Can a travel-agency cooperative's headquarters treat 'override commissions' generated by its out-of-state member agencies' bookings as non-New York receipts for franchise tax allocation purposes, on the theory that they're really royalty-like income?

Plain-English summary

Space & Leisure Time, Ltd. represented a cooperative of roughly 700 independent retail travel agencies, mostly in New York, New Jersey, and Connecticut. Petitioner itself wasn't a travel agency -- its New York City headquarters management negotiated enhanced ("override") commission packages with travel providers (airlines, hotels, tour operators, etc.), giving member agencies access to better-than-standard commission rates in exchange for Petitioner effectively supplying an expanded sales force. Petitioner kept a share of the resulting override commissions and passed the rest to the member agency that made the actual booking. Regional employees, working mostly from home but attached to the New York City office, spent their time visiting member agencies to encourage them to book the more lucrative packages -- but the actual booking decisions and customer payments happened entirely through the member agencies, often outside New York.

Petitioner argued its override commissions were really more like royalty income: it developed the negotiated commission "packages" (an intangible asset) but didn't itself use them -- member agencies did, as they made their own independent booking decisions in their own locations. On that theory, Petitioner wanted to allocate the commissions attributable to out-of-state member agencies as non-New York receipts, the way royalty income can be allocated based on where the underlying asset is used.

The Department rejected the royalty analogy. Petitioner's employees perform real, ongoing services -- for travel providers (an expanded, continually growing sales force) and for member agencies (negotiating and communicating the override packages) -- and Petitioner is paid for those services out of the resulting commissions. Under Tax Law Section 210.3(a)(2)(B) and its implementing regulation (§ 4-4.3(b)), commission receipts go into the New York numerator of the business allocation percentage if the underlying services were performed in New York, OR if they were performed by salespeople "attached to or working out of" a New York office -- even if those salespeople work primarily from home. Since Petitioner's top-management negotiations happened at the New York City headquarters, and its regional field employees were all attached to that same office, every dollar of override commission was earned through services either performed in or deemed performed in New York. None of it could be allocated away as non-New York receipts, regardless of where the individual bookings that generated the commissions occurred.

What this means for you

Cooperatives, franchisors, and membership organizations earning commission-style income

Don't assume income tied to a network of geographically dispersed members automatically allocates outside New York. If the services that actually generate the commission -- negotiating, recruiting, coordinating -- are performed at or by employees attached to a New York office, the commissions are New York receipts under Section 210.3(a)(2)(B), even if the transactions the commissions are based on close elsewhere.

Organizations with remote/home-based sales employees

An employee working primarily from home doesn't take their activity out of New York for allocation purposes if they remain "attached to or working out of" a New York office -- their production still counts toward the New York numerator.

Accountants evaluating a royalty-versus-services characterization

The distinction matters: royalty income can allocate based on where an intangible asset is actually used, but ordinary commission/service income allocates based on where the underlying services were performed. If your client is actively negotiating and coordinating on an ongoing basis (not passively licensing a static asset), expect the Department to treat it as service income, not a royalty.

Common questions

Q: Do override commissions have to be allocated based on where the underlying agencies are located?
A: No -- under this ruling, commission receipts are allocated based on where the SERVICES that earned the commission were performed (or deemed performed), not where the member agencies that generated the bookings are located.

Q: Does working from home take an employee's activity outside New York for allocation purposes?
A: Not if the employee remains attached to or works out of a New York office -- the regulation deems such services performed in New York regardless of the employee's physical work location.

Q: Can another cooperative or membership organization rely on this Opinion?
A: No. It binds the Department only as to Petitioner's own facts and cannot be relied upon by other taxpayers, even in a similar cooperative structure.

Citations and references

Statutes and regulations:

• Tax Law § 210.3(a)(2)(B) (allocation of commission receipts)
• Business Corporation Franchise Tax Regulations § 4-4.3(b) (commissions deemed performed where salespeople are attached)

Date note: The document header reads "July 22, 1985," while the sign-off line reads "DATED: July 11, 1985" -- an eleven-day gap, consistent with internal signing well before the header/publication date; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_15c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (15) C
Corporation Tax
July 22, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C821004B

