The New York City Department of Finance (“City Finance”) has released a Statement of Audit Procedure (“SAP”) to explain its position on whether companies in the business of broadcasting films and television programs may include the value of licensed films and television programming in the property factor of their business allocation percentage. Statement of Audit Procedure GCT-2014-01, Computation of the Property Factor for Corporations Engaged in the Business of Broadcasting (N.Y.C. Dep’t of Fin., Oct. 2, 2014).  City Finance is taking the position that a taxpayer may not include any licensed film, television, or video program in its property factor for general corporation tax (“GCT”) purposes for any tax period.

Background.  Tangible personal property is included in the property factor of a New York City general corporation taxpayer if the property is owned or rented by the taxpayer. Admin. Code § 11-604(3)(a)(1).  New York State’s statute is similar and, as acknowledged in the SAP, before 2008 the New York State Department of Taxation and Finance (“State DTF”) had long treated film, whether rented or owned, as tangible personal property, and included its value in the property factor. Effective in 2007, the property factor was eliminated under Article 9-A, and a single sales factor method of apportionment was used for purposes of the corporation franchise tax. The following year, the State DTF announced that it would follow a new position for determining the apportionment factor for the MTA surcharge, applied to taxpayers in New York City and nearby counties, which still retained a property factor, and would no longer allow the value of licensed film to be included in the property factor, “since it is not considered to be tangible personal property.”  Computation of the MTA Surcharge for Corporations Engaged in the Business of Broadcasting, TSB-M-08(6)C (N.Y.S. Dep’t of Taxation & Fin., June 4, 2008) (“2008 TSB”). The 2008 TSB also stated that licensed film obtained via satellite or over the Internet had “always” been considered an intangible right or license to use property and not includible in the factor.

The State DTF also attempted to exclude licensed film from the property factor for years prior to 2008, but this attempt was rejected in Meredith Corporation v. Tax Appeals Tribunal, 102 A.D.3d 156  (3d Dep’t 2012).  In Meredith, the State DTF argued that film transferred via satellite, rather than on tape or other physical media, was not properly includible in the property factor for the years 1998 through 2000, and relied in part on the unsupported statement in the 2008 TSB-M that film delivered via satellite had always been excluded. The State DTF also argued that all licensed film was an intangible right – an argument in clear conflict with its longtime position of including licensed film in the property factor – and for this position purported to rely on the Appellate Division decision in Disney Enters., Inc. v. Tax App. Trib., DTA No. 818378 (N.Y.S. Tax App. Trib., Oct. 13, 2005), confirmed, 40 A.D.3d 49 (3d Dep’t 2007), aff’d. on other grounds10 N.Y.3d 392 (2008). However, in Disney the issue was not whether licensed film was includible in the property factor – the case concerned film owned by Disney, which all parties had agreed was included – but rather whether Disney could increase the value of that film from its cost to its fair market value, by using the huge fair market value of the Walt Disney name and characters in licensing transactions as the measure of the value of the film property.  The Tax Appeals Tribunal rejected this valuation method, and was affirmed by the Appellate Division, but the company’s original inclusion of film in the property factor was not disturbed.

The court in Meredith held that licensed film, no matter how it was delivered, was included in the property factor in 1998 through 2000 – implicitly rejecting the State DTF’s argument that licensed film was an intangible right – and that the State DTF’s position would be an invalid retroactive application of a new policy. Since neither the MTA surcharge nor the years after 2008 was before it, the court did not reach the issue of whether the 2008 policy change was valid prospectively.

New York City’s new position. Under its new SAP, City Finance, while acknowledging that since 1982 it has also allowed taxpayers to include the value of films and television programs produced by the taxpayers in the GCT property factor, will not allow the inclusion of any licensed film or video program, regardless of how obtained. City Finance states that, while it had adopted the State DTF’s position with regard to owned programming, it has “always” treated licensed film as intangible property. Purporting to rely on the finding in Meredith that film transferred by satellite is no different than film transferred on tangible media, City Finance will not allow, prospectively and for all open years, any licensed film to be included in the property factor, which remains a part of the City apportionment method through 2017.

Additional Insights

The SAP includes no explanation of why licensed film is treated as intangible property, while film produced by a taxpayer itself is included as tangible property.  The statute defining property to be included in the factor clearly covers both owned and rented property. Perhaps recognizing that the Disney case, on which the State DTF tried to rely in Meredith, contains no such support, the SAP does not cite Disney or any other authority for the proposition that films are intangible when licensed but tangible when owned.

The validity of the State DTF’s change of position in the 2008 TSB – which City Finance is now adopting – has not been tested in the Division of Tax Appeals or any court, and the 2008 TSB contains no citation or other support for its conclusion that all licensed film became intangible in 2008. Whether any City taxpayers will try to challenge City Finance’s new SAP is not yet known, but questions remain as to why owned film should be treated differently from licensed film, since the statute clearly includes both owned and rented property in the property factor.