Upholding a policy first announced by the Department of Taxation and Finance in 2008, the New York State Tax Appeals Tribunal has affirmed the decision of an Administrative Law Judge that film cannot be included in the property factor, reversing years of contrary treatment in New York. Matter of Meredith Corporation, DTA No. 822396 (N.Y.S. Tax App. Trib., Mar. 10, 2011).

The dispute concerned the petitioner’s television broadcasting business, operated out of its headquarters in Des Moines, Iowa, during the tax years ended June 30, 1998, June 30, 1999, and June 30, 2000. During the course of an audit, the petitioner sought to include in its property factor payments it made to secure television programming from various third parties. The petitioner was initially advised by auditors from the Department that programming delivered on videocassette was properly included in the property factor calculation, but not programming delivered by satellite transmission. The petitioner then filed refund claims for each year, premised on including in its property factor all payments for programming. Virtually all of petitioner’s programming was delivered by satellite transmission, although the agreements also provided for the delivery of a hard copy, which was generally employed as a backup arrangement. Because all of petitioner’s television stations were located outside of New York, the payments were included in the denominator but not in the numerator of the property factor, thereby decreasing the allocation of income to New York.

At the hearing, petitioner introduced the testimony of two witnesses who testified that satellite signals are tangible and “‘very real’” and that satellite transmission was “‘something physical.’” The petitioner argued that the combination of satellite transmission and backup tapes constitutes personal property under Tax Law § 208(11). The petitioner also relied on a letter issued

by the Department’s Office of Counsel on July 2, 1991, confirming another taxpayer’s position that the payments made for film were included in the property factor by multiplying the amount paid by the New York State viewing audience divided by the total viewing audience. The advice given in the 1991 letter was in accordance with TSB-M-83(20)C (N.Y.S. Dep’t of Taxation & Fin.), “Valuation of Films Produced by Broadcasters for Television Exhibition in Computing the Property Factor of the Business Allocation Percentage,” a policy statement that held that, for corporations engaged in the business of broadcasting television programs, the value of a film attributable to New York State was determined by multiplying the average fair market value of the film by the New York State viewing audience ratio. In 2008, the Division issued TSB-M-08(6)C, “Computation of the MTA Surcharge for Corporations Engaged in the Business of Broadcasting” (N.Y.S. Dep’t of Taxation & Fin. June 4, 2008), which, for purposes of the MCTD allocation percentage, announced that the value of a program received in hard copy “may not be included in the property factor…since it is not considered to be tangible personal property. This new position applies to taxable years beginning on or after January 1, 2008.” The 2008 TSB-M also noted that programs obtained in electronic form “have always been considered an intangible right or license” and cannot be included in the MCTD property factor.

The Tribunal held that what the petitioner was acquiring was the right to broadcast a program, which is equivalent to a copyright and constitutes an intan gible asset, which cannot be included in the property fact or.

The Tribunal held that what the petitioner was acquiring was the right to broadcast a program, which is equivalent to a copyright and constitutes an intangible asset, which cannot be included in the property factor. The Tribunal, as had the ALJ, relied heavily on the decision in Matter of Disney Enterprises, 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 grounds, 10 N.Y.3d 392 (2008), concluding that the rights acquired by the petitioner were similar to those at issue in Disney, which concerned how Disney was permitted to value the films it acquired in order to reproduce them for sale in the consumer market. The Tribunal in Meredith found that the copyrights derived from the ownership of film negatives in Disney are “analogous to broadcast rights from licensing agreements,” and that it was “of no moment” that in Disney the challenge was to a fair market valuation. The Tribunal in Meredith also rejected the arguments raised by The Motion Picture Association of America in an amicus curiae brief, stating that it rejected the “arguments based upon the definition of film because this matter does not concern film, but rather the licensing of broadcast rights.”

Additional Insights. This decision in effect reverses New York’s long-standing practice of generally treating film as tangible personal property and including it in the property factor. See, e.g., Matter of MCA, Inc., TSB-H-78(7)C (May 3, 1978), in which the State Tax Commission treated film as tangible personal property for purposes of the New York investment tax credit; TSBM- 81(19)C (N.Y.S. Dept of Taxation & Fin. Nov. 20, 1981), which stated that “motion picture films” are property for purposes of computing the property factor of the New York business allocation percentage. The decision is also contrary to the position taken by California, another state with a large number of taxpayers in the television and film business, which provides by regulation that “[a] ‘film’ is deemed to be tangible personal property” and is included in the property factor, with various special provisions regarding valuation, timing, etc. Cal. Code Regs. tit. 18, § 25137-8(a)(4). However, due to New York’s shift to a single sales factor, fully effective as of 2007, the long-term effect of this change should not be significant.

The Tribunal’s reliance on Disney is curious. In both the ALJ and Tribunal decisions in Disney, the issue appears not to be whether the film is included in the factor at all, but rather whether it would be valued on a cost basis or on a fair market value basis. The Tribunal in Disney, in affirming the ALJ, described the ALJ’s decision as rejecting the argument that “the film masters should be included in the property factor at their fair market value instead of at a value equal to their original cost,” but neither the ALJ decision nor the affirmance by the Tribunal appears to require that the film be entirely excluded from the factor. The Tribunal in Meredith also states that it rejected the amicus arguments made by The Motion Picture Association of America because the matter does not concern film, but rather the licensing of broadcast rights, but the Disney decision, on which the Tribunal relies so heavily, also concerned film negatives, which the Tribunal found “analogous” to broadcast rights.