Standard & Poor's headquarters at 55 Water St.
Standard & Poor’s headquarters at 55 Water St. (NYLJ/Monika Kozak)

Since the credit ratings that Standard & Poor’s publishes for the general public are protected by the First Amendment, the firm should be taxed by New York City in the same way as it does other publishers, an administrative law judge for the city’s Tax Appeals Tribunal has determined.

Judge Anne Murphy accepted S&P’s contention that as a publisher, the rating service is entitled to nearly $35 million in rebates from the city through an application of the general corporation taxes for the tax years 2003 through 2007 available to news publishers.

Murphy noted in Matter of the Petition of The McGraw-Hill Companies, TAT (H) 10-19 (GC), that S&P, a subsidiary of McGraw-Hill, introduced testimony from First Amendment specialist Floyd Abrams of Cahill, Gordon & Reindel to bolster its position in a proceeding that began in late 2012.

Abrams said that in his opinion, a credit rating is a “predictive opinion about the future and it is fully protected by the First Amendment unless issued in bad faith.” He also said that raters can be analogized to journalists.

Murphy wrote that S&P makes its ratings available to the public through its website. She said it does not affect the status of the reports as protected under the First Amendment that S&P does not charge the subjects of its ratings for posting the information or its non-client web subscribers for gaining access to its evaluations.

“A CRA [credit rating agency] is a financial information publisher entitled to the same constitutional protections afforded other members of the press provided the ratings are publicly disseminated protected speech,” Murphy wrote, citing In re Pan Am Corp., 161 B.R. 577 (SD NY 1993). “The safeguards of the First Amendment are not available to ratings which are prepared for, and distributed solely to, specific clients who contract for them (i.e. private or confidential ratings).”

For the tax years 2003 to 2007, S&P’s general corporate taxes were computed under an “origin” basis, meaning that payments were allocated according to where revenue-generating activities occurred or where receipts were earned.

But under amended city general corporate tax returns, McGraw-Hill sought refunds totaling $34.99 million based on the argument that S&P was a news publisher eligible for application of the tax based on the location of those viewing the its reports on the website.

While the general corporation tax assessment for publishers is generally based on circulation or audience, Murphy said that application to the S&P credit reports is not applicable because S&P does not sell advertising and it does not charge for access to the reports on its web site that are released to the public.

Murphy rejected an alternative solution proposed by the city’s Department of Finance, to allocate S&P receipts according to where the issuer of debt is located since it is the issuer who pays S&P to generate the ratings reports in the first place.

But the administrative law judge said that approach would run afoul of the constitution because it would treat one publisher—S&P—differently than others for the purpose of the application of the general corporation tax.

Murphy said she would accept an alternative proposed by S&P that its allocation for tax purposes in the future be determined by its own information on its web subscribers and by data collected by HBX, a firm that analyzes and identifies demographic information for financial firms and marketing companies.

“While not precise, the methodology is consistent in principle with the circulation/audience methods which the [city tax] Code provides be used by other publishing companies to allocate City receipts,” Murphy wrote in her Feb. 24 determination.

Peter Faber of McDermott Will & Emery in Manhattan represented McGraw-Hill along with Robert McDermott.

Faber said Abrams, who has argued in prior cases for S&P’s First Amendment rights, was called in on the case because McGraw-Hill felt it would bolster the argument of the financial ratings as being protected speech and of S&P’s status as a publisher for purposes of the city’s tax laws.

“We thought it would be useful in setting the constitutional stage in having someone of Mr. Abrams’ background say, ‘Yes, this is an important constitutional issue,’” Faber said Thursday in an interview.

Faber noted that Abrams’ firm, Cahill, Gordon & Reindel, represents McGraw-Hill.

Frances Henn of the city’s Corporation Counsel’s Office, represented the city’s commissioner of finance. A spokesman for the Corporation Counsel’s office said Murphy’s determination was still under review Thursday.

Murphy noted that S&P has used an “issuer pays” model for its financial ratings since the default of the Penn Central Railroad in the 1970s led to complaints that only a select few financial firms could afford the company’s rating services. The large investor losses were attributed in part to unavailability of public credit information.

S&P makes public the public ratings it prepares for issuers, investors and intermediaries such as banks and other financial institutions on its web site,

It also releases the private and confidential ratings it prepares if it becomes aware that an obligor or other entity is making the ratings public.