On October 4, 1982 a Petition for Advisory Opinion was received from Space & Leisure
Time, Ltd., 461 8th Avenue, New York, New York 10001.
At issue is whether under Article 9-A of the Tax Law, for fiscal years ended February 28,
1979 and February 29, 1980, Petitioner may allocate as non-New York business receipts those
override commissions attributable to sales made by member agencies located outside New York
State.
Petitioner, a taxpayer under Article 9-A, is a corporation which solicits the membership of
retail travel agencies and represents a cooperative of approximately 700 retail travel agencies located
primarily in New York, New Jersey and Connecticut. Each member agency pays an annual fee that
gives it the right to participate in commission incentives that are negotiated by Petitioner. Petitioner
is not itself a retail travel agency. Rather, Petitioner's top management contacts providers of travel
services (hereinafter "travel providers''), such as airlines, railroads, bus companies, hotels, travel
wholesalers, and tour operators, to enter into agreements to allow a member agency to arrange travel
bookings with the travel providers for the member agency's customers. Payments for the travel
bookings are made directly by the member agencies to travel providers' offices throughout the United
States, rather than to the office of Petitioner in New York. Since Petitioner is providing the travel
providers with an expanded sales force, Petitioner negotiates with the travel providers a commission
to be paid to its member agencies. This commission would generally exceed the normal commission
paid by a travel provider to a travel agency. For example, if a travel provider would ordinarily pay
a seven percent commission to a travel agency when it booked business with the travel provider, the
travel provider would pay a ten percent commission. This additional commission earned over the
normal commission is called an "override commission." These override commissions are shared on
a percentage basis by Petitioner and its member agencies.
Petitioner maintains its headquarters in New York City where employees handle general and
administrative functions and where top management negotiate the commission packages. In addition,
Petitioner has employees who work primarily out of their homes and come to the New York City
office only to attend monthly sales meetings. These employees are assigned to geographic regions
and they attempt to attract new members within their respective regions. More importantly, they
spend much of their time visiting member agencies to keep in contact and encourage them to book
tours that provide the most profitable override commissions and to make sure that the member
agencies are made aware of the more profitable packages as they are negotiated. Petitioner contends
that it is the continuing business generated by member agencies who deal directly with the travel
providers that produces the commission and any bookings are individual, separate decisions made
by the member agencies, without further involvement or approval of Petitioner.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-85 (15) C
Corporation Tax
July 22, 1985

Petitioner states that when member agencies execute the override commission packages,
Petitioner is providing travel providers with a service, namely an expanded sales force. In exchange
for this service Petitioner receives override commissions directly from the travel providers, keeping
a portion for itself and transmitting the balance to the member agency booking the related
transaction. However, Petitioner contends that its agreements with the various travel providers
represent intangible assets that will produce income as those assets are used by the member agencies.
Petitioner itself does not really use the intangible asset. Instead, Petitioner develops it and then
merely collects income as member agencies actually put the asset to use in their respective
geographic locations. Petitioner asserts that its override commissions should be treated as "other
business receipts" in the calculation of the receipts factor and be allocated in accordance with the
provision governing the allocation of patent and copyright royalties.
Petitioner's assertion that the override commissions are analogous to royalty income is
incorrect. Petitioner's employees provide services to both the travel providers and the member
agencies for which the Petitioner receives a portion of the override commissions. Petitioner provides
the travel providers with the service of an expanded sales force by continually increasing its
membership and encouraging the member travel agencies to participate in the negotiated commission
packages for which the travel providers pay override commissions. Petitioner provides its members
the service of negotiating the override commission packages for which Petitioner receives a
percentage of the override commissions generated. The negotiations for the override commission
packages are performed by top management in the New York City headquarters. Increasing
memberships and encouraging participation in negotiated packages offering the most advantageous
override commissions are performed by employees who work out of their homes but who are
attached to the New York City office of Petitioner.
When computing the receipts factor of the business allocation percentage, commission
receipts that are included in the numerator are determined pursuant to section 210.3(a)(2)(B) of the
Tax Law and section 4-4.3 of the Business Corporation Franchise Tax regulations. Such regulation
section 4-4.3 provides that commissions received by a taxpayer are allocated to New York State if
the services for which the commissions were paid were performed in New York State. It also
provides that if the services for which the commissions were paid were performed for the taxpayer
by salesmen attached to or working out of a New York State office of the taxpayer, the services will
be deemed to have been performed in New York State. Thus, all of the services performed by
Petitioner were either performed in New York State or deemed to have been performed in New York
State.
Accordingly, when computing the receipts factor of the business allocation percentage
pursuant to section 210.3(a)(2) of Article 9-A of the Tax Law for fiscal years ended February 28,
1979 and February 29, 1980, all of Petitioner's override commissions constitute commissions earned

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TSB-A-85 (15) C
Corporation Tax
July 22, 1985
within New York State for services performed as contemplated by section 210.3(a)(2)(B) of such
Article 9-A and section 4-4.3(b) of the Business Corporation Franchise Tax regulations and such
commissions may not be allocated as non-New York business receipts.

DATED: July 11, 1985

s/ANDREW F. MARCHESE
Chief of Advisory Opinions

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.