The New York State Department of Taxation and Finance (the Department) recently released an advisory opinion analyzing the proper characterization and sourcing of various revenue streams derived from the facilitation of online trading activities. Petition No. C080222A, TSB-A-11(8)C (July 12, 2011). Relying on our old friends, Deloitte & Touche, LLP, TSB-A-02(3)C (Apr. 18, 2002); Ins. Servs. Offices, Inc., TSB-A-99(16)C (Apr. 7, 1999); and New York Merchantile Exch., TSB-A-00(15)C (Apr. 18, 2002), the opinion represents the Department’s growing trend to expand the category of “other business receipts,” to source receipts on a market rather than on a cost-of-performance basis.
In the opinion, the Parent is a Delaware corporation headquartered in New York. It owns and operates an Internet-based platform (Exchange) that serves as a marketplace for over-the-counter (OTC) global futures markets. Although the Parent is not a registered broker-dealer, the Exchange serves as a marketplace for buyers and sellers of certain commodities contracts, financial contracts, and other derivatives contracts in futures and OTCs to meet and execute trades on a real-time basis. All of the Parent’s property and equipment associated with the Exchange is located outside of New York, and all of the clearing administration for the OTC is performed outside of New York. In addition to the Parent’s activities, its affiliates generate receipts from various transactions, including open outcry trading, digital auction, flat monthly subscriptions, and trades executed with the assistance of interdealer brokers.
New York consistently has determined that receipts received from electronic transmissions, access to Internet databases, products offered through the Internet, and other online fees such as debit card processing fees, are properly characterized as “other business receipts” sourced to the location of the customer. In this opinion, the receipts at issue can generally be put into three categories:
- Fees derived from pure electronic facilitation of trading activities, such as electronic trade confirmation fees and charges to access trading data generated by the Exchange.
- Fees derived from interdealer trading or other trading activities that involve the expertise of individuals, which are fees associated with trading services and advice facilitated by a “live” broker.
- Brokerage commissions earned by a registered broker-dealer.
Under the first category, the Department determined that all of the receipts generated by the Parent and its affiliates from electronic trading activities, such as fees derived from electronic trade confirmations, commissions earned on trades executed via the Parent’s electronic trading platform, and fees generated from the provision of data, were “other business receipts” and should be sourced to the location of the customer (or their mailing address). The Department relied heavily on the principles of New York Merchantile Exchange (monthly subscription fees to access market data treated as “other business receipts,” sourced to the location of modems and transmission equipment), Insurance Services Offices, Inc. (fees received from a subscriber’s right to access intangible databases constituted other business receipts, sourced to the location of modems and transmission equipment), and Deloitte & Touche, LLP (receipts from online processing of gift certificates and gift cards deemed “other business receipts,” sourced based on the location of the customer).
The Affiliate’s commissions for open outcry transactions were sourced to the location of the physical trading floor in New York, and the interdealer broker fees and voice brokerage fees were sourced to the location of the representative who facilitated the trades. The Department drew a distinction between the first and second category of receipts because an actual representative, as opposed to an electronic system, facilitated and provided expertise in executing the trades. The Department concluded that these activities constitute services that must be sourced to the location where the transactions took place.
The Department relied on the special apportionment rules available to registered broker-dealers and concluded that revenue generated from the digital auction business, revenue received for the execution of purchase and sale orders, and trading commission receipts were brokerage commissions. Pursuant to N.Y. Tax Law § 210.3(a)(9), brokerage commissions are treated as service receipts that are sourced to the location of the counterparty or customer responsible for paying for the commission.
With the release of this advisory opinion, it is clear that the Department will apply the principles of New York Merchantile Exchange, Insurance Services Offices, Inc., and Deloitte & Touche LLP to a broad range of electronic commission receipts. Taxpayers should take note of the Department’s revised characterization of electronic trading activities and be aware of the Department’s propensity to apply a market approach to receipts from activities that may arguably constitute service receipts.