For the Article 9-A receipts factor, is part of a company's commission income allocable outside New York when the income-generating telemarketing is performed by an out-of-state subcontractor?

Plain-English summary

Citrin Cooperman & Company, LLP asked, for a New York corporate client, whether part of the company's receipts are allocable outside New York for the Article 9-A receipts factor when it hires out-of-state subcontractors. The taxpayer provides telemarketing services to regional telephone companies. It performs all planning (marketing strategy, script writing) in New York, then hires an independent telemarketing company located outside New York to actually call the telephone company's customers and offer the new service. The taxpayer earns a commission for each customer who subscribes.

Under the receipts factor, receipts from services performed in New York are allocated to New York -- and that is true whether the services are performed by the taxpayer's employees, agents, or subcontractors (20 NYCRR 4-4.3(a)). Commissions are allocated to New York if the services for which they were paid were performed in New York (4-4.3(b)).

Following Doyle and Langer, the Department focused on what generates the income. Here, no revenue is generated until a telephone-company customer subscribes because of the out-of-state telemarketer's solicitation. The taxpayer's New York planning, strategy, and script-writing do not generate income by themselves (those efforts are reflected in the property and payroll factors). Accordingly, the commissions are allocated to New York only to the extent the subcontractor's services are performed or deemed performed in New York -- so a portion of the receipts is allocable outside New York.

What this means for you

Receipts follow where the income-generating service happens

The receipts factor sources service income to where the services are actually performed -- by subcontractors as much as by employees.

Commissions track the revenue-producing effort

Commission income is allocated to where the services that earned it were performed; here that is the out-of-state telemarketer's solicitation, not the New York planning.

Planning in New York does not, alone, source the receipts

Strategy and script-writing that do not generate income are reflected in the property and payroll factors, not the receipts factor.

Common questions

Q: Do subcontractors' services count for the receipts factor?
A: Yes. Services performed in New York are allocated to New York whether done by employees, agents, or subcontractors.

Q: Why isn't all the income sourced to New York where planning occurred?
A: Because the planning does not generate income; the subcontractor's out-of-state solicitation does.

Q: How are the commissions allocated?
A: To New York only to the extent the subcontractor's services are performed or deemed performed in New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.3(a)(2) (receipts factor includes receipts from services)
- 20 NYCRR 4-4.1(b)(2) (100 percent of receipts from services performed in New York)
- 20 NYCRR 4-4.3(a) (services performed in New York allocated to New York, including by subcontractors)
- 20 NYCRR 4-4.3(b) (commissions allocated where the services were performed)
- Christopher L. Doyle, Esq., TSB-A-95(11)C (July 26, 1995)
- Alan Langer, CPA, TSB-A-92(9)C (May 20, 1992)
- Citrin Cooperman & Company, LLP, TSB-A-98(7)C (date in opinion)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a98_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(7)C
Corporation Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C971001A

On October 1, 1997, a Petition for Advisory Opinion was received from
Citrin Cooperman & Company, LLP, 529 Fifth Avenue, New York, New York 10017.
The issue raised by Petitioner, Citrin Cooperman & Company, LLP, is
whether, for purposes of the receipts factor under Article 9-A, a portion of a
taxpayer's receipts are allocable outside New York State when it hires
subcontractors outside New York State.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
The Taxpayer is a New York State corporation that provides telemarketing
services to regional telephone companies throughout the United States.
The
Taxpayer receives a commission from a telephone company for each customer of the
telephone company that subscribes to the new service being promoted by the
telephone company.
Prior to contacting the customers of the telephone company, the Taxpayer
performs all planning functions within New York State. These functions include
marketing strategy, script writing and other functions in order to prepare the
telemarketing campaign.
The Taxpayer then hires an independent telemarketing company, located
outside New York State, that will actually call the telephone company's customers
and offer the additional telephone services.
The number of customers that
subscribe to the new telephone service being solicited by the telemarketing
company provides the basis for the Taxpayer's commissions. The Taxpayer gets a
commission for each customer that subscribes to the new telephone service.
Section 210.3(a)(2) of the Tax Law provides that the receipts factor of the
business allocation percentage includes receipts from the performance of
services.
Section 4-4.1(b)(2) of the Business Corporation Franchise Tax
Regulations (“Article 9-A Regulations”) provides that 100 percent of receipts
from services performed in New York State are included in the numerator of the
receipts factor.
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. All 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.

