When a film distributor licenses films to TV networks and also sells its right to collect future syndication payments to a bank, how should it source those two kinds of receipts to New York State in its franchise-tax receipts factor?

Plain-English summary

ITC Entertainment, Inc., a Delaware corporation doing business in New York, distributes theatrical and television films: it licenses films to TV networks for nationwide broadcast and supplies prints for that purpose. On audit for its Article 9-A franchise tax, two receipts-sourcing questions arose.

Issue 1 -- network licensing receipts. ITC argued its payments from networks are royalties from an intangible (a licensing right) representing nationwide broadcast income, and that it should source them to New York by "viewing audience" -- borrowing the rule for broadcasters under 20 NYCRR 4-4.3(f)(2) and TSB-M-79(5)C, on the theory it's "one step removed" from the actual broadcast. The Department rejected using that specific regulation, since by its own terms it applies only to FCC-licensed broadcasters transmitting via radio/TV antennae, not film distributors. Instead, the correct source rule turns entirely on ITC's ROLE in each transaction: if ITC is acting as an AGENT for a film's producer (the producer can bind ITC's negotiations, and ITC can bind the producer to deals with networks), ITC's receipts are commissions for "services performed," sourced to New York only if performed by salespeople working out of a New York office (20 NYCRR 4-4.3(b)). But if ITC is selling distribution rights on its OWN behalf (having bought them from the producer), those are royalty receipts, sourced by the "audience-participation" method (ratio of NY viewers to total viewers) under TSB-M-86(4)C -- or, for cable, the ratio of NY subscribers to total subscribers. Which category applies is inherently a FACT question (does ITC control producers' obligations, or vice versa?) that the Department can't resolve in an Advisory Opinion; it must be sorted out in the ongoing audit, guided by principal/agent factors under 2 NY Jur 2d, Agency, § 2. ITC could even be an agent for some producers and a principal for others.

Issue 2 -- sale of future billing rights. Separately, in 1981 ITC sold to various banks its rights to collect payments under certain not-yet-billed syndication contracts -- essentially factoring receivables it would otherwise have collected in the ordinary course. ITC included the sale proceeds (the discounted present value of the future income stream) in its federal and New York entire net income, and in the denominator of its receipts factor, but put nothing in the numerator on the theory that title to the contracts transferred outside New York. The Department held that factoring doesn't change the underlying character of the receipts -- ITC "essentially factored receivables it otherwise would have collected in the ordinary course of its business," so the accelerated proceeds are ordinary business receipts that must be sourced to New York using the SAME allocation method that would have applied to the original, un-factored syndication receivables (the audience-participation method described above for Issue 1).

What this means for you

Film, media, and licensing companies with intercompany or agency distribution structures

Whether your distribution income is sourced as a "service" (agent) or a "royalty" (principal) hinges on real contractual control facts -- who can bind whom -- not on how the payment is labeled. Document your agency/principal relationships clearly, since the sourcing method (and often the resulting New York liability) differs sharply between the two.

Companies factoring or selling receivables to banks

Selling your right to collect future income to a bank for immediate cash doesn't change how those receipts are sourced for franchise-tax purposes -- you must trace the proceeds back to the underlying receivable's own sourcing method, not treat the sale itself as a separate transaction with its own (e.g., "title passed outside New York") sourcing rule.

Common questions

Q: Does the broadcaster "viewing audience" regulation (4-4.3(f)(2)) apply to film distributors?
A: No -- by its own terms it applies only to FCC-licensed broadcasters transmitting via radio/TV antennae, not to companies distributing films to networks.

Q: How do I know if I'm acting as an agent or a principal in a film-licensing deal?
A: Look at who can bind whom: an agent relationship exists where the distributor can bind the producer to deals with networks, and/or the producer controls the specifics of the distributor's network negotiations. A company can be an agent for some deals and a principal for others.

Q: If I sell my accounts receivable to a bank for immediate cash, does that change how the income is taxed to New York?
A: No -- the proceeds are sourced using the same method that would have applied to the underlying receivable, regardless of where title to the contract technically transferred.

