United States: New York ALJ Rejects Attempt To Apply Sourcing Rules For "Other Business Receipts" To Online Travel Reservation Services

An administrative law judge (ALJ) in the State of New York Division of Tax Appeals has determined that a taxpayer's receipts for facilitation of online travel reservations were from providing a service and should be sourced based on where the service was performed.1 In issuing this determination, the ALJ rejected an attempt by the New York State Department of Taxation and Finance to source the receipts as "other business receipts" and source to where the receipts were earned. At this point, it is not known whether the Department is going to appeal this decision to the New York State Tax Tribunal.2


The taxpayer, Expedia, Inc., a Washington corporation operating a travel reservation facilitation business, earned revenue by assisting in the reservation of hotels, flights, rental cars, and cruises by customers. The taxpayer compiled summaries of available products from travel service providers, provided information to its customers via the Internet or telephone, facilitated travel arrangements, and provided customer support. The taxpayer employed approximately 6,600 employees outside New York to perform administrative and corporate functions related to the operations of the company and its affiliates as well as at call centers which offered seven-day-a-week traveller support via telephone or email.

For the 2005 and 2006 taxable years, the taxpayer timely filed separate New York State general business corporation franchise tax reports. As required, the taxpayer computed a business allocation percentage based on a three-factor formula comprised of property, payroll, and sales factors. To compute its sales factor, the taxpayer applied the rules regarding allocation of receipts from services and reported no New York receipts, resulting in a sales factor of zero.

For the 2007 taxable year, following a change to the New York State combined reporting requirements, the taxpayer timely filed a New York State general business corporation combined franchise tax return with its parent holding company which included an affiliate, TripAdvisor. Massachusetts-based TripAdvisor operated an online travel search engine and directory that aggregated user reviews, opinions, photos, and articles regarding various travel destinations and activities. TripAdvisor derived revenue from advertisers and other third parties for advertisements placed on its Web sites. Procurement and management of these advertisements were performed exclusively by employees located in Massachusetts. TripAdvisor did not publish any newspapers or periodicals, or produce radio or television programs during the years at issue. To compute its New York sales factor, the taxpayer treated both its receipts from travel reservation services and TripAdvisor's receipts from advertising as sales of services. Finding similarly that no services were provided in New York, the entities reported a combined New York sales factor of zero.

During 2008, the Department selected the taxpayer's 2005 and 2006 New York State general business corporation franchise tax returns, as well as its parent corporation's 2007 New York State general business corporation combined franchise tax return for audit and determined that the taxpayers' receipts from travel reservation services and advertising should have been classified as "other business receipts" and sourced based on customer location. Using publicly available taxpayer information as well as U.S. census population data, the Division assigned a portion of the taxpayers' receipts as received in New York and determined an appropriate adjustment to each return. Based on these calculations, the Division issued notices of deficiency to the taxpayer for the 2005-2007 taxable years. The taxpayer responded by filing a petition for redetermination of the deficiency with the Division of Tax Appeals.3

Receipts from Travel Facilitation

During the relevant tax years, New York imposed a franchise tax on all domestic and foreign corporations doing business, employing capital, owning or leasing property, or maintaining an office in New York.4 Specifically, corporate taxpayers were required to calculate their tax liability based on the greater of the following bases: (1) a percentage of the taxpayer's entire net income (ENI) allocated to New York State; (2) a percentage of the taxpayer's taxable assets allocated to New York State; (3) a percentage of the taxpayer's alternative ENI allocated to New York State; or (4) a minimum tax of $250. ENI was allocated to New York pursuant to the taxpayer's business allocation percentage, which consisted of property, receipts and payroll factors.

The sole substantive issue in the determination concerned the calculation of the receipts factor, which provided for the sourcing of sales to New York to the extent that: (i) tangible personal property was sold to points within the state; (ii) services were performed within the state; and (iii) rentals and other business receipts were located within the state.5 The taxpayer characterized its travel facilitation receipts as "services" while the Department characterized these receipts as "other business receipts." The characterization of the receipts was important because the New York sourcing rule governing services sourced sales based on where the taxpayer performed its services, while the New York sourcing rule governing other business receipts allocated them to the location earned, resulting in a market-based sourcing approach.

