New York Advisory Opinion TSB-A-16(3)C: Did a bank's regular employee trips to, and computer equipment housed at, a New Jersey hosting center make it 'doing business' outside New York so it could allocate its income under Article 32?
Plain-English summary
A bank headquartered in New York wanted to allocate its income under the former bank-tax article (Article 32), which is allowed only when a taxpayer does business both within and without New York. Its question was whether its New Jersey footprint counted. The bank had no office or leased real estate in New Jersey, but under a 10-year "e-business hosting agreement" it housed data-processing equipment at a Secaucus hosting center and its employees traveled there often — roughly 60–70 trips in 2008 and about 50 in 2009 — to monitor its global settlement system and resolve transaction exceptions on its own computers.
The Department concluded the bank was doing business in New Jersey and could allocate. Under 20 NYCRR 16-2.7, "doing business" is read broadly and turns on factors like the nature, continuity, frequency and regularity of activity, the location of places of business, and where employees work. The bank did not need to own or lease real property, and the fact that the hosting contract was a license rather than a lease did not matter. Regular, business-critical employee work in New Jersey — more than once a week on average — plus a long-term equipment presence established that the bank carried on business outside New York. (The Department did not decide how much income to allocate to New Jersey.)
What this means for you
Banks and financial institutions (and any multistate corporation)
You can establish out-of-state "doing business" — and the right to allocate — through people and equipment, without owning or leasing real estate. Regular employee work in another state, especially recurring and business-critical, is the heart of the test. Conversely, the same factors let New York assert nexus over an out-of-state company whose employees regularly work here.
Accountants and tax professionals
Although Article 32 was repealed for tax years beginning on or after January 1, 2015, the "doing business" factor analysis in 20 NYCRR 16-2.7 mirrors the Article 9-A regulation (20 NYCRR 1-3.2(b)), so the reasoning carries over. Document trip frequency, the nature of the work performed, and the term and purpose of any hosting or service agreement.
Common questions
Q: Do you need real property in a state to be "doing business" there?
A: No. Regular employee activity and equipment use can be enough; a hosting license is not a lease, but it still supports doing business.
Q: Does this decide how much income goes to New Jersey?
A: No. The Department found only that the bank could allocate; it did not determine the allocation percentage.
Q: Is this still good guidance even though Article 32 was repealed?
A: The factors track the Article 9-A "doing business" rule, so the analysis remains instructive, but confirm current law for post-2015 years.
Citations and references
- Tax Law § 1454(b)(1) (former Article 32 allocation where business is carried on within and without New York)
- 20 NYCRR 16-2.7 (definition of "doing business" and the factors considered)
- 20 NYCRR 19-1.1(c) (meaning of "business carried on" for Article 32 allocation)
- 20 NYCRR 1-3.2(b) (Article 9-A "doing business," used as an interpretive guide)
- Matter of Peter Pan Bus Lines (license vs lease); Sumitomo Trust, TSB-A-01(18)C; Bleakley Platt, TSB-A-90(25)C
- Article 32 repealed by Chapter 59 of the Laws of 2014, effective for tax years beginning on or after January 1, 2015
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2016.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a16_3c.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-16(3)C
Corporation Tax
May 27, 2016
Office of Counsel
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C120806A
The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTEDREDACTEDREDACTED. Petitioner asks
whether its activities in New Jersey in 2008 and 2009 (“the period at issue”) constituted “doing
business” in that state such that it was doing business both within and without New York State,
and therefore entitled to allocate its income for purposes of Article 32. 1
We conclude that Petitioner was doing business in New Jersey during the period at issue
because, when taken together, the nature and frequency of Petitioner’s employees’ trips to New
Jersey, Petitioner’s purchase of a long-term license to use business space in a facility located in
New Jersey, and its maintenance of computer equipment (which its employees used to conduct
business) in that New Jersey facility demonstrate that Petitioner’s New Jersey activities satisfy
the factors found in the Article 32 regulations that are used to determine if a taxpayer is doing
business in a state. Accordingly, Petitioner may allocate its income. We do not reach any
conclusions as to what portion of Petitioner’s income might be attributable to its activities in
New Jersey.
Facts
Petitioner is a wholly-owned U.S. subsidiary of a global group. Its principal activity is
the provision of a settlement service that mitigates settlement risk (i.e., the risk that only one
party to a financial transaction will pay what it owes) through a global multi-currency settlement
system. Petitioner maintains accounts with central banks in a number of countries to provide this
global service and its customers are some of the world’s largest financial institutions.
The Petitioner’s revenues are derived principally from the fees that it charges its global
customer base.
During the period at issue, the Petitioner’s principal office was located in New York and
its employees were based in New York.
However, in January 2004, the Petitioner entered into a service agreement called an “ebusiness Hosting Agreement” with a third party provider. Under the terms of that contract, the
Petitioner was supplied with hosting space and related services at supplier’s e-business Hosting
Center in Secaucus, New Jersey (“Secaucus Hosting Center”) for a ten-year period. Section 11.3
of the agreement, “No Lease of Real Property,” states that the agreement “is a services
agreement and not a lease of any real property.”
1
Article 32 of the Tax Law was repealed by chapter 59 of the Laws of 2012, which became effective for taxable
years beginning on or after January 1, 2015. All the facts stated in this Advisory Opinion relate to the 2008 and
2009 tax years.
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Corporation Tax
May 27, 2016
During the period at issue, Petitioner housed some of its data processing equipment at the
Secaucus Hosting Center. The Petitioner’s New York employees shared the responsibility for
daily monitoring of the Petitioner’s settlement service and addressing any exceptions related to
carrying out that settlement service with the employees of the Petitioner’s overseas affiliate.
Occasionally, the Petitioner’s employees performed the monitoring function, which required
significant technical expertise, at the Secaucus Hosting Center using the Petitioner’s data
processing equipment.
Frequently, the exceptions that needed to be addressed were related to out-of-trend
settlement member payment issues. When employees working at the Secaucus Hosting Center
encountered this type of exception, they used the Petitioner’s computers located on-site to detect
at what stage of the settlement process the issue had occurred. The employee responding to the
exception would create a log to manage the issue, contact relevant parties, document any actions
taken on the issue and conversations related to the issue, and ultimately resolve any issue arising
by verifying that the “pay-in” funding for the related settlements had taken place.
During 2008, at least five of the Petitioner’s employees travelled to the Secaucus Hosting
Center on a regular basis for a total of approximately 60-70 trips. During 2009, the Petitioner’s
employees made approximately 50 trips to the Secaucus Hosting Center; a single employee
accounted for most of these trips.
Petitioner filed franchise tax returns in New Jersey during 2008 and 2009.
Analysis
Under former Tax Law §1454(b)(1), a banking corporation whose “entire net income is
derived from business carried on both within and without the state” may allocate its income
based on a formula that includes a wage factor, a receipts factor, and a deposits factor.
20 NYCRR 19-1.1(c) defines the term “business carried on” for purposes of allocation
under Article 32 to mean “doing business” as defined in section 20 NYCRR 16-2.7, “provided
the income or expenses from such business are required to be included in the computation of the
taxpayer’s alternative net income.”
20 NYCRR 16-2.7 provides, in part:
(a) The term doing business is used in a comprehensive sense and includes all activities
which occupy the time or labor of people for profit. Every corporation organized for
profit and carrying out any of the purposes of its organization is deemed to be doing
business for purposes of the tax. In determining whether a corporation is doing
business, it is immaterial whether its activities actually result in a profit or a loss.
(b) Whether a corporation is doing business in New York State is determined by the
facts in each case. Consideration is given to such factors as:
(1) the nature, continuity, frequency, and regularity of the activities of the
corporation in New York State;
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Corporation Tax
May 27, 2016
(2) the purposes for which the corporation was organized;
(3) the location of its offices and other places of business;
(4) the employment in New York State of agents, officers and employees; and
(5) the location of the actual seat of management or control of the corporation.
In situations where it is necessary to determine whether a taxpayer is doing business
outside of New York, the same factors apply. See Sumitomo Trust and Banking Co., TSB-A01(18)C (May 30, 2001).
Although 20 NYCRR 16-2.7(c) provides several examples of activities that would
constitute “doing business,” it is not necessary for a taxpayer to be engaged in one of these
specific activities in order to be doing business within the state. Therefore, the conclusion that
the Secaucus Hosting Facility is not a “bona fide office” or “branch” of Petitioner (two of the
examples listed) does not mean that Petitioner is not doing business there. Similarly, it is clear
from the details of Petitioner’s contract with IBM that the contract is a license to use, not a lease
of real property. See Matter of Peter Pan Bus Lines, Inc., Tax Appeals Tribunal (July 28, 2005).
But again, Petitioner does not have to own or lease real property in New Jersey in order to be
doing business there.
The nature of the Petitioner’s employees’ activities in Secaucus supports Petitioner’s
claim that it is doing business there because its employees resolve potential transaction errors
there. This work is critical to Petitioner’s successful functioning as a financial institution.
The Article 9-A regulations defining “doing business” within a state (20 NYCRR 13.2[b]) are almost identical to the Article 32 regulations quoted above. 2 Therefore, Article 9-A
advisory opinions interpreting section 20 NYCRR 1-3.2(b) can be used as a guide to interpreting
20 NYCRR 16-2.7. See Sumitomo, supra.
The Article 9-A regulations consistently have been interpreted to mean that, if a
taxpayer’s employees regularly perform any work in a state, the taxpayer is doing business in
that state. See G&S Creations, Inc., TSB-A-01(18)C (July 21, 2004). Here, Petitioner’s
employees traveled to the Secaucus Hosting Facility on a regular basis: on average, more than
once a week throughout 2008 and 2009. A bank’s employees coming into a state may constitute
doing business in a state. See Bleakley Platt & Schmidt, TSB-A-90(25)C (Dec. 13, 1990).
Petitioner’s agreement with the third party provider to use space at the Secaucus Hosting
Center to house some of its computer equipment and as workspace for its employees was for a
10-year term. This demonstrates the continuity of Petitioner’s presence outside New York. The
fact that a significant amount of the equipment used by Petitioner’s employees to conduct
business was installed at the Secaucus Hosting Center also supports the conclusion that the
nature of Petitioner’s activities there was business-related, and that the Secaucus Hosting Center
could be considered one of Petitioner’s places of business.
2
The allocation formula used in Article 32 to determine what portion of a taxpayer’s entire net income is
attributable to New York was modeled after the allocation formula in Article 9-A. See Governor’s Approval Mem,
Bill Jacket, L 1985, ch 298 at 28-29.
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Corporation Tax
May 27, 2016
Given the facts in this case, we conclude that Petitioner conducted business outside the
state during the period at issue and, therefore, it has the right to allocate its income for the period
at issue. Because Petitioner did not provide any information about what part of its income for
the period at issue was attributable to its activities in New Jersey, we do not reach any
conclusions as to what portion of its income might be attributable to Petitioner’s out-of-state
activities.
DATED: May 27, 2016
/S/
DEBORAH R. LIEBMAN
Deputy Counsel
NOTE:
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. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.