Are lease payments for satellite transponders included in the New York property factor, and how are they valued?

Plain-English summary

A global media and entertainment company (operating cable brands such as the Discovery Channel, TLC, Animal Planet, and Travel Channel) leases satellite transponders from unrelated third parties to distribute its programming. It asked whether those lease payments belong in the property factor of its business allocation percentage under section 210.3(a).

The Department held the lease payments must be split:

• A transponder lease conveys both a tangible asset (the transponder -- tangible personal property under section 208.11) and intangible assets (the allocated frequency rights, plus maintenance/service agreements). The gross charge must be apportioned between them.
• The intangible portion is not included in the numerator or denominator of the property factor.
• The tangible transponder portion is included, generally valued at eight times the gross rent attributable to it (Regulations section 4-3.2(a), excluding the intangible portion).
• That eight-times method may produce an inaccurate value -- for instance, where the lease charge equals the transponder's purchase price -- in which case the Department may adopt another valuation method; and under section 210.8 it may use a different overall allocation if section 210.3(a) does not fairly reflect New York activity. Whether the standard method gives a fair result is a factual matter outside an advisory opinion.

What this means for you

Split mixed leases into tangible and intangible

A lease that bundles tangible property with intangible rights (here, a transponder plus frequency rights and service agreements) must be apportioned. Only the tangible portion goes in the property factor; the intangible portion is excluded.

Value rented tangible property at eight times rent -- usually

Rented tangible property in the property factor is generally valued at eight times the gross rent attributable to it (Regulations section 4-3.2(a)). But that multiplier can overstate value when the rent approximates the purchase price, and the Department may then use a different valuation method.

Allocation fairness is factual

Whether the standard allocation fairly reflects your New York activity -- and whether an alternative method should apply under section 210.8 -- is a facts-and-circumstances question the Department will not resolve in an advisory opinion.

Common questions

Q: Do satellite transponder lease payments go in the property factor?
A: Only the tangible transponder portion. The intangible portion (frequency rights, service agreements) is excluded from the numerator and denominator.

Q: How is the tangible portion valued?
A: Generally at eight times the gross rent attributable to the transponder under Regulations section 4-3.2(a), excluding the intangible portion.

Q: What if eight times rent overstates the value?
A: The Department may adopt another valuation method -- for example, where the lease charge equals the purchase price -- and may adjust the overall allocation under section 210.8.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.3(a) (business allocation percentage; property factor)
- Article 9-A Regulations section 4-3.2(a) (valuation of rented property at eight times gross rent)
- Tax Law section 208.11 (definition of tangible personal property)
- Tax Law section 210.8 (Commissioner authority to adjust allocation)
- TSB-A-04(8)C (May 12, 2004)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a04_8c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(8)C
Corporation Tax
May 12, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C020722A

On July 22, 2002, a Petition for Advisory Opinion was received from Discovery
Communications, Inc., 7700 Wisconsin Avenue, Bethesda, Maryland 20814. Petitioner, Discovery
Communications, Inc., submitted additional information pertaining to the Petition on July 21, 2003.
The issue raised by Petitioner is whether the lease payments made to unrelated third parties
for the use of extraterrestrial satellite transponders should be included in the numerator and
denominator of the property factor for purposes of determining the business allocation percentage
under section 210.3(a) of Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner is a Delaware corporation founded in 1985, and is currently headquartered in
Bethesda, Maryland. Petitioner is a global media and entertainment company, offering a number
of distinctive cable entertainment brands, including: the Discovery Channel, The Learning Channel,
Animal Planet and The Travel Channel. Domestically, Petitioner reaches almost 85 million
households through 11 networks, producing 2,100 hours of original programming each year in the
United States. Internationally, Petitioner has programming in 155 countries and territories reaching
over 700 million total subscribers.
The general process used by Petitioner to produce television programming to be viewed by
the cable subscriber is outlined below. Typically, the process begins with Petitioner contracting with
an outside (unrelated third party) production company to produce and tape a show at the producer’s
own facility. Petitioner does not operate its own production studios; thus, all programming is
obtained from independent third parties. Taped shows purchased from third-party production houses
are then sent to an uplink facility which mounts the tape and sends a signal to extraterrestrial satellite
transponders. The signals from the transponders are then sent from space to ground equipment
owned by independent cable operators who then transmit the programs to their cable subscribers.
Petitioner does not own or lease any of the uplink facilities or ground equipment used in the
transmission process. Petitioner contracts for uplink services with an unrelated third party whose
uplink facility is located in Connecticut. Petitioner owns some transponders outright and leases
other transponders from an unrelated third party. Lease agreements for transponders range between
ten to fifteen years in duration. Petitioner leases office space in New York, which is used solely for
advertising and sales functions. All of Petitioner’s employees located in New York perform
advertising and sales functions.
Petitioner has submitted portions of one transponder lease agreement for the full-time lease
of transponder capacity by Petitioner. Pursuant to that lease agreement, if the transponder capacity

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is provided from a portion of a transponder, consisting of a transponder segment, the transponder
capacity is power and bandwidth limited. The particular transponder or transponder segment that
makes up Petitioner’s transponder capacity is to be identified in the agreement. Petitioner pays a
monthly lease fee and a monthly in-orbit protection fee. (The facts submitted do not indicate
whether Petitioner pays any other fees with respect to this agreement.) In the event that there ceases
to be at least one preemptible transponder segment available for use by Petitioner, the in-orbit
protection fee will cease. The initial lease agreement is for a term of seven years and may be
extended for an additional three years.
Pursuant to Petitioner’s transponder capacity lease agreement, the transponder capacity may
be used by Petitioner solely for transmission of its own television service, which means video
programming, with associated audio, control and data signals, for broadcast, cable, direct-to-home,
or similar mass distribution. Petitioner’s television service includes the television services of its
parent companies and subsidiaries identified in the agreement, and joint venture companies as
defined in the agreement. However, the agreement provides that these provisions are not meant to
permit resale or sublease of Petitioner’s transponder capacity.
Petitioner has also submitted a transponder lease agreement for the full-time lease of a
specific transponder from the owner of the satellite on which it is located. In this lease agreement,
Petitioner receives satellite transponder service on one fully protected transponder specified in the
agreement. Petitioner has the exclusive right to use the transponder for all purposes allowed under
the agreement, and has control of the content of the communications transmitted over the
transponder. For the lease of this transponder, Petitioner pays a monthly fee which includes all
charges for tracking, telemetry and control services (TT&C) and full protection (in-orbit protection)
provided by the satellite owner, which is the lessor. The satellite owner has the sole and exclusive
control and operation of the satellite. Petitioner may only use the transponder for video services and
the transponder is used by Petitioner as the primary feed of its principal cable programming service.
Petitioner shall not assign or transfer its rights or obligations under the agreement, except to its
parent corporation or to a wholly-owned subsidiary, without getting the lessor’s agreement. The
initial term of the agreement is 10 years, and may be extended.
In addition, Petitioner has submitted a transponder lease agreement for the full-time lease
of a specific transponder that was purchased by the lessor from the owner of the satellite on which
the transponder is located. The transponder sales agreement between the owner of the satellite and
the lessor of the transponder has been incorporated into the transponder lease agreement between
the lessor and Petitioner. Under this transponder lease agreement, Petitioner agrees that it will use
the transponder solely in accordance with, and subject to, the provisions and restrictions in the sales
agreement. The owner of the satellite has represented that the transmission of digital signals through
the transponder is acceptable usage. Petitioner may assign its rights under the agreement to a
subsidiary majority-owned by Petitioner only if certain conditions of the agreement are met. (In a
separate letter agreement between Petitioner and the lessor, Petitioner may sublease the transponder
or a portion thereof in accordance with the letter agreement.) Petitioner pays a monthly fee to the
lessor which includes the lease of the transponder and TT&C services and in-orbit protection for the

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transponder. The lease will expire at the end-of-life of the satellite unless previously terminated in
accordance with the provisions of the agreement.
Applicable law and regulations
The United States Government has exclusive sovereignty of airspace of the United States
(49 USCS § 40103).
Section 208.11 of the Tax Law provides that “[t]he 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.”
Section 210.3(a) of the Tax Law contains the provisions for the business allocation
percentage, consisting of a property factor, a payroll factor and a receipts factor, for purposes of
allocating business income and business capital to New York State. Section 210.3(a)(1) of the Tax
Law contains the provisions for the property factor of the business allocation percentage, and
provides, in part:
ascertaining the percentage which the average value of the taxpayer’s real and
tangible personal property, whether owned or rented to it, within the state during the period
covered by its report bears to the average value of all the taxpayer’s real and tangible
personal property, whether owned or rented to it, wherever situated during such period....
Section 210.8 of the Tax Law provides:
If it shall appear to the [commissioner of taxation and finance] that any business or
investment allocation percentage or alternative business allocation percentage determined
as hereinabove provided does not properly reflect the activity, business, income or capital
of a taxpayer within the state, the [commissioner of taxation and finance] shall be authorized
in [his] discretion, in the case of a business allocation percentage or alternative business
allocation percentage, to adjust it by (a) excluding one or more of the factors therein, (b)
including one or more other factors, such as expenses, purchases, contract values (minus
subcontract values), (c) excluding one or more assets in computing such allocation
percentage, provided the income therefrom is also excluded in determining entire net income
or minimum taxable income, or (d) any other similar or different method calculated to effect
a fair and proper allocation of the income and capital reasonably attributable to the state....
Section 4-3.1(c) of the Business Corporation Franchise Tax Regulations (“Regulations”)
provides:
Tangible personal property of the taxpayer is considered to be within New York State
if and so long as it is physically situated or located here, even though it may be stored in a

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bonded warehouse. Property of the taxpayer held in New York State by an agent, consignee
or factor is considered to be situated or located within New York State. Property in transit
between locations of the taxpayer is considered to be at its destination for purposes of the
property factor. Property in transit between a buyer and a seller which is included by a
taxpayer in the denominator of its property factor in accordance with its regular accounting
practices is included in the numerator of its property factor if its destination is New York
State.
Section 4-3.2 of the Regulations provides, in part:
(a) In computing the property factor, real and tangible personal property rented to the
taxpayer must be included. In order to avoid unnecessary hardship on taxpayers and for ease
of administration, the value of real and tangible personal property, both within and without
New York State, which is rented to the taxpayer is determined by multiplying the gross rents
payable during the period covered by the report by eight.
*

*

*

(d) In exceptional cases, use of the general method described in this section may
result in inaccurate valuations of rented real or tangible personal property. In such cases,
any other method which properly reflects the value may be adopted by the department either
on its own motion or at the request of the taxpayer. Another method of valuation may not
be used unless approved by the department. A request for a different method of valuation
must provide full information with respect to the property, including the basis for the
valuation proposed by the taxpayer. Once approved or required by the department, such
other method of valuation must be used in subsequent taxable years unless the facts
materially change. If the facts materially change, the taxpayer must report such change in
facts to the department and the department may consent to or require a change from the
method of valuation previously approved.
Section 4-6.1 of the Regulations provides, in part:
(a) Generally, the business allocation percentage results in a fair allocation of the
taxpayer’s business capital and business income to New York State.... However, experience
in this and other states which impose similar franchise taxes has shown that due to the nature
of certain businesses the formulas used to compute the percentages may work hardship in
some cases and not do justice either to the taxpayer or to the State. Article 9-A of the Tax
Law authorizes the commissioner to use other methods to more accurately reflect the
business activity within New York State. If a different method is used, it must be calculated
to effect a fair and proper allocation of the business income [and] business capital ...
reasonably attributable to the State.

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(b) When it appears that the business allocation percentage ... does not properly
reflect the activity, nature of business, income or capital of the taxpayer in New York State,
the commissioner, in his or her discretion, may adjust the business allocation percentage ...
by:
(1) excluding one or more factors;
(2) including one or more factors, such as expenses, purchases or contract values
minus subcontract values;
(3) excluding one or more assets used in computing any factor included in the
business allocation percentage ... provided the income therefrom is also excluded in
determining entire net income ... or
(4) any other similar or different method calculated to effect a fair and proper
allocation.
Opinion
Before Petitioner’s issue can be addressed, it is necessary to provide some background with
respect to satellite transponders.
The following is part of a discussion of Settlement Guidelines for Transponders, an Internal
Revenue Service coordinated issue paper under its Industry Specialization Program, issued April 26,
1994:
“A ‘transponder’ is the device on a communications satellite which amplifies and
relays transmissions between ‘transmit’ and ‘receive’ earth stations.” In the Matter of
Domestic Fixed-Satellite Transponder Sales, 90 FCC 2d 1238 n.2 (1982). (Hereinafter
referred to as“Domsat Transponder Sales, 90 FCC 2d 1238.”) More precisely, a transponder
is a device in a satellite that accepts communication signals relayed to it from the satellite’s
receiver antenna (which signal was received from a transmit antenna for transmission to a
receive earth station), amplifies the signal, converts the signal into another frequency and
relays the signal to the satellite’s transmit antenna for transmission to receive earth station.
A single satellite may have from 12 to 36 transponders. The receive and transmit
antennas on the satellite handle all the signals relayed through the various transponders.
Each transponder accepts only signals on the frequency for which it is programmed.
The satellite is normally powered by solar panels and once the satellite becomes
operational the transponders will operate automatically. The satellite, itself, is maintained
in its geosynchronous orbit by rocket motors. Besides the transponders, the satellite has
communication devices and switches to control its position and operation. The transponders,

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however, are the heart of the communications link between transmit and receive earth
stations.
Transponders are typically used to transmit telephone, television, and radio signals
and various kinds of data between the earth stations.
Prior to 1982, satellite operators (hereinafter referred to as “domsat operators”) were
generally required to “lease” transponders on a common carrier basis, pursuant to Title II of
the Communications Act of 1934. 47 USCA sections 201-224 (1962 & Supp 1988.)
(Hereinafter referred to as the “Act”) (The best known common carriers are the various
telephone companies.) Under 47 USCA sections 201 and 202 a domsat operator (the
common carrier) was required to furnish communications services to customers on a
first-come, first serve basis. The domsat operator was also subject to considerable regulation
with respect to the prices it charged customers (referred to as tariffs), including price
controls. 47 USCA section 203.
The Federal Communications Commission (FCC) allowed domsat operators to enter
into long term exclusive leases of transponders even though the leases were technically on
a common carrier basis. The leases gave the end user-lessee the exclusive right to use the
transponder over the transponder’s useful life.
The rents charged end users were often equivalent in amount to the purchase of
transponders under the sales at issue here.
In 1982, the FCC ruled that certain satellite owners could sell transponders on
specific satellites to end users. Domsat Transponder Sales, 90 FCC 2d 1238. In so holding,
the FCC expressly removed the transponders that were to be sold from the jurisdiction of
Title II of the Act.
The United States Court of Appeals for the District of Columbia affirmed the FCC’s
holding in World [sic] Communications, Inc. v Federal Communications Commission, 735
F2d 1465 (D.C. Cir 1984). The court, in describing the sale of transponders stated:
A transponder sale contract conveys to the purchaser an exclusive ownership right
in a specific transponder during its useful life. The purchaser may use the property thus
acquired as collateral for loans, and may enjoy certain tax benefits as a result of transponder
ownership-notably, accelerated depreciation deductions and investment tax credit. The
satellite owner, however, retains responsibility for the operation of the satellite. Sale
transactions are not subject to the first-come, first-served allocation mechanism of common
carrier service. Buyers negotiate the right to use specific transponders directly with the
satellite operator, sometimes even before the satellite is launched. The price is set by
contract and is not subject to government regulation.