Though the term "services" was not defined by statute, reference was made to "services performed within the state."6 Based upon the ordinary definition of the term,7 the Court concluded that the receipts at issue were undoubtedly the result of performed services.

The Department relied primarily upon a regulation which provided that "the receipts from services performed in New York State are allocable to New York State. All receipts from such services are allocated to New York State, whether the services were performed by employees, agents or subcontractors of the taxpayer, or by any other persons,"8 to support its position that the receipts did not come from service transactions. The Department argued that no employees, agents, subcontractors or other persons on behalf of the taxpayer were involved at the instant in which the transactions giving rise to the revenue occurred. The Department contended that in order for receipts to be classified as from "services provided," human involvement at the point of transaction was necessary.

Finding specifically that the Department's interpretation of this regulation was misplaced and an "impermissible expansion of law," the ALJ cited case law dictating that tax statutes cannot be extended by implication beyond the clear import of the language used.9 Relying instead upon the statutory language which does not require human involvement at the moment of sale in order for services to be performed,10 the ALJ found that the regulation could not improperly extend that meaning.

The ALJ also distinguished the facts of this decision from those cited by the Department as supportive of its position.11 Specifically, the ALJ noted that the receipts at issue in the cited cases were from initial access or subscription fees, rather than receipts directly related to travel facilitation services performed by the taxpayer at issue. The taxpayer's travel facilitation services had many components, in comparison, and did not result from a single, instantaneous, fully automated transaction.

To properly allocate the taxpayer's receipts as derived from the provision of services, the ALJ turned to previous case law. The New York Court of Appeals had in a prior ruling considered the location of activities performed in connection with loans, including accounting, financing, and general support services, to determine the allocation of receipts from related financial services.12 As applied to the facts of this case, the ALJ reasoned that locations from which travel reservation services, as well as the related support services, were provided were solely outside New York.

Receipts from Advertising

The Department further asserted that, for the 2007 tax year, TripAdvisor's receipts from advertising should be classified as "other business receipts." The Department relied upon language specifying that, "for taxpayers engaged in the business of publishing newspapers or periodicals, receipts arising from sales of advertising contained in such newspapers or periodicals shall be deemed to arise from services performed within the state to the extent that such newspapers and periodicals are delivered to points within the state"13 to exclude Internet advertising revenue from potential classification as derived from "services performed." The ALJ disagreed, rejecting the Department's attempt to allocate the revenue based on the locations where individuals accessed the advertisements,14 and noting that TripAdvisor derived revenue from advertisers and other third parties for advertisements placed on its Web sites, not from the individuals accessing the advertisements. As above, the ALJ found the activity was clearly a service performed for the taxpayer's advertising clientele and consisted of much more than just the instantaneous viewing by one of the taxpayers' purchasing customers.

Therefore, the ALJ concluded that the taxpayer had properly reported its travel facilitation receipts and advertising receipts in the sales factor sourcing calculation for purposes of its 2005-2007 New York corporation franchise tax returns. The ALJ did not find it necessary to address the taxpayer's alternative arguments that the Division's application of the statute violated the Internet Tax Freedom Act or provisions of the United States or New York State Constitutions, because the taxpayer's application of the law was found to be correct.15


It is interesting that the ALJ refused to allow the Department to apply market-based sourcing to the tax years at issue, especially in light of the recent adoption by the New York legislature of market-based sourcing of service revenue.16 The new legislation is effective for tax years beginning on and after January 1, 2015 and generally applies a market-based sourcing approach for sales of services as well as other business receipts. The ALJ found it telling that the new legislation would not have been necessary if the amendment did not effect some purpose and make some change in the existing law. Accordingly, the enactment of new legislation, in the ALJ's view, clarified the result in this matter, that receipts from services should have been sourced by looking at where the service provider performed its services, not where the service provider's market was located.

