United States

New York City: Credit Rating Agency Must Source Receipts using “Place-of-Performance” Method

Nov 16, 2015
From KPMG TaxWatch

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The Appeals Division of the New York City Tax Appeals Tribunal recently reversed an Administrative Law Judge decision addressing how a provider of publicly-accessible credit ratings should source its receipts for New York City General Corporation Tax (GCT) purposes. The taxpayer was a large New York corporation engaged in the business of publishing and providing information services. One of the taxpayer’s divisions operated a large credit rating agency that supplied ratings, indices, risk evaluations, and data for use by debt issuers, individual and institutional investors, brokerage firms, financial institutions and government agencies. The division was hired and compensated by issuer/obligors to prepare credit ratings, but many of the ratings were made available to the general public for free on the taxpayer’s website. The taxpayer originally filed its returns sourcing the credit rating receipts generated by New York City based employees to New York City. This was consistent with the City’s “place-of-performance” sourcing methodology for service receipts in effect for the tax years at issue. Later, the taxpayer amended its returns reclassifying these receipts as “other business receipts,” which were sourced to the location of the credit rating customers. The taxpayer also sourced its receipts in this manner on a subsequent, original return. The City denied the taxpayer’s refund claims and asserted deficiencies on the subsequent return. The taxpayer appealed both actions to the Tax Appeals Tribunal. However, on appeal, the taxpayer argued that instead of treating the receipts as other business receipts sourced to the location of its customers it should be permitted to source the receipts using an audience-based methodology available to publishers and broadcasters. The Administrative Law Judge agreed with the taxpayer, reasoning that the taxpayer was entitled to the same Constitutional protections afforded other members of the press. The City appealed to the Appeals Division of the Tribunal.

On appeal, the taxpayer argued that because it was entitled to First Amendment protections, it must be allowed to use the same allocation method as other first amendment protected entities (publishers and broadcasters). The Division disagreed with this position, noting that the taxpayer’s argument ignored the fact that the allocation method it sought to use applied only to receipts from subscriptions, advertising, and programing. The taxpayer’s receipts were not generated from these activities. Citing to earlier cases, the Appeals Division also noted that not every instance of differential tax treatment between members of the press resulted in unconstitutional treatment. Rather, such differential taxation is suspect only when it threatens to suppress particular ideas or viewpoints. The Appeals Division also rejected the taxpayer’s argument that it must be allowed to use the audience method unless the City demonstrated that differential tax treatment was necessary to service a compelling state interest. Next, the taxpayer argued that its receipts should be categorized as “other business receipts,” rather than service receipts, and that the receipts should be sourced to the location where the receipts were earned. In the taxpayer’s view, its receipts were earned at the locations where the investing public accessed its ratings free of charge. The Appeals Division disagreed, observing that the taxpayer’s own materials described its credit ratings as “services,” and the taxpayer expended significant efforts to obtain each credit rating. In any event, the Division noted that the taxpayer’s receipts were not derived from investors, but were derived from clients that paid for the generation of a credit rating.

Finally, the Division rejected the taxpayer’s third argument that the City should exercise discretion to allow the taxpayer to use an audience allocation method. In the Division’s view, the taxpayer failed to establish (1) that the place-of-performance method for allocating income did not reflect where the taxpayer generated its credit rating receipts, and (2) that using a method that looks to the location where visitors to its free website viewed credit ratings resulted in a more proper allocation of these receipts. Please contact Russ Levitt at 212-872-6717 with questions on In re McGraw-Hill Companies, Inc., (N.Y.C. Tax. App. Trib. Oct. 28 2015).

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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.