Sourcing receipts for apportioning business income continues to be a challenge to CPAs, especially for providers of services. Financial service companies in particular have seen changing trends with the states way to address the apportionment rules. This article will discuss the recent New York State Department of Taxation and Finance’s (DTF) administrative pronouncement, which CPAs need to be aware of.
On August 2, 2017, the DTF issued from its Office of Counsel an informal statement, NYT-G-17(2)C, “Receipts Factor Methodology for the Owners of Single Member Limited Liability Companies that are Registered Broker-Dealers.” NYTG-17(2)C specifically addressed whether a corporation that is not a registered securities broker or dealer may be considered a registered securities broker or dealer for the purposes of computing its receipts factor through its indirect interest in a disregarded single member LLC (SMLLC) that is a registered broker-dealer. It should be noted that, as part of the NYS Corporate Reform of 2015, New York Tax Law (NYTL) section 210-A created a new customer-based apportionment scheme for corporations; as a result, the analysis in the NYT-G-17(2)C will also apply to taxable years beginning prior to January 1, 2015. Noncorporate partners or members of an SMLLC will be guided by the analysis in NYT-G 17(2)C for all taxable years.
The broker-dealer provisions under NYTL section 210.3(a)(9) permitted a registered securities or commodities broker or dealer to use unique customer-based sourcing rules for allocating specific categories of receipts, including brokerage commissions, margin interest, certain underwriting revenues, interest on certain loans to affiliated entities, account maintenance fees, and fees for management and advisory services.
For the broker-dealer provisions to be applicable, the statute requires the taxpayer to be a registered securities or commodities broker-dealer, as defined to mean a broker or dealer registered as such by the Securities and Exchange Commission (SEC) or the Commodities Futures Trading Commission (CFTC).
In a previously issued advisory opinion, TSB-A-13(11)C (Dec. 20, 2013), the DTF concluded that an SMLLC that is treated for tax purposes as a disregarded entity is a registered securities broker-dealer, and that its single member should be treated as a registered broker-dealer for purposes of the allocation rules under NYTL section 210.3(a)(9). In addition, a partner in a partnership that is a registered broker-dealer is itself deemed to be a registered broker-dealer in regards to the partner’s distributive share of partnership receipts.
This position was confirmed in a subsequent advisory opinion [TSB-A-16(1)C, Jan. 11, 2016], whereby, for purposes of qualifying for an investment tax credit, the DTF concluded that the required certification of an SMLLC that is a disregarded entity treated for tax purposes as a division of its single member is treated as the certification of the single member. This type of conclusion has been extended to the registration of broker-dealers with the SEC; thus, if an SMLLC that is treated as a disregarded entity is a registered broker-dealer, its single member should also be treated as a registered broker-dealer.
The New Guidance
In NYT-G-17(2)C, the DTF has reinterpreted its previous guidance, concluding that a disregarded SMLLC’s classification as a registered broker-dealer can only be conferred upon its single owner as it relates to the receipts of the SMLLC. An owner of an SMLLC may not consider itself a registered broker-dealer for purposes of the treatment of its own receipts. In addition, a partner of a partnership that is a registered broker-dealer will not be deemed a broker-dealer as a result of its partnership interest; however, the partner may compute its distributive share of partnership receipts as if it were a registered broker-dealer.
It should be noted that NYT-G-17(2)C also concludes that the purpose of an apportionment statute such as NYTL section 210(3) is different from a statute that imposes a penalty or tax on an entity, or a statute that contains the qualifications for an entity to claim a tax credit. In such a case, the DTF would attribute the characteristics of an SMLLC to its single member.
Clearly, the DTF has departed from its longstanding policy that an SMLLC that is disregarded for federal income tax purposes will be disregarded, and treated as a division of its owner, for all New York tax purposes. To this end, only taxpayers who themselves are registered securities broker-dealers can apply the broker-dealer special sourcing provisions to their receipts.
Notwithstanding that the conclusions of NYT-G-17(2)C appear to have no impact for 2015 and after, it is possible that there will be challenges, and further guidance in this area may be issued. CPAs should be aware of these rules and the impact they have in order to properly advise their clients.