New York Advisory Opinion TSB-A-11(1)C: How does a prepaid debit card processor source its card-sale fulfillment fees and its transaction fees for the Article 9-A receipts factor?
Plain-English summary
The petitioner markets and processes prepaid debit cards nationwide, distributing them through retail stores and earning two kinds of income: fulfillment fees paid when a card is sold, and transaction fees (interchange, maintenance, etc.) from later card use. It asked how to source these for the Article 9-A receipts factor.
The Department split the answer. Under Tax Law § 210.3(a)(2), receipts fall into categories, with the business allocation percentage made up entirely of the receipts factor (§ 210.3(a)(10)(A)(ii)). A prepaid debit card is not tangible personal property (Tax Law § 208.11 excludes money, deposits, and evidences of an interest in property); like the gift checks in Deloitte & Touche, the card represents an intangible right to redeem value later. So the fulfillment fees from selling the cards are other business receipts, sourced to where they are earned -- where the card is sold to the customer (e.g., a New York distributor's retail store means New York receipts). The transaction fees from using the card are sourced to where the cardholder performs the transaction.
What this means for you
Payments and stored-value businesses
Selling a stored-value or prepaid product is selling an intangible, not goods, so the sale fee sources as an other business receipt to the point of sale -- not by delivery of tangible property. Usage-based fees source to where the customer actually transacts, which usually requires transaction-level location data.
Accountants and tax professionals
Separate the revenue streams: point-of-sale fulfillment fees (sourced to the selling location) versus transaction/interchange/maintenance fees (sourced to the cardholder's transaction location). Build systems to capture transaction location; the opinion notes the company tracked card sales by state but not yet transaction fees.
Common questions
Q: Are prepaid debit cards tangible personal property?
A: No. They are intangible rights to redeem value later (Tax Law § 208.11), so card-sale fees are other business receipts.
Q: Where are the card-sale (fulfillment) fees sourced?
A: To where the card is sold to the customer -- a sale at a New York retail location is a New York receipt.
Q: Where are the transaction fees sourced?
A: To where the cardholder performs the transaction.
Citations and references
- Tax Law § 210.3(a)(2) (receipts factor; other business receipts sourced where earned)
- Tax Law § 208.11 (tangible personal property excludes money and evidences of an interest in property)
- Tax Law § 210.3(a)(10)(A)(ii) (single receipts-factor business allocation)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2011.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a11_1c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-11(1)C
Corporaton Tax
December 28, 2010
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C090108A
A petition received by the Department requests an advisory opinion regarding the way receipts of
name redacted (“Petitioner”) should be allocated for purposes of calculating the numerator of the receipts
factor of the business allocation percentage under Tax Law Article 9-A. Petitioner’s receipts from the sale of
prepaid debit cards should be allocated to New York in accordance with the location where the cards are
sold. The transaction receipts associated with the prepaid debit cards should be allocated to New York based
on where the cardholder performs a transaction.
Facts
Petitioner is a third-party marketer and processor of prepaid debit cards and prepaid debit card
services throughout the U.S. Petitioner contracts with banks (“issuing banks”) to manage the prepaid debit
cards connected with the bank’s depository accounts, using petitioner’s proprietary software program, new
account representatives, and customer service representatives. Petitioner facilitates the sale, activation, load,
reload, use, reporting, and regulatory compliance related to the prepaid debit cards. As part of this process,
Petitioner distributes the prepaid debit cards through designated third-party distributors (“distributors”) who
operate one or more retail locations, such as a store. Petitioner provides distributors with card inventory,
marketing materials, and IT functionality at the point of sale. Petitioner also manages all aspects of the
prepaid debit card program, including overseeing the system of distributors, and cardholders.
Petitioner’s core products include general purpose reloadable cards (GPR), gift cards, and name
redacted® cards. GPRs operate like bank debit products. Money can be deposited onto the card by direct
deposit, at a terminal or retail location, through a person-to-person payment, or online. Gift cards hold a preconfigured amount of money and cannot be reloaded. Name redacted® cards are a hybrid between GPR and
gift cards; they can only be reloaded up to three times. All cards carry the Visa or MasterCard acceptance
marks. Petitioner’s prepaid debit cards give cardholders the ability to securely transact, both online, and
offline, with merchants that accept payments through MasterCard International, Visa or Discover (“the
Network Providers”) and at ATM networks with which the bank is affiliated. The cards do not include any
credit card or other product that accesses credit. For purposes of this opinion, GPRs, gift cards, and name
redacted® cards will be referred to as prepaid debit cards.
