New York Advisory Opinion TSB-A-09(5)C: How are a social network's online advertising receipts (CPC and CPM) allocated to New York for the Article 9-A business allocation percentage?

Plain-English summary

A Delaware company runs a social-networking website and sells online advertising under two models: CPC (cost per clickthrough -- paid each time a user clicks an ad) and CPM (cost per thousand impressions -- paid each time an ad is displayed). Its servers and IT staff are in California and Virginia; its New York sales reps only solicit advertisers. It asked how to allocate the advertising receipts to New York for the receipts factor of the Article 9-A business allocation percentage, arguing none should be sourced to New York because no income-generating work happens there.

The Department disagreed and sourced the receipts to the New York audience. Tax Law section 210.3(a)(2)(B) sources receipts to "services performed within the state," and the advertising regulations source newspaper/periodical advertising by New York circulation (20 NYCRR 4-4.3(d)(3)) and radio/TV advertising by New York listeners/viewers (20 NYCRR 4-4.3(d)(2)); guidance extends the same logic to cable (by New York subscribers). The governing principle is to base allocation on the number of people who view the ad in New York. Online advertising is no different. So: CPC receipts are allocated to New York when a New York subscriber clicks the ad; CPM receipts are allocated by the ratio of New York subscribers to total subscribers. The location of the IT staff, servers, and routers is irrelevant.

What this means for you

Online publishers, ad networks, and social platforms

New York taxes your ad revenue based on where your audience is, not where your infrastructure or engineers are. Build subscriber-location data into your systems; it drives the CPM ratio and the CPC sourcing.

Accountants and tax professionals

This is audience-based (market) sourcing for advertising, reasoning by analogy from the circulation/viewership regulations. Server and staff location arguments will not move New York advertising receipts out of the numerator.

Common questions

Q: Where is online advertising revenue sourced for New York franchise tax?
A: To the New York audience -- CPC when a New York subscriber clicks, CPM by the ratio of New York subscribers to all subscribers.

Q: Does it matter that the servers and IT staff are outside New York?
A: No. The allocation follows where the ads are viewed/clicked, not where the technology or employees are located.

Citations and references

• Tax Law § 210.3(a)(2)(B) (receipts factor; services performed within the state; advertising)
• 20 NYCRR 4-4.3(d)(3) (newspaper/periodical advertising sourced by New York circulation)
• 20 NYCRR 4-4.3(d)(2) (radio/TV advertising sourced by New York listeners/viewers)
• NYT-G-07(1) (cable advertising by New York subscribers)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a09_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(5)C
Corporation Tax
March 9, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C080408B

A petition received April 8, 2008 requests an advisory opinion about how Company A’s
receipts should be allocated for purposes of calculating the numerator of the receipts factor of the
business allocation percentage under Article 9-A. Company A’s receipts from advertisers that have
a CPC price structure arrangement should be allocated to New York when a New York subscriber
clicks on the advertisement. Company A’s receipts from advertisers that have fee structures based
on CPM arrangements should be allocated to New York based on the ratio of New York subscribers
to subscribers everywhere.
Facts
Company A, a Delaware Company, owns and operates a social networking website that
connects subscribers with friends, coworkers, and neighbors. The site is open to anyone with a
valid email address. Before subscribers join, they must create a “profile” that allows the subscriber
to share his or her name, location, interests, and other personal information. Company A then
directs the subscriber to networks that share attributes contained in the subscriber’s profile.
Company A also provides online advertising services to advertisers. The advertisers seek to
target audiences that share specific demographic attributes. Company A generates revenues by
delivering online advertisements to target audiences using two pricing structures: cost per
clickthrough (CPC) and cost per thousand impressions (CPM). A clickthrough occurs when a
subscriber clicks on an advertisement and reaches a site of the advertiser’s choosing. An advertiser
whose fee structure is based on CPC pays Company A a fee for each time an advertisement is
clicked by a user. An advertiser whose fee structure is based on CPM pays a fee for each time an
advertisement is displayed on a subscriber’s computer screen.
Company A maintains sales and marketing representatives, IT support staff, and account
managers in several states. The company’s servers and routers facilitate the routing of advertising
traffic on its social networking site. The server equipment and IT personnel are located in
California and Virginia. The sales representatives are located in California, Virginia, New York
and elsewhere. The sales representatives execute advertising arrangements with online marketers.
The IT support staff develops software applications that allow Company A to deliver
advertisements to subscribers, provide technical support for the company’s sales and marketing
divisions, and manage the network of servers and routers. The IT support personnel also perform
the tasks necessary to load the advertisements on to the servers and deliver them to subscribers.
The New York sales representatives only solicit clients to advertise on Company A’s website. The
company maintains no servers in NY and does not provide any infrastructure or IT support for the

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TSB-A-09(5)C
Corporation Tax
March 9, 2009

site functionality in New York. No New York personnel are involved in uploading or maintaining
advertising content.
Company A incurs substantial costs in providing a platform to host and disseminate
advertising on the internet, including network maintenance, data center operations, technical
support personnel, server and network hosting services, sales and marketing activities, depreciation
and amortization expenses with respect to server equipment, and storage, repair and maintenance of
server equipment. Except for costs attributable to Company A’s New York sales personnel, all
costs were incurred outside New York.
Opinion
Tax Law § 210.3(a)(2)(B) requires that taxpayers include in the numerator of their business
allocation percentage their income from “services performed within the state,” and provides that, for
publishers of newspapers and periodicals, “receipts arising from sales of advertising…shall be
deemed to arise from services performed within the state to the extent that such newspapers and
periodicals are delivered to points within the state.” A Tax Department regulation interprets this to
mean that publishers’ New York receipts from sales of advertising should be “based on the ratio of
the New York circulation of the newspaper or periodical containing such advertising to the total
circulation of such newspaper or periodical.” 20 NYCRR 4-4.3(d)(3). The same regulation treats
radio and television advertising similarly, mandating that a lump sum received for the service of
broadcasting a commercial message “must be allocated to New York State and another state or
states according to the number of listeners and viewers in each state.” 20 NYCRR 4-4.3(d)(2).
Subsequent departmental guidance, issued in the absence of any statute or regulation governing the
allocation to New York of revenue from advertising via cable programming, likewise concluded, by
analogy to this regulation, that a cable television corporation “should base the allocation of
advertising revenue on the ratio of its New York subscribers to the number of cable programming
subscribers everywhere.” New York Guidance Memo NYT-G-07(1).
The governing principle is to base the allocation, to the extent possible, on the number of
people who view or read the advertisement in New York. Company A’s sales of advertising that
appears on its website differ in no pertinent way from the sales of advertising by publishers,
broadcasters, and cable providers. Although a website operator may not have any way of knowing
where a subscriber is when (s)he views or clicks on an advertisement on the website, basing the
apportionment on the location of the subscriber should provide a close approximation of this figure.
Accordingly, Company A should base the allocation of its internet advertising revenue on the ratio
of its New York subscribers to the number of subscribers everywhere. Specifically, receipts from
advertisers that have a CPC price structure arrangement, where the advertiser pays Company A each
time an advertisement is clicked on by a subscriber, would be allocated to New York when a
New York subscriber clicks on the advertisement. For fee structures based on CPM arrangements,
where Company A is paid based on where the advertisement is displayed, advertising receipts
would be allocated to New York based on a ratio of the number of New York subscribers, to the
total number of subscribers everywhere.

TSB-A-09(5)C
Corporation Tax
March 9, 2009

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Company A suggests incorrectly that its advertising receipts should not be allocated to
New York because its employees do not perform any income-generating services in New York.
Company A contends that its advertisement fees result from the services performed by Company
A’s IT personnel, servers, and routers relating to its website functionality, including the
management and upkeep of servers that generate and deliver advertising impressions to subscriber
groups. Also, even though Company A employs sales representatives in New York who execute the
advertising arrangements with online marketers that generate this advertising revenue, it maintains
that these sales activities do not warrant any allocation of this revenue to New York. However, the
advertising receipts generated by Company A are properly based on the number of times a
New York subscriber clicks on or views an advertisement, and not on the activities of IT staff and
management that are directly related to its website, wherever these employees may be located.

DATED: March 9, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the person
or entity fully and accurately describes all relevant facts. An Advisory
Opinion is based on the law, regulations, and Department policies in effect as
of the date the Opinion is issued or for the specific time period at issue in the
Opinion.