How are receipts from internet sales of gift certificates and gift checks sourced for the New York receipts factor?

Plain-English summary

Deloitte & Touche LLP, for Taxpayer X (an online seller of gift certificates, gift cards, and gift checks), asked how receipts from those internet sales are sourced for the receipts factor under section 210.3(a)(2).

The Department held:

• Selling merchant certificates, gift certificates, and gift checks -- whether delivered physically or electronically -- is not the sale of tangible personal property. Their value is the intangible right to redeem them for property or services later, and the receipts are not from services, rentals, royalties, etc.
• They are therefore "other business receipts" under section 210.3(a)(2)(D) (and 20 NYCRR 4-4.6).
• The receipts are earned in New York when the sale is made in New York -- and because the sales occur through the website (not a New York office), they are made in New York when the customer accesses the website in New York (analogizing to NYMEX and Insurance Services opinions).
• Where Taxpayer X cannot determine where the customer accessed the website, that location may be presumed to be the customer's billing address.
• (The opinion does not address receipts for optional special packaging of physically shipped certificates.)

What this means for you

Gift certificates are intangibles, not goods

Even when a gift certificate is printed and shipped, selling it conveys an intangible right to redeem -- so the receipts are other business receipts, not sales of tangible personal property, for New York's receipts factor.

Source to where the customer clicks

These web receipts are earned in New York when the customer accesses the website in New York. The sale is tied to the customer's activity, not a New York office of the seller.

Use billing address when access is unknown

If you cannot tell where the customer accessed the site, you may presume the customer's billing address is the access location -- a practical default worth building into your records.

Common questions

Q: Is selling a gift certificate online a sale of tangible personal property?
A: No. It conveys an intangible right to redeem, so the receipts are other business receipts under section 210.3(a)(2)(D).

Q: Where are the receipts sourced?
A: To New York when the customer accesses the seller's website in New York.

Q: What if the access location is unknown?
A: It may be presumed to be the customer's billing address as shown in the seller's records.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.3(a)(2) (receipts factor of the business allocation percentage)
- Tax Law section 210.3(a)(2)(D) (other business receipts earned in New York)
- 20 NYCRR section 4-4.6 (other business receipts; intangible personal property)
- Deloitte & Touche LLP, TSB-A-02(3)C (Apr. 18, 2002)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a02_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(3)C
Corporation Tax
April 18, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C010110A

On January 10, 2001, a Petition for Advisory Opinion was received from Deloitte & Touche
LLP, 1633 Broadway, 38th Floor, New York, New York 10019.
The issue raised by Petitioner, Deloitte & Touche LLP, is how to determine the source of
receipts from Internet sales of Merchant Certificates, Taxpayer X Certificates, and Gift Checks for
purposes of determining the numerator of the receipts factor of the business allocation percentage
computed under section 210.3(a)(2) of Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Taxpayer X is an online marketer and transaction processor of gift certificates, gift cards and
other related products. Taxpayer X markets products over the Internet. Taxpayer X’s product line
includes various types of proprietary gift certificates (“Taxpayer X Certificates”), gift certificates
of unrelated retailers, restaurants and providers of travel related services (“Merchant Certificates”),
and Gift Checks issued by a certain financial services institution. Gift certificates may be either
physical, represented by a physical certificate or card, or digital, where value is presented solely by
a digital code that is delivered electronically via Taxpayer X’s Web site, an online service that is
open 24 hours a day, seven days a week.
The core of Taxpayer X’s business involves the sale of Merchant Certificates. Taxpayer X
purchases these certificates from participating merchants at a discount. An inventory sufficient to
meet two to three weeks’ worth of sales is maintained by Taxpayer X. In a typical transaction
involving these certificates, a customer accesses Taxpayer X’s Web site to place an order for a
Merchant Certificate. The Merchant Certificate is then shipped via common carrier or other
expedited courier service to the destination selected by the customer. The Merchant Certificate is
attractively packaged and is usually sent with a personalized card and message. For an additional
fee, the Merchant Certificate may be packaged with an elegant box and a satin ribbon. The
Merchant Certificate is then presented by the recipient, who is usually a person other than Taxpayer
X’s customer, to the merchant for redemption.
Where a physical Merchant Certificate is purchased and physically shipped, Taxpayer X has
a record of the credit card information, including the address, for the purchaser. All transactions
subsequent to the shipping of the Certificate are between the merchant and the recipient. Taxpayer
X has no control over the redemption policies, refunds and exchanges of Merchant Certificates. In
short, once purchased, the Merchant Certificates generally cannot be returned to Taxpayer X for
exchange or refund.

