If an out-of-state broker-dealer trades securities in New York only through independent brokers, but also acts as an AMEX options specialist requiring a leased exchange seat, is it doing business in New York for franchise tax purposes?

Plain-English summary

Taxpayer is a Delaware corporation electing federal S status, with its sole shareholder and sole place of business in Houston, Texas; it has no office outside Texas apart from a registered representative in Chicago. It is a registered broker-dealer that trades stocks, bonds, options, and other instruments on exchanges nationwide, executing all trades -- for its own account and for clients -- through independent brokers. It also acts as a "specialist" or market maker for certain options traded on the American Stock Exchange (AMEX), a role that requires maintaining a fair and orderly market by standing ready to buy or sell. To qualify as an AMEX member corporation (required to act as a specialist), Taxpayer entered into an agreement with an individual AMEX principal member ("X"), who leases an exchange seat that Taxpayer pays for (lease rent, membership fees, dues, telephone charges) -- even though all of Taxpayer's own trades, including its specialist trades, are still executed through independent brokers.

The answer: yes, this constitutes doing business in New York. The Department first noted that merely trading securities on a New York exchange through an independent broker is, by itself, not enough for nexus -- citing Cargill Financial Services Corporation, TSB-A-90(20)C, where the same kind of independent-broker trading activity did not create nexus. But Taxpayer's AMEX specialist role goes further: specialists perform three market functions (holding brokers' limit orders as the "book," facilitating trades using market knowledge, and dealing from their own account when public interest is insufficient), and by AMEX rule, acting as a specialist requires membership in the AMEX and, by its very nature, a presence on the exchange floor. Weighing the doing-business factors in Regulations section 1-3.2(b), the Department found that this specialist/market-maker function -- even though Taxpayer itself doesn't physically execute trades -- constitutes "doing business" in New York, making Taxpayer subject to Article 9-A franchise tax.

What this means for you

Broker-dealers and trading firms with only independent-broker execution

Simply trading securities on a New York exchange through independent brokers, without more, does not by itself create Article 9-A nexus (per Cargill). But taking on an exchange-membership role -- like acting as a specialist or market maker, which inherently requires exchange-floor presence -- crosses the line into doing business, even if actual trade execution is still outsourced to independent brokers.

Out-of-state firms structuring exchange-membership arrangements

Structuring a seat-leasing arrangement through an individual member to satisfy exchange membership rules doesn't avoid nexus -- the Department looked past the formal lease structure to the substantive fact that Taxpayer's business model requires an ongoing New York exchange-floor presence.

Accountants and tax professionals

This ruling draws a precise line: trading-through-a-broker alone (Cargill) is not nexus; taking on an exchange-member specialist/market-maker role that requires exchange presence by its nature is nexus (this ruling). The distinguishing fact is the qualitative nature of the New York activity, not just the volume of trades.

Common questions

Q: Does trading on a New York stock exchange through independent brokers create nexus by itself?
A: No -- per Cargill Financial Services Corporation, TSB-A-90(20)C, that alone is not sufficient.

Q: What tipped this taxpayer into "doing business" status?
A: Acting as an AMEX specialist/market maker, a role that by its nature requires AMEX membership and an exchange-floor presence, even though the taxpayer's own trades are still executed through independent brokers.

Q: Does a seat-leasing arrangement through an individual member avoid nexus?
A: No -- the Department looked at the substance of the specialist function and the taxpayer's obligations under the arrangement, not just the formal lease structure.

Citations and references

Statutes and regulations:

• Tax Law section 209.1 (Article 9-A franchise tax)
• Business Corporation Franchise Tax Regulations section 1-3.2(b) (doing-business factors)
• Business Corporation Franchise Tax Regulations section 1-3.2(c) (employing capital)
• Business Corporation Franchise Tax Regulations section 1-3.2(d) (owning/leasing property)
• Business Corporation Franchise Tax Regulations section 1-3.2(e) (maintaining an office)

Prior opinion cited in the ruling:

• Cargill Financial Services Corporation, TSB-A-90(20)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91(18)C
Corporation Tax
September 23, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.C910606A

