For a marketing company whose execution work is done by subcontractors, are receipts for services performed in New York (including by subcontractors) New York receipts, and how is a lump-sum fee covering work in and out of New York allocated?

Plain-English summary

A marketing company (asking through Hodgson Russ) provides "diversified marketing services" -- it develops a program in its New Hampshire office, then subcontracts the execution (display erection, sample distribution, brochure mailing, etc.) to independent contractors in the target markets. The company never performs the execution tasks itself and never owns the displays. Its client pays one lump-sum price covering both program development and execution. The question, for the Article 9-A receipts factor: are receipts from services performed in New York (including by subcontractors) New York receipts, and how is the lump sum split?

Yes, subcontractor work counts; the lump sum is split by value or time. Under 20 NYCRR 4-4.3(a), receipts from services performed in New York are New York receipts whether performed by the taxpayer's employees, agents or subcontractors, or any other person. So the value of the execution-stage work the subcontractors perform in New York goes in the New York numerator. Where the lump-sum fee covers services performed both in and outside New York, the New York portion is determined under 20 NYCRR 4-4.3(f)(1) by the relative values of, or time spent on, the services in and out of New York (or another reasonable method), with full details submitted. Whether the chosen method is reasonable is a factual question for the Audit Division, not an Advisory Opinion.

What this means for you

Subcontracted services performed in New York are New York receipts

You cannot keep receipts out of New York by hiring subcontractors to do the in-state work. Services performed in New York are New York receipts no matter who performs them.

A lump-sum fee must be apportioned by a reasonable method

When one price covers in-state and out-of-state services, allocate the New York share by relative value or time spent (or another reasonable method) -- and document it fully.

Reasonableness is decided on audit, not in advance

The Department will not bless a particular allocation method in an Advisory Opinion; reasonableness depends on the facts and is reviewed on audit.

Common questions

Q: My subcontractors do the New York work -- are those receipts taxed in New York?
A: Yes. Services performed in New York are New York receipts whether done by employees, agents or subcontractors.

Q: How do I split a single fee covering work in several states?
A: By the relative values of, or time spent on, the services in and out of New York, or another reasonable method -- with full details on your return.

Q: Will the Department approve my allocation method up front?
A: No. Reasonableness is a factual question reviewed on audit, not in an Advisory Opinion.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.3(a)(2) (receipts factor of the business allocation percentage)
- 20 NYCRR 4-4.1(b) (100% of receipts from services performed in New York are allocable to New York)
- 20 NYCRR 4-4.3(a) (services performed in New York are New York receipts whether by employees, agents or subcontractors)
- 20 NYCRR 4-4.3(f)(1) (lump-sum payment allocated by relative value or time spent, or another reasonable method, with full details)
- Followed in Distribution by subcontractor-services line, TSB-A-98(7)C (receipts-factor subcontractor services where performed)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a95_11c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (11) C
Corporation Tax
July 26, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C950301A

On March 1, 1995, a Petition for Advisory Opinion was received from Christopher L. Doyle,
Esq., c/o Hodgson, Russ, Andrews, Woods & Goodyear, LLP, 1800 One M&T Plaza, Buffalo, New
York 14203.
The issue raised by Petitioner, Christopher L. Doyle, Esq., is whether certain receipts of the
corporation described herein are sourced in New York State for purposes of the receipts factor of the
business allocation percentage under Article 9-A of the Tax Law.
The Taxpayer is a corporation subject to tax in New York State under Article 9-A of the Tax
Law. The Taxpayer's only office is located in New Hampshire. The Taxpayer provides diversified
marketing services to its clients.
The diversified marketing services the Taxpayer provides are performed in two stages: the
development stage and the execution stage. Typically, a potential client will approach the Taxpayer
with a marketing idea it would like executed in a particular market or markets. The marketing plan
might include something as simple as setting up point of sale displays in a supermarket chain in a
particular region. Or the marketing plan may be more complicated and include design and
distribution of brochures or other collateral information pieces about a product or company. Some
plans also include packaging and distribution of free samples of products manufactured by one or
several manufacturers.
Once the Taxpayer has received a marketing plan from a client, it reviews the plan and
develops a program to facilitate realization of the plan. As part of program development, the
Taxpayer maps out a strategy for the execution stage, identifies the independent contractors (the
"subcontractors") that will physically perform the tasks required during the execution stage and
develop a program price based on the budgeted costs for the execution stage. The Taxpayer
assimilates the program strategy and budget into a document (similar to a "bid") submitted to the
client, who then accepts or rejects the Taxpayer's program bid.
If the client accepts the program bid, the Taxpayer enters the execution stage during which
the program strategy discussed above is implemented by the subcontractors. For instance, the
Taxpayer will contract with a graphic art designer to design brochures if brochure design is part of
the program. If brochure distribution is part of the program, the Taxpayer will contract with
subcontractors to prepare packets of brochures for mailing; or, if hand distribution has been specified
in the program, the Taxpayer will contract with subcontractors to distribute the brochures by hand.
TP-9 (9/88)

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TSB-A-95 (11) C
Corporation Tax
July 26, 1995

