A California-based stock and bond brokerage firm executes trades on New York exchanges: buying/selling for its own account as an American Stock Exchange specialist, buying/selling as an over-the-counter market-maker, and executing customer buy/sell orders that originated at its out-of-state offices. For Article 9-A receipts-factor purposes, how much of each type of New York-executed income counts as a New York receipt?

Plain-English summary

Wedbush, Noble, Cooke, Inc. was a stock and bond brokerage headquartered in California, with offices across nine western states, and a member of the American, New York, Pacific, and Philadelphia stock exchanges plus the Chicago Board of Options Exchange. All its data processing and clearing happened in California, but it earned New York income in three distinct ways: trading for its own account as a specialist on the American Stock Exchange, trading for its own account as an over-the-counter market-maker, and executing customer buy/sell orders originating from its out-of-state offices on the American and New York Stock Exchanges. The question was how much of each income stream counts toward the New York numerator of Petitioner's Article 9-A receipts factor.

Specialist and market-maker trading profits are treated as "other business receipts." Under 20 NYCRR § 4-4.6(a), receipts from a dealer's sales of intangible personal property held for sale to customers are New York receipts if the sale was made in New York (or through a New York place of business). Because Petitioner's specialist and market-making trades were executed in New York, 100% of that trading income is includible in the New York receipts-factor numerator.

Commissions on out-of-state-originated orders follow a different, tiered rule. These are "compensation for services" receipts, governed by 20 NYCRR § 4-4.3(c). For taxable periods beginning on or after January 1, 1978, the regulation (as amended in 1979) sources 20% of the commission to New York when the order originated at a bona fide out-of-state office and was transmitted to New York for execution -- unless the broker can demonstrate, based on actual experience, that a different rate more fairly reflects its New York-attributable commission income. For periods before January 1, 1978, the OLDER regulation required a flat 40% (stocks) or 50% (bonds/commodities) allocation; but a Technical Services Bureau policy memo, TSB-M-79(9)C, later softened that for open pre-1978 audit cases, allowing brokers to substantiate an actual-experience rate instead -- so long as it's not below 20%.

What this means for you

Trading-desk profits and customer-commission income are sourced by completely different rules

If your brokerage or trading firm earns both principal trading profits (specialist, market-maker, dealer positions) and customer commissions, don't apply the same allocation percentage to both -- trading profits generally follow "where the trade executed," while commissions on orders that originated elsewhere follow a specific, tiered regulatory percentage.

The applicable commission-sourcing rate depends on which tax period you're allocating

The percentage of out-of-state-originated commission income treated as New York receipts changed materially with the 1979 regulatory amendment (from 40%/50% down to 20%) for periods starting in 1978 -- if you're dealing with an older open audit period, check whether TSB-M-79(9)C's actual-experience option applies instead of the flat pre-1978 rate.

You can potentially displace the default percentage with your own execution data

Both the current 20% rule and the pre-1978 TSB-M-79(9)C policy allow a broker to substantiate, with actual experience, a different (though not lower than 20%) rate -- worth pursuing if your actual New York execution activity is materially lower than the default percentage would suggest.

Common questions

Q: Do I use the same allocation percentage for principal trading profits and customer commissions?
A: No -- principal trading profits (specialist/market-maker activity) executed in New York are 100% New York receipts, while commissions on orders originating outside New York follow the separate tiered percentage rule.

Q: Can I use a lower commission-sourcing percentage than the regulation's default if my actual New York execution volume is lower?
A: You can potentially use a different rate if you can substantiate it with actual experience, but not below 20%, whether under the current rule or the pre-1978 TSB-M-79(9)C policy.

Citations and references

Statutes and guidance:

• Tax Law § 210.3
• 20 NYCRR § 4-4.6(a)
• 20 NYCRR § 4-4.3(c)
• TSB-M-79(9)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a81_3c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81 (3) C
Corporation Tax
July 23, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C800805A

On August 5, 1980, a Petition for Advisory Opinion was filed by Wedbush, Noble, Cooke,
Inc., P.O. Box 30014, Terminal Annex, Los Angeles, California 90030.
The issue raised in the Petition is the proper method of allocation, for fiscal years ending on
June 30, 1976, 1977, 1978, 1979 and 1980, of receipts from:
1.

profits on sales as a specialist on the American Stock Exchange,

2.

profits on sales as a market-maker in the over-the-counter market, and

3.

commissions on the execution of buy and sell orders on the American
and New York Stock Exchanges, where such orders originated
outside of New York.

