New York City: Court Holds in City’s Favor in Services Sourcing Dispute

Listen to a brief overview of state tax developments this week, including New York, or read full New York development below.

Detailed New York City Development

The New York Supreme Court, Appellate Division recently held in the City’s favor in a dispute over whether certain service receipts should be sourced to New York City. The taxpayer at issue offered customers a subscription-based service providing access to experts and consultants in a broad variety of disciplines. Under New York City general corporate tax law for the tax years at issue, receipts from services were allocated to the City if the services were performed in the City. This rule applied irrespective of whether the service was performed by an employee, an agent, or a subcontractor. If the service was performed both within and without the City, service receipts were attributed to the City based on the relative value or time spent in the City performing the services. The issue before the court was what activities counted in measuring where a service was performed or what portion of the service was performed in New York City. The City argued that the taxpayer’s salespeople, IT staff, consulting managers, as well as core consultants, all contributed to the performance of the services provided to clients. The taxpayer, in contrast, argued that only the locations and amounts paid to consultants and research managers who provided services directly to clients should be counted.  After the Tax Appeals Tribunal ruled in the City’s favor, the taxpayer appealed.

On appeal, the court determined that the Tribunal correctly focused its inquiry on the nature of the taxpayer’s business and all the personnel that contributed to the performance of the services provided. The activities of the IT staff, salespeople, and consulting managers all played a role in providing services to customers. The court concluded that the efforts all these individuals were all part of the delivery of services for which clients paid an upfront flat subscription fee. 

It should be noted that the New York City and New York State corporate taxes were overhauled for tax years 2015 and forward, whereby the receipts factor rule for sourcing of services no longer depends on where the services were relatively performed but, rather, on where the customer of the service received the benefit. As such, City and State law for general corporations has changed since the tax years at issue in the case. However, the holding would apply to pre-reform years for both the City and State corporate taxes. It should be noted that both the New York City Unincorporated Business Tax and the City tax applicable to S corporations continue to use the “where services are performed” receipts sourcing approach addressed by the court in the instant case. The taxpayer may seek to appeal the holding to New York’s highest court, the Court of Appeals.  Please contact Russ Levitt with questions on Gerson v. Tax Tribunal.



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Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US