A New York City Administrative Law Judge (“ALJ”) held that income earned from the provision of security guard services to United States government agencies by a private company at offices located in New York City is not exempt from the City general corporation tax (“GCT”), which must be apportioned by application to entire net income of the City business allocation percentage (“BAP”), based on the proportion of property, receipts, and payroll attributable to New York City.

In Matter of Alante Security Group, Inc., TAT (H) 09-40(GC) (N.Y.C. Tax. App. Trib., Admin. Law Judge Div., Feb. 10, 2012), the petitioner, a New York corporation, provided armed and unarmed security guard services to corporations and entities, including federal agencies located in federal buildings in the City. The petitioner participated in the City’s 2003 amnesty program with respect to its GCT liability for the tax years 1992 through 2001, years for which the petitioner had not timely filed GCT returns. It subsequently filed GCT returns for the tax years 2002 through 2005. The Department of Finance audited the years 1997 through 2005 and assessed a deficiency based principally on adjustments to the receipts, payroll, and property factors.

Before the ALJ, the petitioner argued that income earned from providing guard services to the federal government was exempt from GCT and that the Department lacked jurisdiction to tax the income. The ALJ disagreed, reasoning that while federal instrumentalities are immune from direct imposition of the GCT, “this immunity does not extend to corporations which do business with the government agency.”

The ALJ also rejected the petitioner’s argument that its services were provided to a federal agency in a “federal enclave” where the City had no jurisdiction to tax. To the contrary, the ALJ found that the Buck Act of 1940, 4 U.S.C. § 106, specifically permits the imposition of the GCT in this instance. Under the statute, “[n]o person shall be relieved from liability for any income tax levied by any State, or by any duly constituted taxing authority therein, having jurisdiction to levy such a tax, by reason of his residing within a federal area or receiving income from transactions occurring or services performed in such area.”

The ALJ also noted the direct conflict between the petitioner’s claims of immunity from the GCT and its failure to dispute liability for State sales and use taxes computed on its receipts from providing security services to the federal government. The petitioner filed returns and paid State sales and use taxes for the tax years at issue, which the ALJ noted was consistent with the petitioner’s contract with the federal government.

Finally, finding no authority to set aside the City’s BAP methodology, which takes into account the portion of a taxpayer’s property, receipts, and payroll attributable to the City, the ALJ also rejected the petitioner’s position that its entire net income should instead be allocated using the percentage of City sales reported in the petitioner’s State Sales and Use Tax returns for the years in issue.

Additional Insights. Although not cited in the Alante opinion, in United States v. New Mexico, 455 U.S. 720 (1982), the United States Supreme Court considered whether private contractors with the federal government were entitled to “derivative” sovereign immunity from state taxation under the Supremacy Clause of Article VI, Section 2 of the United States Constitution. In that case, the United States sought a declaratory judgment that three of its contractors were entitled to the benefit of sovereign immunity and therefore were not obligated to pay gross receipts tax, compensating use tax, or sales tax imposed by New Mexico.

The Supreme Court held against the United States, and stated that “tax immunity is appropriate in only one circumstance: when the levy falls on the United States itself, or on an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned.” Id. at 735. Under this test, it is evident that the petitioner in Alante Security Group did not have a strong claim to derivative immunity from the GCT, since nowhere was it alleged that the petitioner acted in an agency capacity, nor did the petitioner “stand in the government’s shoes.” United States v. Mexico, 455 U.S. at 736.

With regard to the petitioner’s “federal enclave” argument, Article I, Section 8, clause 17 of the United States Constitution grants Congress the power “[t]o exercise exclusive Legislation in all cases whatsoever . . . over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings.” However, as recognized by the ALJ in Alante, when Congress enacted the Buck Act in 1940, it gave the states the power to impose income taxes on persons (which include business entities) residing on federal land or on sales or uses occurring on land that would otherwise be within the exclusive jurisdiction of the United States. 4 U.S.C. §§ 105-110. For that reason, the ALJ rejected the petitioner’s contention that its income was immune from the GCT simply because it provided its security services at locations otherwise within federal jurisdiction.