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Corporation Tax
April 18, 2002

Taxpayer X’s merchant product line also includes digital (e-mailable) Merchant Certificates
(“Digital Merchant Certificates”) that are redeemable at the merchant’s Web site and/or the
merchant’s brick and mortar retail location. Taxpayer X maintains an inventory of digital codes
purchased from the merchant which represent Digital Merchant Certificates. When an order for a
digital certificate is received, Taxpayer X sends, via e-mail, a digital code representing the gift
certificate to the recipient. Taxpayer X has a record of the purchaser’s e-mail address, street address
and credit card information, and the e-mail address of the recipient (if different from the purchaser).
Taxpayer X also sells its own Taxpayer X Certificates that may be either physical or digital
and may only be redeemed at Taxpayer X’s Web site, or by phone, for the Merchant Certificates
described above. As with Merchant Certificates, physical Taxpayer X Certificates are attractively
packaged and usually include a personalized card and message. Each physical and digital certificate
is controlled and tracked by an identifying code that is unique for each certificate and contains all
the relevant information relative to that particular certificate.
To date, physical gift certificates, both Merchant Certificates and Taxpayer X Certificates,
comprise the majority of Taxpayer X’s sales.
In addition to the above, Taxpayer X sells Gift Checks of a certain financial services
institution. Taxpayer X purchases and maintains an inventory of Gift Checks, then resells the Gift
Checks on its Web site. As with Merchant Certificates, Taxpayer X has no control over the
contractual terms of Gift Checks.
Petitioner states that Taxpayer X has a record of the credit card billing address of all
customers.
Discussion
Section 208.11 of the Tax Law provides that the term “tangible personal property” means
corporeal personal property, such as machinery, tools, implements, goods, wares and merchandise,
and does not mean money, deposits in banks, shares of stock, bonds, notes, credits or evidences of
an interest in property and evidences of debt.”
The term “gift certificate” means a certified statement entitling the recipient to select
merchandise in the amount stated thereon. (Webster’s Third New International Dictionary 956
(unabridged 1961)). In this case, the underlying value of a Merchant Certificate, Taxpayer X
Certificate or Gift Check represents the intangible right to redeem it for property or services at some
future time. As such, a Merchant Certificate, Taxpayer X Certificate or Gift Check is not considered
to be tangible personal property under section 208.11 of the Tax Law.

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TSB-A-02(3)C
Corporation Tax
April 18, 2002

Section 210.3(a)(2)of the Tax Law provides that the receipts factor of the business allocation
percentage is determined by ascertaining the percentage which the receipts of the taxpayer, arising
during such period from sales of its tangible personal property where shipments are made to points
within New York State, services performed within New York State, rentals from property situated,
and royalties from the use of patents or copyrights, within New York State, receipts from the sales
of rights for closed-circuit and cable television transmissions of an event taking place within
New York State as a result of the rendition of services by employees of the corporation, as athletes,
entertainers or performing artists, and all other business receipts earned within New York State, bear
to the total amount of the taxpayer's receipts, arising during such period from all sales of its tangible
personal property, services, rentals, royalties, receipts from the sales of rights for closed-circuit and
cable television transmissions and all other business transactions, whether within or without
New York State.
In New York Mercantile Exchange, Adv Op Comm T&F, April 7, 1999, TSB-A-99(16)C
(NYMEX), the petitioner’s Market Data was its exclusive property, and petitioner entered into
license agreements with direct and indirect Vendors for worldwide distribution of the Market Data.
The Vendors generally did not use the Market Data other than to provide it to Subscribers via
electronic transmission. The Subscribers were only permitted to use the Market Data internally and
could not distribute it to any third parties. The petitioner placed its own modems and other
transmission equipment at a direct Vendor’s place of business for the Vendor’s telecommunications
link with the petitioner’s network. At all times, such equipment remained the property of the
petitioner. The indirect Vendors obtained access to the Market data through a direct Vendor. A
Vendor paid the petitioner a monthly subscription fee based on the number of terminals at
Subscriber locations that provided access to the petitioner’s Market Data. The advisory opinion held
that the monthly subscription fees that the petitioner received from the Vendors constituted "other
business receipts" for purposes of the receipts factor, and were earned at the location where the
petitioner delivered the Market Data to the Vendors. That is, they were earned at the location of the
modems and other transmission equipment that the Vendor used to draw upon the Market Data.
When the location of such modems and other transmission equipment was in New York State the
subscription fees were earned in New York.
The conclusion in NYMEX, supra was instructive, in reaching the conclusion in Insurance
Services Office, Inc., Adv Op Comm T&F, September 6, 2000, TSB-A-00(15)C. In Insurance
Services, the petitioner’s customers subscribed to its Internet service to access petitioner’s databases.
The customers were paying the petitioner for the intangible right to access and obtain copyrighted
data. Customers that subscribed to the databases signed a license agreement to that effect. Similar
to NYMEX, supra it was held that the revenues for access to the petitioner’s copyrighted material
constituted “other business receipts” for purposes of the receipts factor. It was concluded that the
fees that the petitioner received from its customers for access to the copyrighted databases were
properly sourced within and without New York on the basis of the location of modems and other
transmission equipment that the customer used to draw upon the material obtained under the

