Two affiliated companies share one office and split their combined operating expenses based on relative sales, with the company that overpaid its share reimbursed by the other. Does that reimbursement count as a 'business receipt' in the receipts factor used to calculate New York's business allocation percentage?

Plain-English summary

Mr. Daneli, Ltd. is a clothing manufacturer selling to retail stores and also to Pateli Fashions, Inc., an affiliated corporation, at cost; Pateli then resells the same products under its own label. The two corporations share a single office and, in Petitioner's words, "for all intents and purposes... act as one" -- using the same employees, space, and services. Whichever corporation's name an expense is billed under pays it first, and the expenses are then apportioned between the two based on each corporation's share of their combined total sales. The corporation that ends up having paid more than its proportionate share is reimbursed by the other. To simplify its bookkeeping, Petitioner reports that reimbursement as "other income," labeled "Expenses Allocated to Affiliate," rather than reducing each underlying expense line item.

The question was whether that reimbursement counts as a "business receipt" in the receipts factor of the business allocation percentage under Tax Law § 210.3(a)(2), which is defined by 20 NYCRR 4-4.1(a) as "gross income received in the regular course of the taxpayer's business." Receipts from selling capital assets, for example, are excluded because they don't meet that test (20 NYCRR 4-4.6(e)). The Department drew on two prior State Tax Commission decisions -- Becton, Dickinson (short-term investment income not a business receipt because it doesn't arise from regular business operations) and Aerojet-General -- to conclude that Petitioner's expense reimbursements likewise do not arise directly from the regular course of its clothing-manufacturing business. The Department characterized the reimbursements as "more nearly akin to a return of principal in a loan transaction than to receipts derived from the operation of a business enterprise for profit," noting that Petitioner could just as easily have recorded them as reductions to each individual expense account rather than as income.

The Department was careful to cabin its holding: receipts from actual SALES of goods or services between the two affiliates -- such as one charging the other a management fee -- remain fully includible business receipts. The exclusion applies only to true expense-sharing reimbursements, not to arm's-length intercompany charges for goods or services rendered.

What this means for you

Affiliated companies that share office space, staff, or overhead

If you split shared operating costs with an affiliate by proportionate allocation and one company reimburses the other for its overpaid share, that reimbursement is not a taxable "business receipt" for New York allocation purposes -- it functions more like settling a loan than earning income.

Choosing how to book cost-sharing reimbursements

The Department noted Petitioner could have simply netted the reimbursement against each expense line rather than showing it as "other income." Either bookkeeping approach reaches the same tax result here, but showing it as income invites the very question this Opinion had to resolve -- consider netting against expenses to avoid ambiguity.

Don't confuse cost reimbursement with intercompany sales

This exclusion is narrow: if your affiliate pays you for goods or services (management fees, product sales, etc.) rather than simply reimbursing a shared cost, that payment IS a business receipt and belongs in the receipts factor.

Common questions

Q: We split overhead costs with an affiliated company and get reimbursed for our overpaid share. Is that reimbursement taxable New York business income?
A: It's not a "business receipt" includible in the receipts factor of your business allocation percentage, because it doesn't arise from the regular course of your own business -- it's more like recovering an advance than earning income.

Q: Does it matter how we label the reimbursement on our books?
A: No -- the Department looked to the substance of the transaction (cost-sharing) rather than the bookkeeping label ("other income").

Q: What if the affiliate is paying us for services, not just reimbursing shared costs?
A: That's different -- receipts from sales of goods or services between affiliates (e.g., a management fee) remain includible business receipts.

Q: Can another company with a similar cost-sharing arrangement rely on this Opinion?
A: No. It binds the Department only as to Mr. Daneli, Ltd.'s own facts and can't be relied upon by other taxpayers, even those with similar affiliate expense-sharing arrangements.

