Two years ago, this column discussed the trend in New York and other states to move from apportioning income of corporations under the so-called three factor formula (property, payroll, and receipts) to one largely or wholly based on receipts only.1 Unlike property and payroll, however, where location is usually easy to determine, the location to which a “receipt” should properly be attributed is far more subject to interpretation, particularly with regard to services. Historically, services were apportioned to where the provider of the service performed the service.2 Thus, if a consultant located in New York were to prepare a report for a client in California, New York would treat those receipts as sourced to this state. Over the years, however, in response to claims by certain industry groups that this sourcing rule made it disadvantageous to operate in New York, various exceptions were adopted under which certain categories of receipts were allocated to where the customers were located. New York moved to establish customer-based sourcing when it enacted in 2014 comprehensive corporate tax reform, which was generally effective Jan. 1, 2015 (and discussed in more detail below). Nonetheless, cases under previous law, like the recent administrative law judge (ALJ) determination from the New York State Division of Tax Appeals in CheckFree Services,3 still offer guidance for issues of classification and location of “receipts” earned by a business.

Background

In CheckFree, petitioner was a corporation that was in the business of providing electronic bill payment and presentment (EBPP) services.4 CheckFree’s EBPP customers included financial institutions and “large[] merchants” such as AT&T, Macy’s, Home Depot, and Verizon. CheckFree’s EBPP services allowed “consumers” (the customers of CheckFree’s customers) to view and pay bills from such merchants via a website. CheckFree’s website was branded for each merchant, so it appeared to the consumer that he or she is directly utilizing the website of a CheckFree customer (AT&T, for example). Presumably under the guise of its financial institution customers, CheckFree also permitted consumers to electronically pay a bill of “any individual or entity that has a mailing address within the United States.”