In a surprising development, the New York State Department of Taxation and Finance (the “Department”) has filed an exception with the New York State Tax Appeals Tribunal (the “TAT”) to the determination issued by the New York State Division of Tax Appeals (“DTA”) in the Matter of Catalyst Repository Systems, Inc.1 The filing of this exception means that, for the first time, binding guidance will likely be issued regarding the proper classification and sourcing of receipts for apportionment purposes under Article 9-A of New York’s legacy corporate franchise tax regime (the “Tax”).
On August 24, 2017, the DTA issued a third2 decision granting a taxpayer victory regarding the proper classification of electronically delivered service receipts in the Matter of Catalyst Repository Systems, Inc.3 Catalyst is a Colorado-based electronic data and document repository corporation that provides litigation support services to its clients. On audit, the Department took the position that Catalyst’s litigation support service receipts were not receipts from the performance of services, because no employees, agents, subcontractors or other persons were involved in performing the services in question, and should instead be classified as ‘other business receipts.’ The Department also argued that Catalyst’s receipts were generated as the result of the sale of access to, and use of, its software. These arguments were identical to those raised by the Department in the Matter of CheckFree Services Corporation4 and Matter of Expedia, Inc.
In all three cases, the administrative law judges (“ALJs”) determined that there is no requirement – in the statute or regulations – for human involvement in an activity in order to properly classify receipts from the activity as service receipts. In addition, in both the Matter of CheckFree Services Corporation and Matter of Catalyst Repository Systems, Inc., the ALJs (1) rejected the Department’s attempt to classify the receipts as derived from the granting of access to, or use of, intangible assets, and (2) concluded that even if the receipts were properly classified as ‘other business receipts,’ the fees were not earned in New York simply because the client was in New York.