On a New York combined report, are a securities dealer's sales sourced to New York if they are made through a New York office of an affiliate in the same combined group?

Plain-English summary

Merrill Lynch & Co., Inc. asked how to source, in the receipts factor of the Article 9-A business allocation percentage, the securities sales of one subsidiary (GSI, a marketable-securities dealer with property and payroll only in New York) when a large share of those securities are actually sold through the nationwide network of financial consultants of an affiliate (PFS). All three corporations file a New York combined report.

On a combined report, allocation is made from combined accounts with intercorporate items eliminated (20 NYCRR 4-1.2), and the receipts factor is computed as though the combined corporations were one corporation (20 NYCRR 4-4.7). A dealer's receipts from selling intangible personal property held for sale to customers are New York receipts if the sales were made in New York or through a New York office of the taxpayer (20 NYCRR 4-4.6(a)).

Putting these together (and following Deloitte & Touche, TSB-A-96(25)C), the activities of both GSI and PFS are considered: GSI's securities sales are sourced to New York if made in New York or through a New York office of either GSI or PFS -- otherwise they are not New York receipts.

What this means for you

A combined group is treated as one corporation for the receipts factor

Allocation uses combined accounts, intercorporate receipts are eliminated, and the receipts factor is computed as if the combined corporations were a single corporation.

A dealer's intangible-property sales are sourced to the selling office

Receipts from a dealer's sales of intangible personal property held for sale to customers are New York receipts when the sales are made in New York or through a New York office of the taxpayer.

On a combined report, any member's New York office can source the sale

Because the group is treated as one corporation, a subsidiary's securities sold through an affiliate's New York office are New York receipts -- the New York office of either the dealer or the selling affiliate counts.

Common questions

Q: How is the receipts factor computed on a New York combined report? A: As though the combined corporations were one corporation, using combined accounts with all intercorporate receipts eliminated.

Q: Where are a securities dealer's sales sourced? A: To New York if the sales of securities it holds as a dealer for sale to customers are made in New York or through a New York office of the taxpayer (or, on a combined report, of any member of the group).

Q: Do an affiliate's out-of-state sales offices pull the receipts out of New York? A: Yes. Sales not made in New York or through a New York office of either the dealer or the selling affiliate are not New York receipts.

Citations and references

Statutes, regulations, and authorities:

• 20 NYCRR 4-1.2 (combined allocation from combined accounts; intercorporate items eliminated)
• 20 NYCRR 4-4.6(a) (dealer's intangible-property receipts sourced to a New York office)
• 20 NYCRR 4-4.7 (combined receipts factor computed as one corporation)
• Deloitte & Touche LLP, TSB-A-96(25)C (November 7, 1996) (same combined-group sourcing result)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a97_22c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(22)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C970616A

On June 16, 1997, a Petition for Advisory Opinion was received from Merrill Lynch & Co., Inc., Two World Financial Center, 7th Floor, Tax Dept., New York, New York 10080-0748. The issue raised by Petitioner, Merrill Lynch & Co., Inc., is whether, for purposes of computing the receipts factor of the business allocation percentage under Article 9-A of the Tax Law, the sales of Merrill Lynch Government Securities Inc. ("GSI") securities are sourced to the locations from which Merrill Lynch Pierce Fenner & Smith Incorporated ("PFS") financial consultants sold the securities. Petitioner submits the following facts as the basis for this Advisory Opinion. Both PFS and GSI are dealers of marketable securities. PFS has property and payroll in every state of the United States, while GSI has property and payroll only in New York State. Both PFS and GSI are subsidiaries of Petitioner and are included in a New York State combined report group with Petitioner. PFS has a multistate network of financial consultants which market its financial products and those of its affiliates. A substantial portion of GSI's securities are sold through PFS's multistate network of financial consultants. GSI is charged for the compensation paid to PFS's financial consultants for selling GSI's securities. In addition, GSI is charged for a portion of PFS's branch office selling expenses (advertising, occupancy, telecommunications, clerical compensation, supplies, etc.) Section 4-4.6(a) of the Business Corporation Franchise Tax Regulations ("Article 9-A Regulations") provides that 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 its business, are business receipts and are allocated to New York State if the sales were made in New York State or through a New York State office of the taxpayer. Section 4-1.2 of the Article 9-A Regulations provides that "[i]n the case of combined reports, allocation is made on the basis of combined accounts from which intercorporate items including intercorporate receipts are eliminated." Section 4-4.7 of the Article 9-A Regulations provides that the "receipts factor on a combined report is computed as though the corporations included in the report were one corporation. All intercorporate business receipts are eliminated in computing the combined business receipts factor. Intercorporate receipts are receipts by any corporation included in the combined report from any other corporation included in the combined report. As to when combined reports will be required or permitted, see Subpart 6-2 of this Title."

-2­
TSB-A-97(22)C
Corporation Tax

This issue was addressed in Deloitte & Touche LLP, Adv Op Comm T & F, November 7, 1996, TSB-A-96(25)C, which had a similar fact pattern. In that opinion, it was held that where Corporation A and Corporation B file a combined report, section 4-4.7 of the Article 9-A Regulations provides that the activities of both corporations are considered when sourcing the receipts from the sale of Corporation B's securities that are sold through Corporations A's account executives. Further, under section 4-4.6(a) of the Article 9-A Regulations, the receipts from the sale of Corporation B's securities are sourced in New York State if the sales were made in New York or through a New York office of either Corporation B or Corporation A. In this case, it is assumed that PFS and GSI are permitted or required to file a combined report with Petitioner pursuant to Subpart 6-2 of the Article 9-A Regulations. Pursuant to sections 4-1.2 and 4-4.7 of the Article 9-A Regulations, the combined activities of the combined group are used in computing the receipts factor of the business allocation percentage on a combined report. The factor is computed as though the corporations included in the combined report were one corporation. Intercorporate dividends and all other intercorporate transactions between the corporations included in the combined report are eliminated. Accordingly, where PFS and GSI file a combined report with Petitioner pursuant to Subpart 6-2 of the Article 9-A Regulations, section 4-4.7 of the Article 9-A Regulations provides that the activities of both PFS and GSI are considered when sourcing the receipts from the sale of GSI's securities that are sold through PFS's financial consultants. Pursuant to section 4-4.6(a) of the Article 9-A Regulations, the receipts from the sale of GSI securities that are held by GSI as a dealer of marketable securities for sale to customers in the regular course of its business and included in business capital, are sourced in New York State if the sales were made in New York or through a New York office of either GSI or PFS. Otherwise, these receipts are not sourced in New York State.

DATED: August 12, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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