Petitioner derives income from fees charged in connection with the issuance and subsequent use of
the prepaid debit cards. A card is issued for a set amount known as a fulfillment fee. The fulfillment fee,
paid by the customer cardholder, is split between Petitioner, and the distributor (the merchant or store that
physically holds the cards). Once money is loaded onto a card, various transactional fees are collected.
These fees include interchange fees, as described below, monthly service fees, account maintenance fees, lost
or stolen card fees, convenience fees, and balance inquiry fees. Petitioner tracks card sales (e.g. fulfillment
fees) on a state-by-state basis according to the location of the transaction. The company’s transactional fees
are not currently tracked on a state-by-state basis since systems have not been created to allow for such
tracking.
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Petitioner employs regional account managers, located in sixteen states, to solicit business from new
distributors, and maintain relationships with existing distributors. The account managers educate and train
the distributors’ employees, set sales goals for the distributors, ensure that the distributors have the correct
points of sale, and assist the distributors with the marketing of prepaid debit cards. Agreements between
Petitioner, and distributors provide that distributors will act as independent agents: 1) to receive for delivery
to Petitioner sign-up information, and applications for prepaid debit cards, 2) to deliver to the issuing bank
activation fees for cards, and funds tendered by customers to distributors for the purpose of reloading cards,
and 3) to offer its customers other services related to the prepaid debit cards.
Petitioner’s corporate offices and headquarters are based in Austin, Texas, where a majority of its
employees are located. These employees “process” the transactions and manage the debit cardholder’s
account data using Petitioner’s proprietary processing software. Processing includes the activities necessary
to issue a prepaid debit card and complete a transaction. Such activities include, but are not limited to: set
up, activation, and maintenance of the card and cardholder funds, transaction authorization, processing,
clearing, and settlement, system access, cardholder dispute resolution, system compliance, regulatory
compliance, security and fraud control, and activity reporting. For example, when a purchase transaction
takes place, an electronic notification is sent to Petitioner to alert Petitioner that a card holder made a
purchase for a certain dollar amount. The Petitioner processes that transaction by 1) verifying the cardholder
has sufficient funds in his or her account with the issuing bank to cover the purchase, and 2) sends a
notification to the cardholder’s issuing bank indicating funds should be released to the merchant.
Petitioner has the following sources of revenue:
1. Fulfillment fees – amounts received from the sale of prepaid debit cards.
2. Interchange fees - fees charged by the card-issuing bank to the merchant bank for processing the
cardholder’s purchase transaction at the merchant’s establishment. The card-issuing bank deducts the
interchange fee from the amount it pays the merchant bank when the merchant accepts a card using the Visa,
and MasterCard network. The fee is usually a percentage of the transaction amount and is set by the credit
card networks. Typically this fee is earned by the issuing bank, but since the issuing bank has engaged
Petitioner to process transactions on its behalf, it has agreed to give 100% of the fee to Petitioner for
processing the transactions. Petitioner and issuing bank agreed to this fee via a revenue share agreement for
processing the prepaid debit card accounts.
3. Service Revenue – various fees for the maintenance and use of a debit cardholder’s account.
Petitioner charges cardholders various service fees associated with the maintenance and use of the
outstanding cards. The fees include the following:
Service fees – a fee, charged each time the card is used by the customer, or a monthly
service fee that allows for multiple transactions.
Account maintenance fees – Amount charged to a cardholder for each reloadable card with
an inactive balance exceeding 90 days. Gift card accounts are charged an account maintenance fee
for inactive account balances exceeding six months.
Lost or stolen card fees – fees to replace a lost or stolen card.
Balance inquiry fee – fee for inquiring into the balance of an account.
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Account to account transfer – fee for transferring funds from one Petitioner cardholder
account to another.
Check fee – charge for issuing a check to close an account.
Analysis
Paragraph (a) of subdivision three of section 210 of the Tax Law provides that the portion of a
taxpayer’s entire net income allocated to the State is determined in part by multiplying its business income
by its business allocation percentage (BAP). The BAP consists entirely of the receipts factor (Tax Law §
210.3(a)(10)(A)(ii).)