Citations and references

Statutes, regulations, and rulings:

• Tax Law § 210.3(a)(2)
• 20 NYCRR 4-4.1(a), 4-4.6(e)
• Matter of Becton, Dickinson and Company, TSB-H-82(19)C
• Matter of Aerojet-General Corporation, TSB-H-80(24)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1984.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a84_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-84 (12) C
Corporation Tax
October 16, 1984

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C821021A

On October 21, 1982 a Petition for Advisory Opinion was received from Mr. Daneli, Ltd.,
1359 Broadway, New York, N.Y. 10018.
The issue presented is whether reimbursements for certain payments made on behalf of an
affiliated corporation are includible in the business receipts factor utilized in computing Petitioner's
business allocation percentage for purposes of the Franchise Tax on Business Corporations imposed
under Article 9-A of the Tax Law.
Petitioner is a clothing manufacturer. Its products are sold to retail stores throughout the
country and to Pateli Fashions, Inc., a related corporation ("Affiliate") at cost. Affiliate, in turn, sells
its products to retail stores throughout the country. Both Petitioner and Affiliate sell the same
product, but with different labels, for marketing purposes.
Petitioner describes its operation as follows. The two corporations share a single office.
Manufacturing, selling, shipping and administrative expenses are attributable to both organizations.
Both Petitioner and Affiliate utilize the same employees, space and services in an identical manner.
Expenses are initially paid by the corporation billed, regardless of which corporation actually
incurred the expense. For all intents and purposes, the two corporations act as one. Consequently,
the expenses incurred during the course of the year are apportioned between the two corporations.
The apportionment of the expenses is based on the percentage of each corporation's sales compared
with the total sales of the two corporations. Each corporation's proportionate percentage of combined
sales is applied to the expenses. The corporation which has paid more than its proportionate share
of combined operating expenses is reimbursed by the other corporation. Petitioner states that in order
to simplify its bookkeeping procedures, such reimbursement is shown as "other income" on
corporate tax returns, and is entitled "Expenses Allocated to Affiliate". Petitioner states that this
method of showing the reimbursement for the expenditures as an income item is simpler than that
which would be involved in adjusting each expense item separately.
Section 210.3(a)(2) of the Tax Law sets forth the method for computing the receipts factor
utilized in computing a corporation's business allocation percentage. The receipts includible are these
categorized in the statute as being derived from sales of tangible personal property, services, or
rentals, and other business receipts.
Section 4-4.1 of the Franchise Tax Regulations provides for the computation of the receipt factor of
the business allocation percentage by "dividing the sum of the New York State business receipts by
the taxpayer's total business receipts within and without New York State during such period." The
term "business receipt" is defined as "gross income received in the regular course of the taxpayer's

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-84 (12) C
Corporation Tax
October 16, 1984

business . . . . " 20 NYCRR 4-4.1(a) Thus, for example, receipts from the sale of capital assets do
not constitute business receipts, and are not included in the receipts factor. 20 NYCRR 4-4.6(e)
In Matter of Becton, Dickinson and Company, State Tax Commission, August 4, 1982, TSBH-82(19)C, it was held that income from short-term commercial paper and certificates of deposit did
not constitute "business receipts" includible under section 210.3(a)(2) of the Tax Law because not
arising from the regular course of operation of the business. In the present matter the receipts at issue
do not arise directly from the regular course of Petitioner's business. Cf., Matter of Aerojet-General
Corporation, State Tax Commission, July 7, 1980, T-SB-H-80(24)C. The payments at issue herein
do not, thus, constitute business receipts of the type envisaged by Tax Law, §210.3(a)(2) and 20
NYCRR 4-4.1(a). Indeed, Petitioner could quite properly have recorded them in the form of
reductions of each individual expense account. They are more nearly akin to a return of principal in
a loan transaction than to receipts derived from the operation of a business enterprise for profit.
Accordingly, Petitioner's receipts constituting reimbursed expenses, as described herein, are not
includible in the computation of the receipts factor of the business allocation percentage as provided
for in Section 210.3(a)(2) of the Tax Law. Excluded from the treatment prescribed in this opinion,
it should be noted, would be receipts from sales of goods or services (e.g., management fees) by one
of the two corporations to the other.

DATED: October 3, 1984

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.