Q: Can another film distributor rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other distributors, even with similar network-licensing or factoring arrangements.

Citations and references

Statutes and regulations:

• Tax Law § 210.3, § 210.3(a)(2) (business allocation percentage)
• 20 NYCRR 4-4.1(a), 4-4.3(b), 4-4.3(f)(2), 4-4.4(c)
• TSB-M-79(5)C; TSB-M-86(4)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a86_20c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (20) C
Corporation Tax
October 16, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C850730A

On July 30, 1985, a Petition for Advisory Opinion was received from ITC Entertainment,
Inc., 115 East 57th Street, New York, New York 10022.
Petitioner, a Delaware corporation doing business in New York State, is engaged in the
business of theatrical and television film distribution. In connection with the distribution of films,
Petitioner enters into license agreements with various television networks for the nationwide
television exhibition of films. Petitioner has several prints of each film for use in fulfilling its
distribution obligations and makes available to the network a copy of the film for the network's use
in the transmission of nationwide broadcasts.
Petitioner raises two issues with respect to the receipts factor of the business allocation
percentage used to allocate entire net income as provided in Section 210.3 of Article 9-A of the Tax
Law.
Issue (1)
What is the appropriate method to be used to allocate to New York State receipts from the
distribution of theatrical and television films to various television networks?
Petitioner maintains that payments received under agreements with the networks for the
television exhibition of films result from the distribution of a licensing right (an intangible asset).
It is the Petitioner's contention that such payments should be classified as either a rental or royalty.
Petitioner states that the receipts at issue represent income from the nationwide broadcast (as
opposed to the mere New York broadcast) of the films and accordingly, has allocated such receipts
to New York State by reference to viewing audience. This method is consistent with the rules
prescribed for the allocation of broadcasting receipts. 20 NYCRR 4-4.3(f)(2) and Technical Services
Bureau Memorandum TSB-M-79(5)C. Petitioner contends that it is merely one step removed from
the actual broadcasting of the films and thus the viewing audience method of allocation properly
reflects its film distribution activity in New York State.
Initially, it must be noted that regulation section 4-4.3(f)(2) does not apply to receipts from
the distribution of films since, by its terms, it applies only to 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.
Section 210.3 of the Tax Law states:

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

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

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TSB-A-86 (20) C
Corporation Tax
October 16, 1986
"The portion of the entire net income of a taxpayer to be allocated within the
state shall be determined as follows:..."
Section 210.3(a)(2) of the Tax Law, in pertinent part, states that receipts allocable to New
York State include:
"...(B) services performed within the state,...
(C) rentals from property situated, and royalties from the use of patents or
copyrights, within the state...."
Section 4-4.3(b) of the Franchise Tax Regulations provides for the allocation of receipts from
compensation for services, as follows:
"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. If the services for which the commissions were paid were performed
for the taxpayer by salesman 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, where a distributor is acting as an agent of the producer of a film, its receipts are
receipts for services performed. In such a case, the distributor must allocate its commissions from
the sale of distribution rights pursuant to section 4-4.3(b) above.
Section 4-4.4(c) of the Franchise Tax Regulations provides for the allocation of receipts from
royalties, as follows:
"Receipts of royalties from the use in New York State of patents and
copyrights are allocated to New York State. Royalties include all amounts
received by the taxpayer for the use of patents and copyrights, whether or not
such patents or copyrights were issued to or are owned by the taxpayer. A
patent or copyright is used in New York State to the extent that the activities
thereunder are carried on in New York State.
Where a producer of a film sells the rights to the film to a distributor and the distributor sells
its rights to a television network, the distributor must allocate its receipts from the sale of such rights
on the basis of audience participation. Technical Services Bureau Memorandum TSB-M-86(4)C.
Similarly, where a distributor sells its rights to a cable network, then the distributor must allocate its
receipts from the sale of such rights to New York State by the ratio of New York subscribers to total
subscribers everywhere. However, if there are unique circumstances where the viewing audience
concept does not properly reflect the receipts allocable to New York State, the distributor may
request that the Tax Commission permit the use of some other method of allocation. Technical
Services Bureau Memorandum TSB-M-86(4)C.