Section 210.3(a)(2) of the Tax Law provides the rules for purposes of computing the receipts factor.
The BAP is determined by dividing a taxpayer’s New York business receipts by its total business receipts
within and without New York. In general, receipts are placed into one of five categories for purposes of
sourcing and allocation: 1) receipts from tangible personal property are sourced where delivered, 2) receipts
from the sale of services are sourced to the place where performed, 3) receipts from rentals of real, and
personal property are sourced to where the property is located, 4) royalties for the use of patents and
copyrighted material are sourced to the place where used and 5) other business receipts are sourced to the
place where earned.1
In this case Petitioner’s receipts are comprised of: 1) fulfillment fees from the sale of prepaid debit
cards, 2) interchange fees for processing a cardholder’s purchase transactions, and 3) fees arising from the
maintenance, and use of the cardholder’s account.
1. Fulfillment fees
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. In Deloitte & Touche, Adv Op Comm T&F, April 18, 2002, TSB-A-02-(3)C, it was
concluded that merchant certificates, taxpayer certificates and gift checks that a taxpayer sold to customers
over taxpayer’s website were intangible property because the underlying value of that property represented
the intangible right to redeem it for property or services at some future time. In this case, the prepaid debit
cards sold by Petitioner also represent a purchaser’s right to redeem, at some future time, property or services
with merchants that accept payment through the electronic network providers. Therefore, the fulfillment fees
received from the sale of prepaid debit cards are not receipts from the sale of tangible personal property,
services, rentals of real, and personal property or royalties for the use of patents, and copyrighted material.
The fulfillment fees are classified as “other business receipts” under the business allocation provisions of the
Tax Law, and will be allocated to New York according to the place where they are earned.
In this case, the fulfillment fees are earned when the prepaid debit cards are sold to a customer.
Therefore, the fulfillment fees will be considered to be earned in New York when the prepaid debit cards are
sold to a customer at a New York establishment. Thus, if a distributor sells a prepaid debit card to a
customer at its New York retail store, the receipt from that sale will be allocated to New York.
1
Section 210 also includes rules for specific types of receipts, such as brokerage commissions, that are not relevant
here.
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Additionally, Petitioner has submitted information that indicates that the prepaid debit cards are also
sold to customers through Petitioner’s website. In Deloitte, it was decided that receipts from merchant
certificates, taxpayer certificates, and gift checks are derived from the activity of the customer that accesses
the Internet to purchase taxpayer’s products from its Web site, and those receipts would be sourced to New
York if the location where the customer accesses the website is located in New York. Deloitte also held that,
where information is not available to determine the location of the customer’s equipment used to draw upon
the taxpayer’s databases, the location will be presumed to be at the customer’s mailing address. That opinion
is instructive in this case, and leads to the conclusion that receipts from Petitioner’s prepaid debit cards sold
over the Internet through Petitioner’s website will be allocated to New York if the location where the
customer accesses Petitioner’s website is located in New York. If the information to determine the location
of the customer’s equipment that accesses Petitioner’s website is not available to Petitioner, then the location
will be determined in accordance with the customer’s billing address.
2. Interchange fees
Petitioner has agreements with issuing banks to receive all of the issuing banks’ interchange fees in
exchange for performing each of the issuing banks’ processing activities necessary to issue the banks’ debit
cards and process cardholder transactions. The processing activities include, but are not limited to: set up,
activation and maintenance of the card, and cardholder funds, transaction authorization, processing, clearing
and settlement, system access, cardholder dispute resolution, system compliance, regulatory compliance,
security, and fraud control, and activity reporting.
In New York Mercantile Exchange, Adv Op Comm T&F, April 7, 1999, TSB-A-99(16)C (NYMEX),
the taxpayer (NYMEX) received subscription fees from vendors who were granted a license to electronically
access NYMEX’s market data. The Department concluded in that case that the subscription fees were other
business receipts, and should be sourced to where they were earned; that is, to the location where NYMEX
delivered the data to the vendors. Delivery took place at the location that the vendor used to draw upon the
market data obtained under the license arrangement with the taxpayer. Similarly, in Insurance Services
Offices, Inc., Adv Op Comm T&F, September 6, 2000, TSB-A-00(15)C, subscription fees for electronic
access to copyrighted data, forms, and other material were found to be other business receipts. As in
NYMEX, the fees were sourced to the location of the customers’ computer equipment and modems (or if the
location was unknown, then presumptively to the customer’s mailing address). The NYMEX, and Insurance
Services opinions show that the subscription fees or similar charges that give the customer the ability to
electronically receive information from a taxpayer, or from a taxpayer’s database, will be considered other
business receipts.