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Id. at 1471....
*

*

*

Although the FCC removed certain transponders from Title II regulation, the domsat
operator is still subject to Title III of the Act. 47 USCA sections 301-399b. Title III of the
Act generally requires that the operator of a transmitter of radio signals have a license from
the FCC granting him the authority to use a particular frequency for transmissions. The FCC
considers a communications satellite a transmitter of radio signals and, thus, the domsat
operator must have a FCC license to operate the satellite. Domsat Transponder Sale, 90
FCC 2d 1238.
The license granted the domsat operator contains authorization to position the
satellite in a particular orbit above the Earth and authorization to use various frequencies for
transmission of communication signals to Earth. The various frequencies for transmission
of communication signals to Earth are emitted by the transponders on the satellite, one
frequency per transponder.
*

*

*

The operator of a transmit earth station which transmits communication signals to
the satellite must also obtain a license from the FCC because a transmit earth station is also
considered a transmitter of radio signals under Title III of the Act. Domsat Transponder
Sales, 90 FCC 2d 1238....
The purchaser of a transponder is not required to have a license to use the
transponder. The FCC held, in Domsat Transponder Sales, 90 FCC 2d 1238, that the sale
of a transponder does not constitute a transfer of control of a radio transmitter, which
requires the transfer of the FCC license and FCC approval pursuant to 47 USCA section
310(d). In explaining why it did not think a transponder purchaser is required to have a
license, the FCC stated:
We do not believe there is anything intrinsic to transponder sales that now
requires us to individually license the transponders. The buyer of a transponder, like
a lessee under tariff, [i.e., the lease of a transponder from a common carrier,] is
unable to exercise licensee responsibilities because of the limited nature of its
ownership rights. Each of the sellers has represented to the Commission [FCC]
requirements regarding operation of the satellite in orbit. The buyer only obtains
ownership rights to the transponder equipment. Any rights to use the associated
frequency are the same whether provided by the sales contract or pursuant to a
tariffed lease arrangement. Therefore, it has no means to control the facilities power
or transmissions. Thus, we believe that these transactions do not involve the transfer
of control of a Title III license.

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Id. An operator of a receive earth station is also not required to have a FCC license.
A FCC license does not give the licensee any ownership rights, or a vested interest
in, the orbit assigned the satellite or the frequencies assigned to the transponders....
*

*

*

A typical transponder sales contract transfers title to one or more transponders from
the domsat operator to the purchaser for an indefinite period of time. The sales contract
usually contains an estimate of approximately ten years for the useful life of the satellite and
transponders. The agreement usually states the title to the transponders is conveyed free
from all liens, charges, claims or encumbrances and without limitations. In effect, the
purchaser has the exclusive right to the transponders.
*

*

*

The sales contract usually contains warranties that if any of the purchased
transponders fail to function properly after transfer of title and during their useful lives, the
seller will, if available, transfer title to a spare transponder on the same or a different satellite
to the purchaser for no extra charge.
*

*

*

The sales contract usually contains an agreement in which the domsat operator agrees
to maintain the satellite and keep it in its designated orbit. This function is typically called
“Tracking, Telemetry and Control” or “T,T&C”.
*

*

*

It can be argued that the sales contract contains an implied agreement between the
domsat operator and the transponder purchaser giving the transponder purchaser the right
to use the frequencies allocated to the purchased transponders. The domsat operator
obtained the license from the FCC, has control over the frequencies and is responsible for
their use. Thus, even though the sales contract does not expressly mention such an
agreement the agreement must implicitly exist because otherwise the purchaser could not
use the frequencies allocated to the transponders.
*

*

*

A transponder purchaser not only purchases a tangible asset, i.e., the transponder, but
also intangible assets. The basis of the transponder for investment credit and accelerated
depreciation cannot exceed its fair market value at the time of the purchase. Therefore, the
gross purchase price must be apportioned between the transponder and the other intangible