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TSB-A-86 (20) C
Corporation Tax
October 16, 1986
Accordingly, the method of allocation to be used by Petitioner will depend upon whether
Petitioner is acting as the agent of producers of films or is acting in its own behalf. This is inherently
a question of fact which, since it arose within the context of an audit, must be resolved within the
context of such audit.
However, the following guidelines should be considered in resolving this issue of fact.
The purchase by Petitioner of distribution rights from a producer for subsequent resale to
networks does not indicate in and of itself that Petitioner is acting as the agent of the producer. All
of the facts and circumstance in each case must be considered in determining whether a
principal/agent relationship exists.
Two of the primary characteristics of a principal/agent relationship are the ability of the agent
to affect or alter the legal relationship between the principal and third persons and the ability of the
principal to control the conduct of the agent with respect to matters entrusted to him. 2 NY Jur 2d,
Agency, § 2. Within the instant context, a principal/agent relationship would be evidenced by the
ability of Petitioner to bind producers to contractual liability with the networks and the ability of
producers to control the specifics of Petitioner's negotiations with the networks. If Petitioner is not
the agent of the producers, it will have no authority to bind producers to legal obligations with the
networks and it will not be subject to the direction and control of producers in its negotiations with
the networks.
Finally, it should be noted that Petitioner may act as an agent for some producers while acting
in its own behalf with respect to other producers.
Issue (2)
What is the appropriate treatment of income from the sale of the taxpayer's right to future
billings for purposes of calculating the receipts factor of the business allocation percentage?
Petitioner states that in 1981 it sold to various banks its rights to receive payments on certain
un-billed syndication contracts. Amounts received from the banks incident to the sale (such amounts
representing the discounted present value of the future income stream due under the contract) were
included in both Federal taxable income and New York entire net income in 1981. In determining
its receipts factor for 1981, Petitioner included the income recognized on the sale of its future income
stream in the denominator of the receipts factor. No amount was included in the numerator of the
receipts factor on the basis that title to the contracts transferred outside New York State.
Petitioner states that it essentially "factored" receivables it otherwise would have collected in the
ordinary course of its business. Petitioner inquires as to whether or not this is the appropriate
treatment of the income from the sale.

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TSB-A-86 (20) C
Corporation Tax
October 16, 1986
Section 210.3(a)(2) of the Tax Law states that the receipts factor of the business allocation
percentage is determined by ascertaining the percentage which receipts of the taxpayer from New
York sales, services, rentals, royalties and other business receipts bears to all such receipts from both
within and without the state.
Section 4-4.1(a) of the Franchise Tax Regulations states:
"(a) The percentage of the taxpayer's business receipts allocable to New York State
is determined by:
(1)

ascertaining the taxpayer's business receipts within New York State
during the period covered by the report; and

(2)

dividing the sum of the New York State business receipts by the
taxpayer's total business receipts within and without New York State
during such period.

For purposes of this section, the term "business receipts" means gross income
received in the regular course of the taxpayer's business, provided such receipts are
includible in the computation of the taxpayer's entire net income for the taxable
year."
Petitioner has stated that the amounts received from the banks for the sale of rights to future
billings were included in entire net income for 1981. Petitioner has also stated that the sales
transaction essentially "factored" receivables that Petitioner would have collected in the ordinary
course of its business. The fact that Petitioner chose to accelerate the collection of such receivables
through their sale to various banks does not alter the essential nature of these receipts. The amounts
received from the banks are business receipts and must be included in the computation of the receipts
factor of the business allocation percentage. The receipts are to be included in total in the
denominator of the receipts factor. The portion of the receipts allocable to New York State are to
be included in the numerator of the receipts factor. Petitioner must allocate these receipts to New
York State in the manner previously set forth in this Advisory Opinion.

DATED: October 16, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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