Although not dictating the conclusion, NYMEX, and Insurance Services are instructive. Like the
subscription fees in NYMEX, and Insurance Services, the revenue Petitioner receives from issuing banks for
the electronic processing of issuing banks’ transactions with cardholders constitutes "other business receipts"
for purposes of the receipts factor of the business allocation percentage under section 210.3(a)(2) of the Tax
Law. Therefore, such receipts are considered New York receipts to the extent that they are earned in New
York. Neither Article 9-A of the Tax Law nor the Business Corporation Franchise Tax Regulations provide
specific guidance on where receipts of the types at issue in this case are "earned."
However, Article 32 of the Tax Law, which imposes a franchise tax on banking corporations, does
provide guidance in the case of sourcing receipts from certain banking activities. Tax Law § 1454(a)(2)(D)
provides the allocation rules for banking corporations from bank and credit card receivables. That section
provides that interest and fees in the nature of interest from bank, and credit cards are earned within the state
if the mailing address of the cardholder is in the state. That section also addresses receipts from merchant
discounts. A merchant discount is a fee charged by an issuing bank to a merchant for processing bank credit
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card sales and crediting the funds to the merchant’s account. Receipts from merchant discounts are allocated
to New York if the merchant is located in New York. Like a banking corporation’s receipts, Petitioner’s
receipts are earned from an issuing bank in exchange for processing the issuing bank’s transactions with its
cardholders. Therefore, it is appropriate in this case for Petitioner to source the fees it receives from an
issuing bank to New York using a method similar to that used by a banking corporation in allocating its
receipts under Tax Law § 1454(a)(2)(D). That is, the portion of the receipts Petitioner earns for processing
activities of an issuing bank with respect to a New York merchant will be sourced to New York. However, if
it cannot be determined whether the cardholder transaction occurred with a New York merchant, or the fee is
considered more like a service charge or fee, and is not a fee for processing a transaction with a merchant,
then the receipt will be considered earned in New York if the cardholder’s mailing address is in New York
State.
Peach Tree Bancard Corporation, Adv Op Comm T&F, August 4, 1995, TSB-A-95(13)C, no longer
reflects the Department’s position on this subject. There, the Department concluded that a taxpayer’s credit
card processing fees were receipts from services, and those receipts would be allocated to New York if the
services were performed in New York. The opinion also indicated that, unlike § 1454(a)(2)(D) of Article 32
of the Tax Law, which provides a special rule for allocating receipts from merchant discounts to where the
merchant is located, Article 9-A has no special rule for determining receipts from credit card processing
activities for purposes of computing the receipts factor of the business allocation percentage. Neither the
conclusion in Peach Tree nor the rationale remains valid.
3. Maintenance and Use Revenue
Petitioner’s fees from maintenance, and use revenue represents the various fees charged to the
prepaid debit cardholder for maintaining, and using the prepaid debit card, and responding to cardholder
reports, and inquiries. This includes a monthly service fee, account maintenance fee, lost or stolen card fee,
convenience fee, and a balance inquiry fee. These fees are generally incurred each time a customer initiates
a transaction.
Like the processing activities described above that Petitioner performs for the issuing bank, the
processing activities Petitioner performs for the cardholders are also considered other business receipts, and
will be sourced based on where they are earned. In this case, it is appropriate to allocate those receipts based
on where the customer initiates a transaction. Therefore, if customer reloads its prepaid debit card at a New
York establishment, then that fee will be considered to be earned in New York. In cases where it cannot be
determined where the transaction is initiated by the cardholder, then the receipt will be considered earned in
New York if the cardholder’s mailing address is in New York State.
DATED: December 28, 2010
NOTE:
/S/
DANIEL SMIRLOCK
Deputy Commissioner and 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.