The Third Department has held that television programming delivered via satellite was included in the property factor, rejecting the decision of the Tax Appeals Tribunal, which had held that the programming was excluded as intangible property, and the position of the Department of Taxation and Finance, which had excluded the programming from the factor because it was delivered via satellite rather than on videotape. Matter of Meredith Corporation v. Tax Appeals Trib., NY Slip Op. 7909 (3d Dep’t, Nov. 21, 2012).

Meredith Corporation is an Iowa-based publishing and television broadcasting company. It filed refund claims for its tax years ending in June 1998, 1999, and 2000, claiming that its property factor should include, as the rental of tangible personal property, payments it made for television programming for airing on the 12 television stations it operated. Since none of Meredith’s TV stations were located in New York State, the payments would be included in the denominator but not the numerator of the property factor.

For the years in issue, the statute, Tax Law § 210(3)(a)(1), included in the property factor tangible personal property, both owned and rented. As the Third Department recognized, under the Department’s long-standing policy, and consistent with a 1991 Opinion of Counsel, broadcasters like Meredith included owned programming and rented programming, if delivered on videotape, in their property factors, at original cost, multiplied by a New York audience factor. At the hearing, the Department’s auditors agreed that programming delivered by videotape would be considered tangible personal property and included in the factor, but because Meredith’s programming was delivered by satellite, the Department argued that it could not be included. This new position had never been articulated in any statute, regulation, or public release. Nonetheless, in a technical bulletin issued in 2008, in which the Department advised that all programming, no matter how delivered, would be excluded from the property factor for years beginning on or after January 1, 2008, for purposes of the Metropolitan Commuter Transportation District (“MCTD”) surcharge, the Department also said, without citation, that film delivered by satellite had always been excluded. TSB-M-08(6)C (N.Y.S. Dep’t. of Tax. & Fin., June 4, 2008).

At the hearing before the ALJ, Meredith established, and both the ALJ and Tribunal agreed, that no matter how the programming was delivered, it was stored on tangible media in order to be broadcast, and that those hard copies were required under contract to be returned or destroyed after the broadcast. The Tribunal also found that there was no difference in Meredith’s use of the programming or its economic activity whether the programming was delivered by satellite or by videotape, and that the transition to satellite delivery in the early 1980s made “no difference to [Meredith’s] business activity.”

Tribunal decision. The Tribunal agreed with Meredith that the method of delivery — videotape or satellite — was “not dispositive” of whether the payment was included in the factor and that the method of delivery was “irrelevant.” However, the Tribunal found instead that the payments for programming, no matter how delivered, were payments for intangible rights and could not be included in the property factor. In reaching that decision, the Tribunal purported to rely on Disney Enters., Inc. v. Tax App. Trib., 40 A.D.3d 49 (3d Dept. 2007), aff’d on other grounds, 10 N.Y.3d 392 (2008), which had held that Disney could not increase the value of the film it owned (which all parties agreed was included in the factor) by measuring it by its then-current fair market value, rather than its original cost. In Disney, there was no question that the value of the Mickey and Minnie films, and all other Disney property, was included in the factor measured by cost, but the substantial appreciation in the value of the films was at issue.

Appellate Division decision. The Appellate Division has now reversed the Tribunal, holding that the Department made a significant change to its long-standing policy by applying retroactively a new rule that only programming delivered by tangible media would be included in the property factor. The Appellate Division noted that the definition of tangible personal property had not changed in nearly a century; that the Department had unquestionably long included in the factor programming delivered by tangible media; and that the record contained no “rational explanation of the videotape/satellite distinction that was germane to taxation.” Therefore, there was “no rational distinction for taxation purposes between programming sent to a station on videotape and programming sent via satellite.” The Appellate Division found that the Tribunal’s decision was a retroactive application of a new interpretation of the statute and had to be annulled.

Given this decision, the Appellate Division did not reach Meredith’s argument that the new statutory interpretation was baseless, or that the Tribunal applied an incorrect interpretation of the decision in Disney.

Additional Insights. The court’s decision may be significant for all broadcasters who consistently followed the Department’s longstanding position that rented programming was included in their property factor. As the Tribunal found, the shift to satellite delivery occurred by the 1980s and made no difference to the business operations of television broadcasters, which still were required to store that programming on tangible media in order to broadcast it. The Department was unable to present any justification for treating film delivered by satellite differently from film delivered by videotape.

For years after 2006, the single-sales-factor method of apportionment was completely adopted under Article 9-A, and thus the treatment of programming in the property factor is no longer an issue, except for determining the MCTD surcharge. Since the Third Department did not reach the issue of the validity of the Department’s new 2008 interpretation excluding all programming from the property factor for the MCTD, or the issue of whether the Tribunal’s reliance on Disney to exclude all rented film from the property factor would be respected, the treatment of rented film in the MCTD property factor after 2008 remains unresolved.