-2­
TSB-A-98(7)C
Corporation Tax

(b) 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 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....
In Christopher L. Doyle, Esq., Adv Op Comm T & F, July 26, 1995, TSB-A­
95(11)C, a taxpayer provided diversified marketing services to its clients. The
services were performed in two stages: the development stage and the execution
stage.
The taxpayer, located outside of New York State, would receive a
marketing plan from a potential client, and would develop a program for it. The
development would include mapping out a strategy for the execution stage,
identifying the independent contractors (subcontractors) that would physically
perform the tasks required during the execution stage and develop a program price
based on the budgeted costs for the execution stage. This work would be done
outside of New York State. The taxpayer would then submit a program bid to the
potential client.
If it was not accepted, the taxpayer would receive no
compensation for its efforts.
If accepted, the taxpayer would execute the
program it developed by overseeing and scheduling the various tasks required to
be performed by the subcontractors. The oversight and scheduling would be done
outside of New York State, but the subcontractors' work would be done in New York
State. None of the execution tasks would be performed by the taxpayer. When the
program was executed, the taxpayer would pay the subcontractors for the work
performed, and, the client would pay the taxpayer the one price specified in the
bid that covered both the program development and execution. The opinion held
that the taxpayer’s receipts from these marketing services are receipts for
services performed for its clients, and the taxpayer includes, in the numerator
of the receipts factor, the receipts for services performed in New York State by
its employees, if any, and by the subcontractors the taxpayer contracts with to
perform services for it in executing the program.
In Alan Langer, CPA, Adv Op Comm T & F, May 20, 1992, TSB-A-92(9)C, a
taxpayer booked trips and tours.
The taxpayer's purchase agents, and
administrative personnel were located outside New York State and the "booking
agent" or sales agent was located in New York State. The opinion held that the
taxpayer's activities through the efforts of the purchasing agents in packaging
the tours and arranging pricing with the various vendors; the marketing efforts;
the computer operation and the activities of the administrative personnel, all
of which were conducted outside New York State, do not generate any income. The
generation of income is based on the booking agent's efforts in New York State
in selling, to a customer, a trip or tour "packaged" by the purchasing agent.
No revenue is generated until a customer buys a ticket or tour package at the
booking agent's New York location. It is the booking agent's efforts in making
the sale that generates the taxpayer's receipts from services.
The opinion
concluded that since the booking agents were located in New York State, 100
percent of the receipts from services rendered would be attributable to New York
State for purposes of the receipts factor of the business allocation percentage.
The efforts of the taxpayer's purchasing agents and its administrative personnel,
the marketing efforts and the computer operation all conducted outside of New
York State would be reflected in the property and payroll factors.

-3­
TSB-A-98(7)C
Corporation Tax

In this case, the generation of the Taxpayer's income is based on the
independent telemarketing company's efforts in soliciting the telephone company's
customers to subscribe to the additional telephone services promoted by the
telephone company. No revenue is generated until a telephone company customer
subscribes to the new service being solicited by the telemarketing company. The
Taxpayer's performance of all the planning functions including marketing
strategy, script writing and other functions in preparation for the telemarketing
campaign does not generate any income.
Accordingly, when computing the receipts factor of the business allocation
percentage pursuant to section 4-4.3(a) of the Article 9-A Regulations and Doyle,
supra, the Taxpayer's receipts from services performed in New York State are
allocable to New York State whether the services are performed by employees,
agents or subcontractors of the Taxpayer. Pursuant to section 4-4.3(b) of the
Article 9-A Regulations and Langer, supra, the Taxpayer's commissions received
from a regional telephone company, for each customer of the telephone company
that subscribed to the new service being solicited by the independent
telemarketing company hired by the Taxpayer, are allocated to New York State to
the extent that the services of the independent telemarketing company are
performed or deemed to have been performed within New York State. It is the
efforts of the telemarketing company that generate the commissions.
The
Taxpayer's performance of the planning functions does not generate receipts.
These efforts are reflected in the property and payroll factors of the business
allocation percentage.
The services performed by the subcontractor will be deemed to have been
performed in New York State if it is determined that the subcontractor is
"attached to or working out of a New York State office of the [T]axpayer”. Such
determination is a question of fact that is not susceptible of determination in
an advisory opinion. Tax Law, §171.Twenty-fourth; 20 NYCRR 2376.1(a).

DATED: June 8, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.