Corporate Close-Up: New York City Tribunal Rules on Sourcing of Services from Subscription-Based Consulting

In a case involving a taxpayer’s claims for refunds stemming from a proposed change in sourcing methods, the New York City Tax Appeals Tribunal took the surprising step of substituting its own sourcing method. At the heart of the dispute is the question of how to calculate the percentage of services that are performed in New York City.
The taxpayer in In re: Gerson Lehman Group, Inc. uses an industry leading subscription model for consulting and advisory work in which Gerson Lehman Group (GLG) facilitates dialogue between clients and council members, industry, and subject-matter leaders. The dialogue enables the clients, largely investors, to make more informed investment decisions.
As part of this subscription service, GLG also utilizes research managers to develop questions for council members and creates surveys and research tools. It also employs salespeople to develop new clients, manage the customer relationship, and drive customer engagement with the council members. GLG acts as a mediator and does not manage or control the advice or discussions engaged in between clients and council members.
The taxpayer made a number of refund claims related to tax years beginning in 2004 and continuing through 2010. At that time, the rule for sourcing services in New York City for purposes of the General Corporation Tax was based on where the services were performed. In 2015, New York City adopted the corporate income tax and changed the sourcing method to a market-based method, rendering this decision one of largely historical interest.
In earlier proceedings, the administrative law judge (ALJ) ruled that GLG, through its consultants and research managers, is “a provider of expert knowledge, analysis, and views” and that receipts from such services should be sourced based on where those individuals performed those services for GLG’s clients.
On appeal to the tribunal, the taxpayer effectively argued that the performance of services by the council members and research managers should determine the percentage of services performed in New York City. As it had done before the ALJ, the Commissioner of Finance argued that taxpayer’s true business is having salespeople match clients with consultants, and therefore receipts should be sourced based on the location of the salespeople, not the consultants or research managers.
The Tax Appeals Tribunal overturned the ALJ’s ruling and reached its own conclusions, holding that the taxpayer’s clients pay for a subscription service which is a combined effort of council members, research managers, salespeople, and IT staff. The tribunal determined that the correct sourcing method for the receipts factor requires sourcing receipts based on compensation paid to council members, research managers, salespeople, sales assistants, research operations, and IT staff. The tribunal modified the prior decision and remanded the matter to the ALJ division to recalculate taxpayer’s tax liability using the sourcing method set forth by the tribunal.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Did the tribunal reach the right result when it included virtually all GLG salaries in the receipts computation
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