In corporate income tax guidance (NYT-G-17(2)C, hereafter NYT-G), ¹ the New York State Department of Taxation and Finance (Department) determined that direct and indirect owners of a registered broker-dealer cannot use the broker-dealer rules to assign their own service receipts to New York, as neither were registered broker-dealers eligible for the market-sourcing treatment under the pre-2014 rules. NYT-G is merely the Department's interpretation of the law, and may not be used as precedent.

Background

Since 2001, registered securities and commodities broker-dealers have been required to assign certain receipts to the location of the customer for apportionment purposes.² For tax years preceding 2015, the use of customer-based sourcing methodology for broker-dealers sharply contrasted to that available to most other corporate taxpayers in New York, which were required to assign receipts to the location where the services were performed.³ New York legislative tax reform effective for the 2015 tax year expanded market-based sourcing provisions for most services, ⁴ while also leaving the existing broker-dealer sourcing rules in effect.⁵ Although the guidance applies to all open tax years, it may be less important for tax years after 2014 since market-based sourcing now applies broadly to New York corporate taxpayers, including broker-dealers.⁶

New guidance

NYT-G focuses on corporate taxpayers directly or indirectly owning a single-member limited liability company (SMLLC) that is a registered broker-dealer. The NYT-G specifically addresses a tiered structure in which a corporate taxpayer that is not a registered broker-dealer indirectly holds an interest in an SMLLC that is a registered broker-dealer. Under this structure, the ultimate corporate taxpayer held an interest in a partnership (Investment Advisor) that was a registered investment advisor. In turn, the Investment Advisor was a partner in a partnership that owned the SMLLC that was registered as the broker-dealer. NYT-G states that the Investment Advisor, which is registered as the indirect owner of the SMLLC broker-dealer, may conduct SEC regulated broker-dealer activities under the SMLLC's license. The corporate taxpayer believed the broker-dealer apportionment provisions applied to the Investment Advisor's own service receipts based on: 1) its indirect ownership interests in the SMLLC; and 2) its direct ownership interest in the Investment Advisor (which was an 'associated person' of the broker-dealer SMLLC).

In the NYT-G, the Department states it does not agree and concluded that the broker-dealer apportionment sourcing rules were written to apply only to the receipts earned by the legal entity registered as the broker-dealer (i.e., only to the receipts of the SMLLC broker-dealer itself). The Department then states its view that the statute was not intended to extend the broker-dealer sourcing rules to "associated persons" of a registered broker-dealer. Thus, according to the Department, the SMLLC could apply the broker-dealer rules to assign its receipts to New York, but its direct and indirect owners (i.e., the corporate taxpayer and the Investment Advisor of which it was a partner) cannot use the broker-dealer rules to assign their own service receipts to New York, as neither were registered broker-dealers eligible for the market-sourcing treatment under the pre-2014 rules.

NYT-G is an informational statement issued by the Office of Counsel and explains the Department's interpretation of the law and regulations. As such, it should not be given the same weight of authority as the taxing statutes and regulations.

Implications

In light of this ruling, taxpayers should consider whether they qualify as registered broker-dealers for apportionment purposes. Under NYT-G, the Department has categorically stated its view that the direct and indirect owners of an SMLLC cannot claim the preferential broker-dealer sourcing treatment just on the status of the SMLLC alone. On the other hand, since the NYT-G is merely the Department's interpretation of the law, taxpayers may want to consider whether a challenge to the Department's conclusion is worthwhile.⁷

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ENDNOTES

¹ NYT-G-17(2)C, Corporation Tax, Receipts Factor Methodology For The Owners Of Single Member Limited Liability Companies That Are Registered Broker-Dealers (Aug. 2, 2017).

² N.Y. Tax Law Section 210.3(a)(9) (for tax years beginning before January 1, 2015).

³ N.Y. Tax Law Section 210.3(a)(2)(B) (for tax years beginning before January 1, 2015).

⁴ N.Y. Tax Law Section 210-A.10.

⁵ N.Y. Tax Law Section 210-A.5(b).

⁶ Effective for tax years beginning on or after January 1, 2015, New York Legislature enacted market-based receipts sourcing rules for general corporations. More specifically, Tax Law Section 210-A(5) provides for specific treatment of receipts that stem from various transactions involving registered broker-dealers.

⁷ The guidance is contrary to NYS's treatment of SMLLCs as a division of its corporate owner.