Also of note is the ALJ's refusal to allow the Department to expand its reach beyond the applicable statutory language to determine an appropriate sales factor. By clearly limiting the ability of the Department to utilize its own regulations, advisory opinions and other guidance to achieve a desirable result, the ALJ indicated a clear willingness to uphold statutes over Department policy in this matter.

Although the decision is not precedential, other taxpayers with significant revenue streams for sales of items other than tangible personal property should carefully review their sourcing methodology to determine whether the guidance in this decision could lead to a substantially different result. If the Department decides to appeal to the Tribunal, the Tribunal's decision would be precedential and if the taxpayer is successful, could offer further support for taxpayers that might want to reevaluate their sales factor calculations.


1 Matter of Expedia Inc., New York Division of Tax Appeals, Administrative Law Judge Unit, DTA Nos. 825025, 825026, Feb. 5, 2015.

2 The Department has 30 days from the date of the determination to file an appeal with the Tribunal. N.Y. TAX LAW § 2006(7). We have learned that the Department requested and was granted a 30-day extension to file an exception with the Tribunal.

3 In its petition, the taxpayer contended that the receipts at issue were service receipts properly sourced according to the location where the services were performed, which was outside New York. Alternatively, the taxpayer argued that the Division's statutory notices violated the Internet Tax Freedom Act, and the Equal Protection, Due Process, and Commerce Clauses of the United States Constitution and New York State Constitution as they improperly discriminated against an Internet provider.

4 N.Y. TAX LAW § 209.1.

5 N.Y. TAX LAW § 210.3(a).

6 N.Y. TAX LAW § 210(3)(a)(2)(B).

7 Service is defined as "useful labor that does not produce a tangible commodity," Webster's Ninth New Collegiate Dictionary, 1076, or "performance of labor for benefit of another, or at another's command," Black's Law Dictionary, 1227 (5th edition, 1979).

8 N.Y. COMP. CODES R. & REGS. tit. 20, § 4-4.3(a).

9 Yonkers Racing Corp. v. State, 516 N.Y.S.2d 283 (N.Y. App. Div. 1987).

10 N.Y. TAX LAW § 210(3)(a)(2)(B).

11 Alvarez & Marsal, TSB-A-11(8)C, Advisory Opinion, New York State Department of Taxation and Finance, July 12, 2011; Insurance Services Office, Inc., TSB-A-00(15)C, Advisory Opinion, New York State Department of Taxation and Finance, Sep. 6, 2000; New York Mercantile Exchange, TSBA- 99(16)C, Advisory Opinion, New York State Department of Taxation and Finance, Apr. 7, 1999.

12 Matter of Siemens Corp. v. Tax Appeals Tribunal, 679 N.E.2d 1072 (N.Y. 1997).

13 N.Y. TAX LAW § 210(3)(a)(2)(B)(i).

14 The Department relied upon WTAS LLC, TSB-A-09(5)C, Advisory Opinion, New York State Department of Taxation and Finance, Mar. 9, 2009, which concluded that advertising receipts should be allocated to New York based upon: (i) when a New York subscriber clicks on an advertisement or (ii) the ratio of New York subscribers to subscribers everywhere. The ALJ found this advisory opinion to be inapplicable because the taxpayer in this instance was not in the business of providing newspapers or periodicals to customers.

15 The ALJ did uphold the imposition of a Metropolitan Commuter Transportation District (MCTD) surcharge on the taxpayer's New York corporation franchise tax for the 2007 tax year. Specifically, this surcharge is imposed when a taxpayer is doing business in the MCTD, which includes New York City and several of its suburbs. The taxpayer did not dispute that it leased office space in New York City during 2007 and was therefore subject to the surcharge.

16 Ch. 59 (A.B. 8559 / S.B. 6359), Laws 2014. For a discussion of this legislation, see GT SALT Alert: New York State Enacts FY 14-15 Budget Legislation Providing Extensive Tax Reform.

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