A Texas securities firm has no New York office, only floor brokers ('$2 brokers') executing orders on the NYSE/AMEX. How much of its commission income -- from unrelated firms' orders, and from its OWN customers' orders -- gets allocated to New York for franchise-tax purposes?

Plain-English summary

Eppler, Guerin & Turner, Inc., a Delaware corporation headquartered in Dallas, Texas, is a securities broker-dealer with NO New York office -- but does employ floor brokers who work from booths on the floors of the New York and American Stock Exchanges (paying under $10,000/year in booth fees). These floor brokers are Petitioner's ONLY New York employees, and act purely as "$2 brokers": they execute buy/sell orders on the exchange floor for whichever brokerage firm requests their services (including Petitioner itself), but don't obtain orders or clear transactions -- all clearing runs through the Stock Clearing Corporation and/or AMEX Clearing Corporation. Floor brokers are paid based on the income they generate for Petitioner: amounts unrelated firms pay for order execution, plus amounts credited for executing Petitioner's OWN customers' orders (credited at a slightly higher rate than what an unrelated firm would pay, to prioritize Petitioner's own customers).

For tax years 1979-81, the audit question was how much of this commission income to allocate to New York in Petitioner's Article 9-A receipts factor. Two rules potentially applied: the general rule that 100% of receipts from services PERFORMED in New York are allocated to New York (20 NYCRR 4-4.1(b)(2)), and a securities-broker-specific rule presuming 20% New York allocation when an order ORIGINATES at a bona fide out-of-state office and is transmitted to New York for execution (20 NYCRR 4-4.3(c)(2)) -- with a taxpayer-friendly override letting the taxpayer use its actual experience instead, if it proves the 20% presumption doesn't fairly reflect its New York-attributable income (4-4.3(c)(4)).

Petitioner agreed unrelated-firm commissions are 100% New York. But for its OWN customers' orders (which originate outside New York and are executed by Petitioner's New York floor brokers), Petitioner argued the presumptive 20% rule shouldn't apply at all, because Petitioner isn't a "clearing firm" and the 20% rate supposedly represents an arm's-length clearing/execution charge. Instead, Petitioner wanted to cap the New York-attributable amount at what it would have earned from -- or paid to -- an UNRELATED floor broker for the same execution (which was less than 20%, given its higher internal crediting rate).

The Department rejected Petitioner's substitute methodology outright: the amount Petitioner would have earned or paid on the open market is IRRELEVANT to the actual-experience override, because it doesn't show how much commission income was actually GENERATED by activities performed within New York. To use the actual-experience alternative under 4-4.3(c)(4), Petitioner must instead analyze its total activities generating that commission income (e.g., through an expense analysis) to show what percentage is truly attributable to in-state versus out-of-state activity -- merely alleging the 20% rate is "unfair" doesn't meet that burden. Absent such proof, the presumptive 20% rate applies to Petitioner's own-customer floor-execution commissions. The Department declined to determine the exact dollar figure, since that's a fact question for the ongoing audit.

What this means for you

Out-of-state broker-dealers with New York floor-broker presence only

Even without a New York office, having employees execute trades on a New York exchange floor creates New York-source receipts. Commissions from UNRELATED firms' orders you execute are 100% New York; commissions from your OWN out-of-state customers' orders default to a 20% presumptive New York allocation.

Rebutting the 20% presumptive securities-allocation rate

If you want to use a lower actual-experience rate instead of the 20% default, you must affirmatively prove -- through an analysis of your actual New York versus non-New York activities and expenses -- what percentage of the commission income was truly generated by New York activity. Pointing to what an unrelated firm would have charged for the same service does NOT satisfy this burden, since it doesn't measure where the income-generating activity actually happened.

Common questions

Q: Are commissions from executing OTHER firms' orders on the NY exchange floor 100% New York?
A: Yes -- both parties agreed, and the Department confirmed, that's 100% allocable since the service is performed entirely in New York by Petitioner's only New York employees.

Q: What's the default New York allocation for a firm's own out-of-state customer orders executed by New York floor brokers?
A: 20% of that commission income, under the presumptive rule in 20 NYCRR 4-4.3(c)(2), unless the taxpayer proves a different rate via the actual-experience alternative.

Q: Does showing what an unrelated floor broker would have charged prove the 20% rate is unfair?
A: No -- the Department explicitly held that's irrelevant, since it doesn't demonstrate how much commission income was generated by activities actually performed within New York.

Q: Can another broker-dealer rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other broker-dealers, even with similar floor-broker arrangements.

Citations and references

Statutes and regulations:

• Tax Law § 210.3(a)(2)
• 20 NYCRR 4-4.1(b)(2), 4-4.3(c)(2), 4-4.3(c)(4)
• Tax Law § 171, subd. twenty-fourth; 20 NYCRR 901.1(a)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a86_16c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (16) C
Corporation Tax
September 2, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C841107A

