New York ALJ: Travel reservation facilitation receipts are service receipts
Multistate tax alert | February 17, 2015
This tax alert summarizes an Administrative Law Judge decision from the New York State Division of Tax Appeals holding that Expedia, Inc.’s receipts from its travel reservation facilitation business should be characterized as “services."
An Administrative Law Judge (the “ALJ”) from the New York State Division of Tax Appeals recently ruled in favor of Expedia, Inc. (“Expedia”), a Washington-based corporation, holding that Expedia’s receipts from its travel reservation facilitation business should be characterized as “services,” and therefore should be sourced to where the services are performed (in this case outside of New York), for purposes of apportioning income under Article 9-A of the New York Tax Law.1 The ALJ also ruled that the advertising receipts of an Expedia affiliate that operated an on-line travel search engine and directory should be classified as service revenue and sourced accordingly. The New York State Department of Taxation and Finance (the “Department”) had, on audit, asserted that such revenues constituted “other business receipts”, and sourced these receipts to New York using a customer location approach. The Department has the right to appeal this decision within 30 days of the ALJ’s ruling. Accordingly, the decision may not be final.2
In this Tax Alert we summarize this ALJ decision.
For tax years beginning prior to 2015, the New York tax law specified that receipts from services were required to be sourced to the location where the services were performed.3 By contrast, “other business receipts” were required to be sourced to where they were earned.4 The Department has taken the approach in recent years that the receipts of out-of-state businesses earned through transactions effected through electronic commerce or on-line were other business receipts and sourced to the location of the customer. This approach is based on their view that receipts from an electronic commerce/on-line transaction were earned from a simple, instantaneous and automated transaction, fully executed at the moment of a customer click. As such, the Department’s position was that the transactions at issue could not be services as, in their view, the applicable regulation required a human component at the moment of sale.5
In this case, Expedia asserted that the travel reservation facilitation receipts during the years at issue were receipts from services, properly sourced outside of New York based on its specific facts. Additionally, Expedia argued that its affiliate’s advertising receipts were also service receipts that, likewise, must be sourced outside of New York.
1 In re Expedia, Inc., New York State Division of Tax Appeals, Administrative Law Judge Unit, DTA Nos. 825025 and 825026 (Feb. 5, 2015), which may be accessed at the following link: http://www.dta.ny.gov/pdf/determinations/825025.det.pdf.
2 Note that ALJ determinations are not considered precedent, nor are they given any force or effect in other proceedings in the Division of Tax Appeals. However, an ALJ’s reasoning and analysis may potentially suggest how that ALJ may address similar facts presented by another taxpayer.
3 Former N.Y. Tax Law Sec. 210.3(a)(2)(B), prior to adoption of N.Y. Tax Law Sec. 210-A.10(a), as added by Section 16, Part A, Chapter 59, Laws of 2014, effective Jan.1, 2015.
4 Former N.Y. Tax Law Sec. 210.3(a)(2)(D), prior to adoption of N.Y. Tax Law Sec. 210-A.10(a), as added by Section 16, Part A, Chapter 59,Laws of 2014, effective Jan.1, 2015.
5 See TSB-A-99(16)C, Apr. 7, 1999 ; TSB-A-00(15)C, Sept. 6, 2000 ; TSB-A-02(3)C, Apr. 18, 2002; TSB-A-11(1)C, Dec. 28, 2010; TSB-A-11(8)C, July 12, 2011.
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