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rights acquired by transponder purchaser based on their fair market values. Some of the
other intangible rights may include maintenance and service agreements, nonstandard and
additional warranties, rights to use Federal Communication designated frequencies, preferred
orbital positions, etc.
Therefore, the values of the transponders and various intangibles should be
determined and assigned their separate tax basis for investment credit and accelerated
depreciation purposes....
In this case, Petitioner contracts for uplink services with an unrelated third party that sends
Petitioner’s taped shows through a signal to satellite transponders. The signals from the
transponders are then sent from space to receiving ground equipment owned by independent cable
operators who then transmit the programs to their cable subscribers. Petitioner’s contracted uplink
services are provided in Connecticut. Petitioner owns some of the satellite transponders, and some
are leased from unrelated third parties under ten to fifteen year lease agreements.
Following the Internal Revenue Service and FCC determinations, satellite transponders are
tangible personal property as defined in section 208.11 of the Tax Law. However, leasing certain
capacity on a transponder enables the lessee to obtain the right to use FCC designated frequencies,
which constitutes intangible personal property.
Accordingly, the lease agreements where Petitioner is only leasing capacity on a transponder
are for the right to use FCC designated frequencies, and the leasing of such capacity constitutes
intangible property. Such intangible property is not included in the numerator or denominator of
the property factor of the business allocation percentage under section 210.3(a)(1) of the Tax Law
and section 4-3.1(c) of the Regulations.
The transponders owned by Petitioner, and transponders leased by Petitioner from either the
satellite owner itself or the owner of a transponder previously purchased from the satellite owner,
constitute tangible personal property and are included in the denominator of the property factor of
the business allocation percentage under section 210.3(a)(1) of the Tax Law. Since the satellite
transponders are not physically situated or located in New York State, pursuant to section
210.3(a)(1) of the Tax Law and section 4-3.1(c) of the Regulations the transponders would not be
included in the numerator of the property factor.
When determining the value of Petitioner’s owned or leased transponders that are included
in the computation of the property factor of the business allocation percentage under section
210.3(a)(1) of the Tax Law, only the value of the tangible personal property, excluding any
intangible assets that may also be acquired, may be included in the computation. Following the
Internal Revenue Service treatment, when Petitioner purchases or leases a transponder, the gross
purchase price or lease payment must be apportioned between the transponder, which is the tangible
property, and any intangible rights that are also acquired by the purchase or lease. Such intangible
rights may include maintenance and service agreements, nonstandard and additional warranties,

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rights to use FCC designated frequencies, preferred orbital positions, etc. The portion attributable
to such intangibles may not be included in valuing the transponder that is included in the property
factor.
Further, with respect to a transponder leased by Petitioner, the general method of valuation
contained in section 4-3.2(a) of the Regulations of multiplying the gross rents payable with respect
to the transponder (excluding any portion of the lease payment attributable to intangible property)
by eight, may result in an inaccurate valuation of such leased transponder if the lease charges are
the equivalent in amount to the purchase price of the transponder, if sold. Pursuant to section
4-3.2(d) of the Regulations, if the general method does result in an inaccurate valuation of a leased
transponder, the Department of Taxation and Finance may adopt another method of valuation that
properly reflects the value of the transponder leased by Petitioner, for purposes of computing the
property factor pursuant to section 210.3.(a)(1) of the Tax Law. Such determination is a factual
matter that is not susceptible of determination within the scope of an advisory opinion. (An advisory
opinion merely sets forth the applicability of pertinent statutory and regulatory provisions to “a
specified set of facts.” Tax Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a).)
Finally, it should be noted that section 210.8 of the Tax Law and section 4-6.1 of the
Regulations authorize the Commissioner of Taxation and Finance to use other methods to more
accurately reflect the business activity within New York State when it appears to the Commissioner
that the business allocation percentage determined pursuant to section 210.3(a) of the Tax Law does
not properly reflect the activity, business, income or capital of a taxpayer within New York State.
If a different method is used, it must be calculated to effect a fair and proper allocation of the
business income and business capital reasonably attributable to New York State. The determination
of whether the business allocation percentage determined pursuant to section 210.3(a) of the Tax
Law results in a fair allocation of Petitioner’s business capital and business income to New York
State is also a factual matter that is not susceptible of determination within the scope of an advisory
opinion. (Tax Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a).)

DATED: May 12, 2004

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.