On November 7, 1984, a Petition for Advisory Opinion was received from Eppler, Guerin
& Turner, Inc., 2001 Bryan Tower - Suite 2300, Dallas, Texas 75201.
The issue raised is what portion of Petitioner's receipts should be allocated to New York
State, pursuant to Article 9-A of the Tax Law, for taxable years ended August 31, 1979, August 31,
1980 and August 31, 1981 as a result of services rendered by Petitioner's floor brokers who act as
"$2 brokers" (brokers who execute but do not clear transactions) on the floors of the New York and
American Stock Exchanges.
Petitioner, a corporation organized under the laws of the State of Delaware, is engaged in the
securities business as a broker and dealer and has its principal place of business in Dallas, Texas.
Petitioner does not have an office in New York State, but does have employees located in New York
State in the capacity of floor brokers who operate from booths located on the floors of the New York
and American Stock Exchanges. The fee for utilizing these booths is less than $10,000 annually.
Petitioner's floor brokers perform all of their services within New York State and are
Petitioner's only employees located in New York State. They act as "$2 brokers" and the only
services they perform are the execution of buy and sell orders on the floors of the New York and
American Stock Exchanges. Petitioner's floor brokers execute orders on behalf of any brokerage
firm, including Petitioner, which requests their services. Petitioner's floor brokers do not obtain
orders or clear transactions on behalf of Petitioner. All of Petitioner's orders are cleared through the
Stock Clearing Corporation and/or the American Stock Exchange Clearing Corporation.
The compensation paid to Petitioner's floor brokers is based on the income they earn for
Petitioner in acting as floor brokers. The income they earn is the sum of the amounts received from
unrelated firms for executing such firms' orders and the amounts credited to them for executing
orders on behalf of Petitioner's customers. However, in order to encourage its floor brokers to give
priority to the execution of Petitioner's customers' orders rather than those of unrelated firms,
Petitioner credits its floor brokers with a slightly higher amount than what an unrelated third party
would pay Petitioner to have Petitioner's floor broker execute the unrelated firm's order. The amount
credited to Petitioner's floor brokers for executing Petitioner's customers' orders is higher than the
amount which Petitioner would have paid to unrelated floor brokers for execution of Petitioner's
customers' orders.
Section 4-4.1(b)(2) of the Business Corporation Franchise Tax Regulations (hereinafter
Article 9-A regulations), provides that 100 percent of receipts from services performed in New York
State are allocable to New York State. 20 NYCRR 4-4.1 (b)(2).

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-86 (16) C
Corporation Tax
September 2, 1986

Section 4-4.3(c) of the Article 9-A regulations pertains to taxpayers who are security and
commodity brokers and paragraph (2) of such section 4-4.3(c) states that "For taxable periods
commencing on and after January 1, 1978, if the order originates at a bona fide established office
of the taxpayer located outside New York State and is transmitted to the New York State place of
business for execution on an exchange located in New York State, 20 percent of the commission in
the case of stocks, bonds and commodities must be allocated to New York State and included in the
gross income attributable to New York State in the taxable period in which such order is executed."
20 NYCRR 4-4.3(c)(2).
Section 4-4.3(c)(4) of the Article 9-A regulations provides that for taxable periods
commencing on and after January 1, 1978, the taxpayer may allocate commission income on the
basis of actual experience if the taxpayer can demonstrate to the satisfaction of the Tax Commission
that the allocation pursuant to section 4-4.3(c)(2) of the Article 9-A regulations does not fairly reflect
the amount of commission income attributable to New York State. 20 NYCRR 4-4.3(c)(4)
Petitioner believes that the 20 percent allocation of commission income provided pursuant
to Article 9-A regulation section 4-4.3(c)(2) represents the presumed arm's length charge for
execution and clearing that would be paid by a nonclearing firm to an unrelated clearing firm for
executing and clearing transactions for the nonclearing firm. Since Petitioner is not a clearing firm
and does not perform clearing services for the orders of its customers or for other firms, it believes
that the 20 percent allocation of commissions is inapplicable in Petitioner's case.
Petitioner agrees that its receipts derived from unrelated firms for services performed by
Petitioner's floor brokers in New York State are allocable 100 percent to New York State. However,
where the Petitioner's floor brokers execute Petitioner's customers' orders in New York State, it is
Petitioner's contention that the value of the services performed by its floor brokers cannot exceed the
cost of having those services performed by unrelated floor brokers or, put another way, the floor
brokerage commissions that Petitioner would have earned if the orders had originated with an
unrelated firm. Therefore, Petitioner submits, pursuant to Article 9-A regulation section 4-4.3(c)(4),
that the amount of commission income that is attributable to New York State is either the amount
Petitioner would have earned on such orders if they had been orders of an unrelated third party or
the amount Petitioner would have paid to unrelated floor brokers to obtain execution of these orders.
For taxable years ended August 31, 1979, August 31, 1980 and August 31, 1981, Petitioner's
commission income derived from the execution of buy and sell orders on the New York and
American Stock Exchanges, should be included in the numerator of Petitioner's receipts factor at a
rate of 20 percent where such orders arise without the State, unless the Petitioner can establish to the
satisfaction of the Tax Commission, pursuant to 20 NYCRR 4-4.3(c)(4), that such rate does not
fairly reflect the amount of commission income attributable to New York State. This regulation
places the burden of proof upon Petitioner. Petitioner's burden of proof is not met by merely alleging
unfairness. To demonstrate that the allocation to New York State of 20 percent of commission

-3­
TSB-A-86 (16) C
Corporation Tax
September 2, 1986

income does not fairly reflect the amount of commission income attributable to New York State,
Petitioner must analyze the total activities involved in the generation of the commission income in
question (e.g. through an analysis of relevant expenses) and thereby determine the percentage of the
commission income attributable to such activities within and without New York State.
The amounts of commission income that Petitioner would have earned on such orders if they
had been orders of an unrelated third party or would have paid to unrelated floor brokers to obtain
execution of these orders are irrelevant to this question since they do not demonstrate the extent to
which the commission income was generated by activities actually performed within New York
State.
The precise portion of the commission income at issue which fairly reflects the amount of
commission income attributable to New York State and which is includible in the numerator of the
receipts factor in the present matter is a question of fact not susceptible of determination in an
Advisory Opinion. An Advisory Opinion merely sets forth the applicability of pertinent statutory
and regulatory provisions to "a specified set of facts." Tax Law, 171, subd. twenty-fourth; 20
NYCRR 901.1(a). Inasmuch as the question presented here arises within the context of an audit, the
necessary factual determination will be made within such context, in accordance with the principles
outlined above.

DATED: September 2, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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