On June 6, 1991, a Petition for Advisory Opinion was received from Anonymous, c/o Robert
L. Kohl, Esq., Gaston & Snow, 666 Fifth Avenue, New York, New York 10103.
The issue raised by Petitioner is whether a Delaware corporation whose sole place of business
is in Texas is subject to tax under Article 9-A of the Tax Law when it is engaged in the business of
trading stocks, bonds, options and other financial instruments on various stock exchanges located
in New York and elsewhere, and acts as a "specialist" or "market maker" with respect to certain
options that are traded on the American Stock Exchange.
A Delaware corporation (hereinafter "Taxpayer") has elected to be taxed as an S corporation
for federal income tax purposes. Taxpayer's sole shareholder is a resident of the state of Texas.
Taxpayer's sole place of business is located in Houston, Texas. Taxpayer does not maintain an office
anywhere other than within Texas, but does have its "registered representative" (an employee
performing certain regulated services) located in Chicago, Illinois. Certain of Taxpayer's directors
are located in New York State. Taxpayer is a registered broker-dealer under the Securities and
Exchange Act of 1934.
Taxpayer is engaged in the business of trading stocks, bonds, options and other financial
instruments on the various stock exchanges located in New York and elsewhere. Taxpayer's
activities within New York State consist of the buying and selling of stocks and securities on stock
exchanges for its own account and on behalf of a limited number of clients, for which it is paid a
commission. Taxpayer's securities transactions, both for its own account and client transactions, are
executed through independent brokers.
In addition to the proprietary and commission trades described above, Taxpayer acts as a
"specialist" or "market maker" with respect to certain options that are traded on the American Stock
Exchange (hereinafter "AMEX"). The Taxpayer's role as a specialist requires it to maintain a fair
and orderly market in such securities and to ensure that there will always be (and sometimes act as)
a ready buyer or seller for the AMEX-traded options. As a specialist, in order to maintain the
market, Taxpayer buys and sells certain AMEX-traded options for its own account. Unlike many
specialists, all of Taxpayer's trades as a specialist are executed through independent brokers.
The AMEX rules require Taxpayer to be a "member corporation" of the AMEX to act as a
specialist for the AMEX-traded options. To be a member corporation, the rules require that the
corporation be associated with at least one regular or options "principal member" of the AMEX. The
AMEX rules further provide that a principal member acting as a specialist must initiate and effect

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September 23, 1991

transactions on the AMEX without interference with or control over such transactions by the member
corporation. In order to comply with these rules, Taxpayer has entered into an agreement
(hereinafter "Agreement") with an individual (hereinafter "X"), an AMEX principal member,
whereby X will qualify Taxpayer as an AMEX member corporation.
Under the Agreement, Taxpayer and X have agreed to create a market maker operation, i.e.,
act as a specialist, with respect to the AMEX-traded options. Under the Agreement, X maintains a
seat on the AMEX, which X leases from an unrelated third party pursuant to a Model Special
Transfer Agreement (hereinafter "Seat Lease"). Pursuant to the terms of the Agreement, Taxpayer
pays a fee to X for acting as Taxpayer's principal member by making all Seat Lease rental payments
(of $1,000 per month), and paying all floor expenses incurred in connection with the use of the seat,
including AMEX membership fees, dues, and telephone fees. X has the right to use the seat for his
own benefit for no consideration. All commissions and other profits from trades by X remain the
sole and exclusive property of X.
X, and not Taxpayer, is the lessee under the terms of the Seat Lease; the Seat Lease
denominates X as Taxpayer's "employee," but recognizes that X is qualifying Taxpayer as a member
organization. The Seat Lease terminates if X can no longer qualify Taxpayer as a member of the
AMEX. In this event, in order to continue to qualify as an AMEX specialist, Taxpayer must
nominate another "employee" as lessee who must enter into a new lease with the lessor. If X ceases
to use the seat or the Agreement is terminated, Taxpayer is still responsible for the payments due to
the lessor under the Seat Lease.
A seat on the AMEX provides the holder with the "privilege of conducting the business of
the buying and selling of securities on the floor of the exchange." All of Taxpayer's trades are
executed through independent brokers. From the Taxpayer's perspective, the AMEX imposed
requirement that it maintain a seat is the equivalent of a license to do business in the securities
industry.
Taxpayer will occasionally execute trades with X, for which X is paid an arm's length fee,
commensurate with the fees that X charges other persons. X is required to use his own judgment,
experience and expertise in executing transactions on the AMEX. Taxpayer does not pay any salary
or other compensation to X, other than pursuant to the Agreement and the arm's length commissions
for occasional trades.
Section 209.1 of Article 9-A of the Tax Law imposes the business corporation franchise tax
on every foreign corporation, unless specifically exempt, for the privilege of doing business, or of
employing capital, or of owning or leasing property in New York State in a corporate or organized
capacity, or of maintaining an office in New York State.
Section 1-3.2(b) of the Business Corporation Franchise Tax Regulations (hereinafter "Article
9-A Regulations") provides that:

