A fundraising-consulting company keeps a New York office (used mainly to see out-of-town clients) but its principal officers travel extensively to client universities around the country and spend little time in New York; it also hires project directors and solicitation staff stationed at the universities themselves, and sometimes uses the university's own staff. For a single lump-sum contract fee covering all this work, how should the company allocate its business income between New York and other states?

Plain-English summary

Philanthropy Management, Inc. was a fundraising-consulting company whose major clients were universities located throughout the United States. It rented New York City office space, used mainly to meet with out-of-town clients, but its principal officers spent little time in New York -- they traveled to the client universities instead. The company also hired project directors and solicitation staff who were based AT the universities themselves, and it occasionally used the university's own staff to help perform the engagement. The question was how to allocate the company's business income between New York and the many other states where its client work actually happened.

Before a 1978 amendment, an Article 9-A corporation could only allocate income within and without New York if it had a genuine "regular place of business" (other than a mere statutory office) outside the state. That amendment liberalized the rule, and § 210.3(a) together with the Franchise Tax Regulations now govern allocation more broadly. Specifically, 20 NYCRR § 4-4.3(f)(1) addresses the exact situation Philanthropy Management faced: where a lump sum is received for services performed both within AND without New York, the New York-attributable portion is determined based on the relative time spent (or value) performing the services in New York versus elsewhere -- or some other reasonable method, with full supporting detail submitted with the tax return.

The Department held this rule applied to Philanthropy Management according to the actual facts of how each individual contract was carried out -- meaning the company had to look at where its officers, project directors, and solicitation staff actually did the work on each engagement, not simply treat all its consulting income as New York income because its office and headquarters were in New York.

What this means for you

A New York office used mainly for client meetings doesn't make all your service income New York income

If your consulting or service business is headquartered in New York but the substantive work happens elsewhere -- at client locations, with staff based outside the state -- you likely need to allocate a lump-sum fee based on where the actual service work was performed, not simply attribute it all to your New York office.

Track time and value by location for lump-sum, multi-location engagements

Since the regulation requires "full details" supporting a time-or-value-based allocation, keep contemporaneous records of where your staff (including any subcontracted or client-provided personnel) actually perform the work underlying each lump-sum fee.

Common questions

Q: Since 1978, do I need a formal office outside New York to allocate income to other states?
A: No -- the 1978 amendment removed the requirement of a regular out-of-state place of business; allocation is now governed by where services are actually performed under the current regulations.

Q: If I bill a client a single lump-sum fee, do I have to allocate it, or can I treat it as one undifferentiated receipt?
A: You must allocate it -- 20 NYCRR § 4-4.3(f)(1) requires apportioning a lump sum between New York and other states based on relative time or value of the services performed in each location.

Citations and references

Statutes and guidance:

• Tax Law § 210.3(a)(4)
• 20 NYCRR § 4-4.3(f)(1)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h81_16c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(16)C
Corporation Tax
March 5, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810121A

On January 21, 1981 a Petition for Advisory Opinion was received from
Philanthropy Management, Inc., 2 West 45 Street, New York, N.Y. 10036.
The question raised in the Petition concerns Petitioner's right to allocate
business income within and without the State, under the Franchise Tax on Business
Corporations imposed under Article 9-A of the Tax Law.
Petitioner is a corporation taxable under Article 9-A of the Tax Law, which
is engaged in the business of "fund raising". Its major customers are
universities located throughout the United States. Office space is rented in New
York City and used to see out of town clients. The principal officers of the
corporation travel to the universities and spend little time in New York. In
addition, the corporation hires project directors and solicitation staffs located
at the universities. The corporation occasionally uses the services of a
university's own staff.
Section 210.3(a)(4) of the Tax Law, contained in Article 9-A, gives every
corporation taxable under Article 9-A the right to allocate business income
within and without the state. Prior to a 1978 amendment to that provision a
corporation was permitted such allocation only if it had a regular place of
business (other than a statutory office) located outside of New York. The present
method of allocating business income is prescribed in section 210.3(a) of the Tax
Law and Subparts 4-2 through 4-5 of the Business Corporation Franchise Tax
Regulations.
Section 4-4.3(f)(1) of the Franchise Tax Regulations provides that "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." 20 NYCRR 4-4.3(f)(1). Thus, income for
services performed is allocated to the place where the services were performed,
and this rule would be applicable to Petitioner in accordance with the facts of
the performance of each contract.

DATED: February 18, 1981

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR