United States

New York: Administrative Law Judge Addresses Sourcing of Online Reservation Facilitation and Advertising Receipts

Feb 16, 2015
From KPMG TaxWatch

Loading the player...

An Administrative Law Judge (ALJ) for the New York Division of Tax Appeals recently addressed whether a taxpayer’s travel-related facilitation receipts were classified as receipts from sales of services or other business receipts. The taxpayer at issue earned fees from assisting customers secure lodgings and other travel reservations through its various Web sites and call center. All of the taxpayer’s administrative and corporate functions related to the operations of its company, Web sites, and call center were performed outside of New York. Under New York law, service receipts are generally sourced to the location where the services are performed. Receipts classified as “other business receipts,” on the other hand, are sourced to where the receipts are earned. The Division of Taxation took the position that because there was no human involvement at the time the taxpayer’s customer completed an online sale transaction, the receipts could not be considered “service receipts” and therefore must be treated as “other business receipts.” As support for its position, the Division cited to a regulation addressing the sourcing of service receipts that referenced a taxpayer’s “employees, agents, or subcontractors.” The Division argued that the regulation mandated that humans be involved at the consummation of a transaction for it to be considered a service. Under the rules for sourcing other business receipts, the receipts from New York customers would be treated as New York receipts.

The ALJ rejected the Division’s position. Although the term “services” was not defined by statute, the ALJ looked to dictionary definitions to define the term as “useful labor that does not produce a tangible commodity” or ”performance of labor for the benefit of another, at another’s command.” Applying these definitions, the ALJ concluded that the taxpayer was clearly providing services when it acted as a travel intermediary as it: provided information to customers, compiled summaries from travel service providers, facilitated travel arrangements, and maintained the customer’s travel reservation information.

As to the Division’s arguments, the ALJ concluded that reading the regulation to require human involvement at the time a sale is completed for the sale to be characterized as a service transaction would be an impermissible expansion of the statute. Nevertheless, even if the Division’s interpretation of the regulation was correct, the ALJ concluded that the taxpayer would still prevail. The taxpayer’s business involved significant human involvement as evidenced by its 6,600 employees, many of whom were involved in the creation of the taxpayer’s software, negotiation of the agreements with travel service providers, compilation of information and maintenance of interfaces with customers.

The ALJ also rejected the Division’s reliance on certain other advisory opinions where the Division concluded that receipts from electronically delivered services were other business receipts. The ALJ noted that the business models in the advisory opinions were significantly different than the taxpayer’s business model.

After concluding that the receipts at issue should be sourced under the rules for services, the ALJ next addressed where the services were performed. To make the determination, the ALJ looked to the location or locations were the activities are performed that give rise to income. The Division attempted to argue that the services were performed when a customer clicked on his or her computer to complete the sale. However, the ALJ noted that there were many components of the services provided by the taxpayer and most of them were performed outside of New York State. The ALJ also observed that the legislature amended the law last year to adopt a market-based approach for service receipts. This law change would have been unnecessary if the Division’s interpretation—sourcing to the location of the customer’s computer—was correct. Finally, the ALJ held that the taxpayer’s sales of advertising were also receipts from providing services sourced outside of New York. As an ALJ decision, the case carries no precedential weight and it is not yet clear whether the Division will appeal to the Tax Appeals Tribunal. Please contact Russ Levitt at 212-872-6717 with questions on In the Matter of the Petition of Expedia, Inc.


For more information about TWIST or to view archived episodes, please visit our TWIST homepage.

 Subscribe to TWIST via iTunes, or  Subscribe via RSS.

To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.

The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.