This issue is raised within the context of Article 9-A of the Tax Law, which imposes the Franchise
Tax on Business Corporations.
Petitioner is a stock and bond brokerage firm having its home office in California and
maintaining offices in nine western states. It is a member of the American, New York, Pacific and
Philadelphia stock exchanges and the Chicago Board of Options Exchange. During the years at
issue, all of its data processing and clearing activities were performed in California. Its income­
producing New York activities were limited to buying and selling for its own account as a specialist
on the American Stock Exchange, buying and selling for its own account as a market-maker in the
over-the-counter market and executing buy and sell orders on the American and New York Stock
Exchanges, such orders having originated at offices outside of New York.
Article 9-A of the Tax Law provides for the allocation of business income within and without
New York on a formulary basis. The formula utilized includes a receipts factor consisting of the
ratio of receipts attributable to New York (the numerator) to the total amount of the taxpayer's
receipts (the denominator). Tax Law, S210.3. Taxpayers' receipts are divided into various
categories, including "receipts from compensation for services" and "other business receipts." Each
is governed by an explicit attribution rule. At issue herein is the portion of the receipts from each
of the three activities described above which is to be included in the numerator of the fraction
constituting Petitioner's receipts factor.
Receipts from Petitioner's market-making and specializing activities constitute "other
business receipts," within the above-described scheme. Their inclusion within a taxpayer's receipts
factor is governed by Section 4-4.6 of the Franchise Tax Regulations, as follows:
"(a) All business receipts earned by the taxpayer in New York State are allocated to New
JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-81 (3) C
Corporation Tax
July 23, 1981
York State .... Receipts from the sale of intangible personal property included in business
capital, held by the taxpayer as a dealer for sale to customers in the regular course of
business, are business receipts and are allocated to New York State if the sales were made
in New York State or through a regular place of business of the taxpayer in New York State."
20 NYCRR 4-4.6(a).
Accordingly, 100% of Petitioner's receipts from its New York market-making and
specializing activities, as described above, are includible in the numerator of the fraction constituting
Petitioner's receipts factor.
Commissions on the execution of buy and sell orders on the American and New York Stock
Exchanges where such orders originate at a bona fide established office of the Petitioner located
outside New York and are transmitted to a New York State place of business for execution,
constitute receipts from compensation for services, and are allocable pursuant to Section 4-4.3(c) of
the Franchise Tax Regulations.
Prior to its amendment in 1979, Section 4-4.3 of the Franchise Tax Regulations required
security and commodity brokers to allocate 40% (in the case of stocks) or 50% (in the case of bonds
and commodities) of such commissions to New York. 20 NYCRR4-4.3(c)(1). Such requirement was
applicable to taxable periods commencing prior to January 1, 1978. For taxable periods commencing
on and after January 1, 1978, pursuant to the Franchise Tax Regulations as amended on September
12, 1979, the following applies:
"(c) Taxpayer which are security and commodity brokers must allocate commissions derived
from the execution of purchases or sales orders for the accounts of customers in the
following manner:
...
(2) For taxable periods commencing on and after January 1, 1978, if the order originates at
a bona fide established office of the taxpayer located outside New York State and is
transmitted to the New York State place of business for execution on an exchange located
in New York State, 20 percent of the commission in the case of stocks, bonds and
commodities must be allocated to New York State and included in the gross income
attributable to New York State in the taxable period in which such order is executed.
...
(4) For taxable periods commencing on and after January 1, 1978, the taxpayer may allocate
commission income on the basis of actual experience if he can demonstrate to the satisfaction
of the Tax Commission that the allocation pursuant to paragraphs (2) and (3) of this
subdivision does not fairly reflect the amount of commission income attributable to New
York State."
In light of the foregoing amendment, the Technical Services Bureau of the Taxpayer Services
Division of the Department of Taxation and Finance, at the express direction of the State Tax
Commission, published a memorandum setting forth the audit policy adopted by the State Tax
Commission applicable to open cases concerning stockbrokerage corporations for all taxable periods
commencing before January 1, 1978. Technical Services Bureau Memorandum TSB-M-79(9)C.

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TSB-A-81 (3) C
Corporation Tax
July 23, 1981
Pursuant to such memorandum, Petitioner must allocate the income in question pursuant to the terms
of Section 4-4.3(c) as it existed prior to the above-described amendment, except that a "change in
the allocation of commission income under the original 60-40 rule will be allowed where the
taxpayer can substantiate that such rule does not reflect the actual execution rate in effect for the
taxable period." However, it is also there provided that such allocation may in no event be at a rate
of less than 20%.
Accordingly, Petitioner's commission income derived from the execution of buy and sell
orders on the New York and American Stock Exchanges, where such orders arise without the State
as described above, should be included in the numerator of Petitioner's receipts factor, as follows.
For taxable periods commencing on or after January 1, 1978 such income should be included at a
rate of 20% unless the Petitioner can establish, on the basis of actual experience, pursuant to 20
NYCRR 4-4.3(c)(4), that another rate is appropriate. For taxable periods commencing prior to
January 1, 1978 the applicable rate is 40% (in the case of stocks) or 50% (in the case of bonds),
unless Petitioner can establish that another rate (but not lower than 20%) would be reflective of the
actual execution rate.

DATED: July 17, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau