The New York State Department of Taxation and Finance has issued an Advisory Opinion concluding that a financial corporation in New York that conducted certain essential business activities in New Jersey at a third party’s “hosting center” is considered to be “doing business” in New Jersey and therefore may apportion some of its income outside the State under the former New York State bank tax. Advisory Opinion, TSB-A-16(3)C (N.Y.S. Dep’t of Taxation & Fin., May 27, 2016). The Department applied the same “doing business” rules as are used to determine whether an out-of-State corporation is doing business in New York.
Facts. A wholly owned financial subsidiary of a global corporate group had its principal office in New York, and all of its employees were based in the State. It principally provided settlement services to large financial institutions throughout the world to mitigate settlement risk from one party to a financial transaction failing to pay what it owes. Beginning in 2004, the subsidiary (“Settlement Provider”) entered into a “hosting agreement” with a third-party provider under which the subsidiary was supplied with hosting space and related services at a hosting center in Secaucus, New Jersey.
During the years in issue (2008 and 2009), Settlement Provider maintained some of its data processing equipment at the hosting center. Its New York employees, together with employees of an overseas affiliate, monitored its settlement service on a daily basis. From time to time, its employees performed that monitoring function at the Secaucus hosting center using its data processing equipment maintained there. The on-site employee responding to a settlement exception would, among other things, contact the relevant parties and verify that the necessary “pay-in” funding for the settlement had, in fact, occurred.
In 2008, at least five of the Settlement Provider’s employees traveled regularly to the Secaucus hosting center making approximately 60-70 trips. During 2009, a single employee made approximately 50 trips to the hosting center. Settlement Provider was subject to former Article 32 in 2008 and 2009, but also filed New Jersey franchise tax returns for those years.
Advisory Opinion. The issue presented was whether the Settlement Provider was “doing business” in New Jersey so as to be entitled to apportion its income under former Article 32 (“bank tax”). Under the bank tax, a banking corporation must “carry on” business outside New York State in order to apportion its income outside the State by formula. Former Tax Law § 1454(b)(1). The Department ruled that Settlement Provider was doing business in New Jersey because of the nature and frequency of its employees’ trips to New Jersey, its long-term license to use the hosting center space, and its maintenance of computer equipment at the hosting center. Therefore, Settlement Provider was allowed to apportion its income for bank tax purposes.
Under the bank tax regulations, the statutory term “business carried on” for apportionment purposes means “doing business” as defined under 20 NYCRR § 16-2.7 (definition of “doing business”). Thus, the same factors used to determine whether a corporation is doing business in New York—e.g., the nature, continuity, frequency, and regularity of its activities—are used to determine whether the corporation is carrying on business outside the state for apportionment purposes.
The Department ruled that the conduct by Settlement Provider’s employees at the Secaucus hosting center in resolving potential transaction errors was critical to its successful functioning as a financial institution and was sufficient proof that it was carrying on business outside the State in New Jersey. The Department also relied on Article 9-A precedent since the “doing business” criteria in Article 9-A and former Article 32 are substantially the same.
The fact that the hosting center was not a bona fide office or branch of the Settlement Provider did not change the result. Rather, the Department concluded that having employees travel to the hosting center on average more than once a week meant that the corporation was doing business in New Jersey. Also relevant was the fact that the corporation had the right to use the hosting space for a 10-year period (evidencing continuity), as well as the fact that the Settlement Provider maintained its own equipment there. The Department did not, however, rule on how much of the Settlement Provider’s income could be apportioned outside the State.
Additional Insights
The Advisory Opinion is not surprising given the bank tax regulations, which expressly apply the “doing business” nexus standards in determining whether a banking corporation is “carrying on” business outside the State. Although the Advisory Opinion addressed the right of a banking corporation to apportion its income, it is also a reminder of the broad scope of the New York nexus rules, even prior to corporate tax reform. Thus, having access to space in New York—even if, as here, not pursuant to a formal lease—and regularly sending employees into the State to perform critical business functions will typically result in taxable nexus with New York.
