the services provided to clients. . Although this case is not binding upon the City and may be appealed, it may provide NYC GCT refund opportunities for certain service companies for periods prior to the enactment of New York City corporate tax reform (i.e., for tax years beginning before January 1, 2015). Based on this ruling, taxpayers could compute their NYC receipts factor for services based upon where the services are provided within and outside the City, considering the relative values of such services (i.e., time spent) and including the use of independent contractors.
1 In the Matter of the Petitions of Gerson Lehrman Group, Inc., Nos. TAT(H)08-79(GC), TAT(H)12-38(CG), and TAT(H)12-39(GC) (NYC Tax App. Trib. Oct. 4, 2016). Document ID: 2016-2182 | |||||||||||||