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Corporation Tax
April 18, 2002

licensing agreement with the petitioner. That is, the petitioner’s fees from a customer under the
licensing agreement were earned in New York when the location of the modems and other
transmission equipment that the customer or its agent used to draw upon the petitioner’s copyrighted
databases was in New York State. In instances where information was not available to determine
the location of the modems and other transmission equipment that the customer used to draw upon
the petitioner’s databases, such location was presumed to be at the customer’s mailing address, as
indicated in the records of the petitioner.
In this case, Taxpayer X’s sale of the Merchant Certificates, Taxpayer X Certificates and the
Gift Checks, whether delivered physically or electronically, does not constitute the sale of tangible
personal property. The underlying value of a Merchant Certificate, Taxpayer X Certificate or Gift
Check represents the intangible right to redeem it for property or services at some future time.
Further, the receipts from such sales do not represent receipts from services, rentals, royalties, sales
of rights for closed-circuit and cable television transmissions. Therefore, the receipts from Taxpayer
X’s sale of the gift certificates and Gift Checks are characterized as “other business receipts” under
section 210.3(a)(2) of the Tax Law.
Pursuant to section 210.3(a)(2) of the Tax Law and section 4-4.6 of the Business Corporation
Franchise Tax Regulations (Article 9-A Regulations) all business receipts earned by the taxpayer
in New York State are allocated to New York State. Section 4-4.6 of the Article 9-A Regulations
provides that “[r]eceipts from the sale of intangible personal property included in business capital,
held by the taxpayer as a dealer for sale to customers in the regular course of its business, are
business receipts and are allocated to New York State if the sales were made in New York State or
through a New York office of the taxpayer.”
The term “dealer” means, in a popular sense, one who buys to sell; not one who buys to keep,
or makes to sell. (Black’s Law Dictionary 359, (5th Edition 1978))
In this case, Taxpayer X’s sale of Merchant Certificates, Taxpayer X Certificates and Gift
Checks are made through its Web site on the Internet. Such sales are not made through a New York
office of Taxpayer X. Therefore, pursuant to section 210.3(a)(2) of the Tax Law and section 4-4.6
of the Article 9-A Regulations, the receipts from such sales are earned in New York State when the
sales are made in New York State.
Taxpayer X’s business activities are substantially similar to NYMEX, supra, and Insurance
Services, supra, in that the receipts from the sale of the Merchant Certificates, Taxpayer X
Certificates and Gift Checks are derived from the activity of the customer that accesses the Internet
to purchase Taxpayer X’s products from its Web site.
Accordingly, for purposes of determining the numerator of the receipts factor, Taxpayer X’s
sales of such gift certificates and Gift Checks are made in New York State when the location where

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Corporation Tax
April 18, 2002

the customer accesses Taxpayer X’s Web site is located in New York State. However, from the
facts submitted, it appears that Taxpayer X may not always know where its customers access the
Web site. In those instances where information is not available for Taxpayer X to determine the
location where the customer accesses the Web site, such location may be presumed to be at the
customer’s billing address, as indicated in the records of Taxpayer X.
Note, this Advisory Opinion does not address the treatment of Taxpayer X’s receipts
representing the additional fees paid by customers for special packaging of Merchant Certificates,
Taxpayer X Certificates and Gift Checks that are physically shipped.

DATED: April 18, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.