New York: Broker-dealer sourcing rules do not extend to non-broker receipts included in the same return

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The New York State Tax Appeals Tribunal has affirmed a 2019 Administrative Law Judge decision holding that a corporate owner of a disregarded single member limited liability company (SMLLC) that was an SEC-registered broker-dealer could not source receipts that were derived outside of that SMLLC broker-dealer using the state’s broker-dealer customer sourcing rules on the overall corporate tax return.  Accordingly, investment advisory service revenues, earned in the pre-2015 litigated years outside of the SMLLC broker-dealer, were required to be receipts-factor sourced by the relative costs of performance approach that applied in general to receipts from services prior to the State’s 2015 corporate tax reform shift to a general “market sourcing” approach.  The Tribunal reasoned that the plain meaning of the statutory text was unambiguous and, therefore, was required to be given such effect, notwithstanding that the SMLLC broker-dealer was disregarded into a single corporate tax return.  The Tribunal’s decision, in favor of the Tax Department’s position, aligns with previous guidance which had been published by the Department in a 2017 TSB-M bulletin, as well as a 2016 New York City Department of Finance audit division pronouncement.

As a New York Tax Appeals Tribunal decision, this decision constitutes binding precedent for the pre-2015 corporate tax (which were the years litigated), as well as for the post-2015 tax years when the receipts factor regime was modified towards a general “market sourcing” approach while retaining the longstanding broker-dealer customer sourcing regime. The case is equally binding precedent for the New York City taxes that contain those same broker-dealer sourcing rules.  Please contact Russ Levitt at 212-872-6717 with questions on BTG Pactual NY Corp.