New York Advisory Opinion TSB-A-09(8)C: How are a website operator's online advertising fees and medical 'risk participation' fees sourced to New York for the Article 9-A business allocation percentage?
Plain-English summary
A petitioner asked how its client (Company A, a New York service business) should source two revenue streams for the Article 9-A receipts factor: (1) monthly fees from physicians for website listing/advertising, and (2) fees from a "risk participation" program under which Company A arranges for a third-party physician to perform a medical service (with re-tries or a partial refund if the first attempt fails).
The Department's conclusions:
- Website advertising (Issue 1): Sourced to New York by the audience, like newspaper, broadcast, and cable advertising and consistent with the just-decided WTAS LLC opinion (TSB-A-09(5)C). Company A allocates internet advertising revenue by the ratio of persons who view/read the ads in New York to persons everywhere; if it can't tell where viewers are, it may use a reasonable estimate subject to Department approval (Tax Law section 210.3(a)(2)(B)).
- Risk-participation fees (Issue 2): These are receipts for services performed. Company A doesn't perform the medical service itself -- it contracts with a third-party physician -- but under 20 NYCRR 4-4.3(a), receipts from services performed in New York are allocated to New York whether performed by the taxpayer's employees, agents, or subcontractors. Following Christopher L. Doyle (TSB-A-95(11)C), Company A must include in its New York receipts the fees for medical services that the third-party physicians perform in New York.
What this means for you
Online and intermediary service businesses
Two different sourcing rules can apply to one company. Advertising follows the audience; arranged/subcontracted services follow where the work is physically performed -- even when someone else does the work for you.
Accountants and tax professionals
For advertising, use audience/market sourcing (estimates allowed with Department approval). For services delivered through subcontractors, remember 20 NYCRR 4-4.3(a) pulls subcontractor-performed New York services into the numerator; the taxpayer doesn't escape sourcing by outsourcing performance.
Common questions
Q: How is website advertising revenue sourced in New York?
A: By the New York audience -- the ratio of viewers/readers in New York to viewers/readers everywhere.
Q: Are fees for services performed by a subcontractor in New York sourced to New York?
A: Yes. Under 20 NYCRR 4-4.3(a), services performed in New York are allocated to New York whether done by employees, agents, or subcontractors.
Citations and references
- Tax Law § 210.3(a)(2)(B) (receipts factor; services performed within the state)
- 20 NYCRR 4-4.3(a) (services performed in New York allocated to New York, including by subcontractors)
- 20 NYCRR 4-4.3(d)(3) (advertising sourced by audience); WTAS LLC, TSB-A-09(5)C; Christopher L. Doyle, TSB-A-95(11)C
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_8c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-09(8)C
Corporation Tax
June 16, 2009
Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C070706A
On July 6, 2007, a Petition for Advisory Opinion was received from SmarTax LLC, 272
US Highway 206, Suite 203, Flanders, NJ 07836.
The issues raised by Petitioner, SmarTax LLC, are the following:
1. Whether receipts from monthly fees received from Web site advertising services are
sourced to New York for purposes of the receipts factor of the business allocation
percentage.
2. Whether receipts from fees from a risk participation program offered to customers are
sourced to New York for purposes of the receipts factor of the business allocation
percentage.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner’s client, Company A, who is in a service industry, is currently located and
doing business in New York State. Company A is also currently located and doing business in
other states. Company A receives three types of revenue from divisional operations: revenue
sharing from affiliates, revenue from Web site advertising, and revenue from a “risk participation
program.” Petitioner is not requesting a ruling regarding the sourcing of the receipts from
revenue sharing from affiliates in this Advisory Opinion.
Company A has agreements in place whereby monthly fees are received from physicians
located in various states for maintaining listings for the physicians on Company A’s Web site.
Company A maintains the Web site out of its New York State office. The Web site lists detailed
information about who the physicians are, where they are located, and what services and
activities they perform. A prospective end-user customer may access the Web site from any state
and can select and be put into contact with any of the physicians (located in various states) listed
on the Web site. Company A does not receive any commissions from such referrals.
Under the risk participation program, Company A also receives fees from customers for
arranging for the provision of a medical service to be rendered by a third party physician. Many,
but not all, of the physicians who participate in this program advertise on Company A’s website.
Company A charges its customers for the service at a higher rate than what would be charged to
have the medical service performed once, but less than what would be charged to have the
service performed several times.
-2TSB-A-09(8)C
Corporation Tax
June 16, 2009
The medical service is of a nature that it may need to be performed several times to
achieve success. In the event the service provided does not produce a successful result on the
first attempt, the customer may participate again at no extra cost to attempt to achieve success, or
may receive a partial refund. The greater price is paid by the customer in exchange for “risk
participation” which is similar to the sale of an insurance policy or a service guarantee or
warranty to a customer, in that it represents a fee for a service and to assure a particular outcome,
whether the service is performed once or several times.
Company A refers the customer to a physician to perform the medical service. Company
A contracts with the physician to perform the service and pays the physician for the services
performed. If a customer needs a medical service to be performed more than once, Company A
pays the physician for each service that is subsequently performed.