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(1) [t]he term doing business is used in a comprehensive sense and includes all
activities which occupy the time or labor of men for profit. Regardless of the nature
of its activities, every corporation organized for profit and carrying out any of the
purposes of its organization is deemed to be doing business for the 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.
(2) 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:
(i) the nature, continuity, frequency, and regularity of the activities of the corporation
in New York State, compared with the nature, continuity, frequency, and regularity
of its activities elsewhere;
(ii) the purposes for which the corporation was organized, compared with its
activities in New York State;
(iii) the location of its offices and other places of business;
(iv) the income of the corporation and the portion thereof derived from activities in
New York State;
(v) the employment in New York State of agents, officers and employees; and
(vi) the location of the actual seat of management or control of the corporation.
Section 1-3.2(c) of the Article 9-A Regulations provides that:
[t]he term employing capital is used in a comprehensive sense. Any of a large variety
of uses, which may overlap other activities, may give rise to taxable status. In
general, the use of assets in maintaining or aiding the corporate enterprise or activity
in New York State will make the corporation subject to tax. Employing capital
includes such activities as:
(1) maintaining stockpiles of raw materials or inventories; or
(2) owning materials and equipment assembled for construction.
Section 1-3.2(d) of the Article 9-A Regulations provides that:
[t]he owning or leasing of real or personal property within New York State
constitutes an activity which subjects a foreign corporation to tax. Property owned
by or held for the taxpayer in New York State, whether or not used in the
taxpayer's business, is sufficient to make the corporation subject to tax.

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Property held, stored or warehoused in New York State creates taxable status.
Property held as a nominee for the benefit of others creates taxable status ....
Section 1-3.2(e) of the Article 9-A Regulations provides that:
[a] foreign corporation which maintains an office in New York State is
engaged in an activity which makes it subject to tax. An office is any area, enclosure
or facility which is used in the regular course of the corporate business. A salesman's
home, a hotel room, or a trailer used on a construction job site may constitute an
office.
In Cargill Financial Services Corporation, Adv Op Comm T&F, September 26, 1990, TSBA-90(20)C, a foreign corporation was engaged in the business of trading in stocks, bonds, currencies,
commodities and other financial instruments on various exchanges in New York City whereby the
transactions were executed by independent brokers. The Commissioner advised that such activity
by itself was notsufficient to deem Cargill to be doing business in New York State. Herein,
Taxpayer's activities involve more than merely trading securities through an independent broker.
Taxpayer and X have an agreement that states "The parties hereto agree to form a 'market maker'
operation, to their mutual benefit during the period January 11, 1991 to January 11, 1992." Under
the agreement X leases a seat on the AMEX for which Taxpayer will pay all the expenses including
Seat Lease rental payments, AMEX membership fees, dues and telephone fees. X will ensure that
Taxpayer qualifies as a specialist.
Specialists are members of the AMEX whose obligation is to maintain a fair and orderly
market in the options in which they are registered. Towards that end, they perform three functions.
First, specialists act as brokers' brokers, holding away-from-the market orders entrusted to them by
brokers on behalf of customers. These limit orders constitute the "book" and specialists are
responsible for seeing to it that they are executed when the market reaches the specified limit price.
Second, specialists work as facilitators, employing their extensive knowledge of the market in a
stock to bring together potential buyers and sellers. Third, specialists serve as dealers when there
is insufficient public interest to accommodate willing sellers and buyers at prices reasonably close
to the last trade. In these instances, specialists buy for or sell from their own account to improve
price continuity and/or depth. (From American stock Exchange, Inc., 1991 Fact Book, Equities and
Options, p. 19.)
As a specialist, Taxpayer is required to be a member of the AMEX and its specialist or
market maker operation requires, by its very nature, a presence on the floor of the exchange. Giving
due consideration to the factors set forth in section 1-3.2(b)(2) of the Article 9-A Regulations, and
viewing Taxpayer's activities as a specialist or market maker, such activities in New York State
constitute "doing business" within the meaning of section 209.1 of the Tax Law even though
Taxpayer does not execute its own trades.

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When a corporation is doing business in New York State pursuant to section 209.1 of the Tax
Law, such corporation is subject to tax under Article 9-A of the Tax Law.
Accordingly, pursuant to section 209.1 of the Tax Law and section 1-3.2(b) of the Article 9-A
Regulations, Taxpayer is subject to the franchise tax imposed under Article 9-A of the Tax Law for
all taxable years Taxpayer is doing business in New York State. Taxpayer must compute its tax
under Article 9-A pursuant to section 210 of the Tax Law for each taxable year.

DATED: September 23, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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