The Taxpayer oversees and schedules the various tasks required to be accomplished during
the execution stage. However, all such tasks are performed by subcontractors, and none of the tasks
are performed by the Taxpayer. The Taxpayer reviews all invoices received from the subcontractors
actually completing the tasks required during the execution phase and pays all of the subcontractors
for the work performed. Once a Program has been executed the Taxpayer invoices its clients. The
client pays the one price specified in the bid which covers both program development and execution.
Program development occurs predominantly in the Taxpayer's office in New Hampshire
although certain aspects of program development may require visits by the Taxpayer's planning
personnel to a client's office located in some other state or country.
Likewise, the Taxpayer's oversight of program execution is accomplished mainly in its New
Hampshire office, even though most of the subcontractors which actually perform the tasks required
in the execution stage of the program are located in the region, country or market which is the target
of the program.
In a hypothetical tax year, the Taxpayer might receive 20 marketing plans with requests for
program bids. The Taxpayer's personnel in its New Hampshire office will prepare program strategies
and budgets and submit a bid in connection with each of the 20 marketing plans received. Perhaps
four of the bids will be accepted by Taxpayer's clients. Of the four bids received, one will require
some execution in New York State.
As part of the execution stage, the Taxpayer will contract with subcontractors located in the
targeted markets to perform the execution stage tasks including: creative services, mailing, hand
distribution, display erection, sample packaging and distribution, etc. If the execution stage requires
multiple steps, the Taxpayer's New Hampshire personnel will oversee the steps and schedule the
subcontractors to provide for the most expeditious completion of the execution stage of the program.
After each phase of the execution stage is completed, the subcontractors will submit invoices to the
Taxpayer. If the invoices are proper, the Taxpayer pays the subcontractors. When the execution
stage is completed, the Taxpayer submits one detailed bill to each client.
The one program requiring New York execution during the hypothetical year involves in­
store displays to be placed in stores located in New York State and the distribution of free samples
at such displays. The Taxpayer pays a Massachusetts subcontractor $20,000 to design the displays,
$30,000 to a Connecticut subcontractor to fabricate the displays in easy-to-ship pieces, and $150,000
to a New York subcontractor to erect the displays in the New York stores and to distribute the
samples at the displays. The displays are owned by the Taxpayer's customer at all times after they
are manufactured4 The Taxpayer never owns the displays. The Taxpayer bills its client $300,000
for its services. The $100,000 the Taxpayer received in excess of its subcontractor expenses covers
the Taxpayer's program development and program management expense and the Taxpayer's profit.
The Taxpayer's program development and management expenses for this program were $50,000,
including salary expense, office overhead, etc. The Taxpayer's total receipts for the year are
$1,200,000.

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TSB-A-95 (11) C
Corporation Tax
July 26, 1995

Section 210.3(a)(2) of the Tax Law provides that the receipts factor of the business allocation
percentage is determined by (1) ascertaining the taxpayer's receipts within New York State during
the period covered by the report and (2) dividing the sum of such receipts by the taxpayer's total
receipts within and without New York State during such period.
Section 4-4.1(b) of the Business Corporation Franchise Tax Regulations ("Article 9-A
Regulations") provide that 100 percent of receipts from services performed in New York State are
allocable to New York State.
Section 4-4.3 of the Article 9-A Regulations provides that:
(a) The receipts from services performed in New York State are allocable to New
York State. Ail receipts from such services are allocated to New York State, whether
the services were performed by employees, agents or subcontractors of the taxpayer,
or by any other persons. It is immaterial where such receipts are payable or where
they are actually received.
. . .
(f)(1) Where a lump sum is received by the taxpayer in payment of services
performed within and without New York State, the portion of the sum attributable
to services performed within New York State is determined on the basis of the
relative values of, or amounts of time spent in performance of such services within
and without New York State, or by some other reasonable method. Full details must
be submitted with the taxpayer's report.
Herein, the Taxpayer's receipts from its diversified marketing services are receipts for
services performed for its clients. Pursuant to section 4-4.3(a) of the Article 9-A Regulations, when
computing the receipts factor of the business allocation percentage, the Taxpayer includes, in the
numerator of such factor, the receipts for services performed in New York State by its employees
and by the subcontractors the Taxpayer contracts with to perform services for it.
Pursuant to section 4-4.3(f)(1) of the Article 9-A Regulations, the Taxpayer determines the
portion of the lump sum payment received from a client that is attributable to services performed
within New York State on the basis of the relative values of or amounts of time spent in the
performance of such services within and without New York State. The Taxpayer may use some
other method if it is determined to be reasonable. Such section 4-4.3(f)(1) requires that regardless
of the method used, the full details, with respect to the method used, must be submitted with the
Taxpayer's report.
Accordingly, the Taxpayer must submit, with its report, the full details with respect to the
method used in computing the portion of a lump sum receipt that is attributable to the performance
of services within New York State for purposes of the numerator of the receipts factor of the
business allocation percentage. The determination of whether the Taxpayer's method is reasonable
is a question of fact that, pursuant to section 4-4.3(f)(1) of the Article 9-A Regulations, must be
answered on a case by case basis based upon a careful review of the relevant facts

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TSB-A-95 (11) C
Corporation Tax
July 26, 1995

and circumstances of each case. Inasmuch as any such review of the relevant facts and
circumstances must be conducted in the context of an audit performed by the Audit Division, such
determination is not within the scope of an Advisory Opinion.
An Advisory Opinion merely sets forth the applicability of pertinent statutory and regulatory
provisions to a "specified set of facts". Tax Law, 171.Twenty-fourth; 20 NYCRR 2376.1(a).

DATED: July 26, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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