Applicable law and regulations
Section 210.3(a) of the Tax Law, provides, in relevant part:
The portion of the entire net income of a taxpayer to be allocated within the state
shall be determined as follows:
(a) multiply its business income by a business allocation percentage to be
determined by….
*
*
*
(2) ascertaining the percentage which the receipts of the taxpayer, computed on
the cash or accrual basis according to the method of accounting used in the computation
of its entire net income, arising during such period from
(A) sales of its tangible personal property where shipments are made to points
within this state,
(B) services performed within the state, provided, however, that (i) in the case of
a taxpayer engaged in the business of publishing newspapers or periodicals, receipts
arising from sales of advertising contained in such newspapers and periodicals 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,...
(C) rentals from property situated, and royalties from the use of patents or
copyrights, within the state…and
(D) all other business receipts earned within the state, bear to the total amount of
the taxpayer’s receipts, similarly computed, arising during such period from all sales of
-3TSB-A-09(8)C
Corporation Tax
June 16, 2009
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 the state;
*
*
*
(10)(A) Notwithstanding the foregoing provisions of this paragraph, other than
subparagraphs seven and eight of this paragraph, the business allocation percentage shall
be computed in the manner set forth in this subparagraph.
*
*
*
(ii) for taxable years beginning on or after January first, two thousand seven, the
business allocation percentage shall be the percentage provided for in subparagraph two
of this paragraph.
Section 4-4.3 of the Article 9-A Regulations provides, in part:
(a) The receipts from services performed in New York State are allocable to
New York State. All receipts from such services are allocated to New York State,
whether the services were performed by employees, agents, or subcontractors of the
taxpayer, or by any other persons. It is immaterial where such receipts are payable or
where they are actually received.
*
*
*
(f)(1) Where a lump sum is received by the taxpayer in payment of services
performed within and without New York State, the portion of the sum attributable to
services performed within New York State is determined on the basis of the relative
values of, or amounts of time spent in performance of, such services within and without
New York State, or by some other reasonable method. Full details must be submitted
with the taxpayer’s report.
(2) The broadcasting of radio and television programs and commercial messages
by way of radio or television antennae pursuant to a license granted by the Federal
Communications Commission is deemed to be a service. When a lump sum is received
for such service, that lump sum must be allocated to New York State and another state or
states according to the number of listeners or viewers in each state.
(3) The publishing of advertising in newspapers and periodicals is deemed to be a
service. Receipts derived from such service shall be allocated to New York State based
on the ratio of the New York state circulation of the newspaper or periodical containing
such advertising to the total circulation of such newspaper or periodical.
-4TSB-A-09(8)C
Corporation Tax
June 16, 2009
Opinion
Issue 1
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). See also WTAS LLC, Adv Op Comm
T&F, March 9, 2009, TSB-A-09(5)C, that determined that a Web site owner/operator should base the
allocation of Internet advertising revenues on the ratio of its New York subscribers to the number of
subscribers everywhere.
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 Web site differ in no pertinent way from the sales of advertising by publishers,
broadcasters, and cable providers. See WTAS LLC, supra. Accordingly, Company A should base the
allocation of its Internet advertising revenue on the ratio of persons who view or read Company A’s
advertisements in New York to the number of persons who view or read Company A’s
advertisements everywhere. If Company A does not have any way of knowing where a prospective
customer is when (s)he views or reads an advertisement on the Web site, Company A may use some
reasonable method to estimate the ratio described in the preceding sentence, subject to the approval
of the Tax Department.
Issue 2
Company A’s receipts from its “risk participation program” are receipts for services
performed for its customers. While the goal of the performance of these services is that a
successful medical outcome will eventually be achieved, the customers are entering into these
arrangements with Company A to have a medical service performed. Company A is receiving
payments for the performance of these services, regardless of the outcome.
-5TSB-A-09(8)C
Corporation Tax
June 16, 2009
Section 4-4.3(a) of the Article 9-A Regulations requires that receipts from services
performed in New York State are allocated to New York State, whether the services are
performed by employees, agents or subcontractors of the taxpayer, or any other persons, in
New York State.
In Christopher L. Doyle, Esq., Adv Op Comm T&F, July 26, 1995, TSB-A-95(11)C, the
taxpayer provided diversified marketing services to its clients. The taxpayer developed a
marketing program and if a customer accepted the program, the taxpayer would execute the
program by overseeing and scheduling the various tasks required to be performed by
subcontractors. The opinion held that the taxpayer’s receipts from these marketing services are
receipts for services performed for its clients and the taxpayer is required to include in the
numerator of the receipts factor, the receipts for services performed in New York State by its
employees, if any, and by the subcontractors the taxpayer contracts with to perform the services.
In this instance, Company A is not directly performing the medical service that the
customers are receiving; Company A contracts with a third party physician to perform the
service. Pursuant to section 4-4.3(a) of the Article 9-A Regulations and Christopher L. Doyle,
supra, if an agent, contractor, or other person in New York State performs services for a taxpayer
within New York State, the taxpayer must allocate the receipts from those services within
New York State. Accordingly, Company A must include in the numerator of the receipts factor
of the business allocation percentage the receipts from medical services performed by third party
physicians for Company A pursuant to the risk participation program, when such services are
performed within New York State.
DATED: June 16, 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.