A New York corporation acts as a selling agent for an out-of-state manufacturer, using resident salesmen based in various states (plus dedicated sales offices in California and Illinois) who never come to the New York office; all orders are simply mailed to New York for processing, and all employees are paid from the New York administrative office. Can the company allocate its sales-commission income to whichever state each sale was actually made in, or does a different rule apply?

Plain-English summary

Glen Oaks Sales Co., Inc., a New York corporation, acted as a selling agent for a Delaware manufacturer doing business in Texas, earning commissions on sales made throughout the United States. Its salesmen were spread across multiple states, with dedicated sales offices specifically in California and Illinois; none of the salesmen were required to, or did, come to the New York office. Contact with salesmen was maintained by phone or at trade shows, they were supervised by district managers who also lived outside New York, and every order was simply mailed to the New York office for processing -- where all employees were also paid from. Glen Oaks wanted to allocate its commission income to whichever state each specific sale was actually made in.

The Department rejected that state-by-state, sale-by-sale approach. Under 20 NYCRR § 4-4.3, commission income is allocated to New York based on where the underlying SERVICES generating the commission were performed -- and services are deemed performed in New York specifically when the salesman is "attached to or working out of" a New York office. It doesn't matter where a particular sale transaction physically happened, and it doesn't matter that the company's administrative headquarters, payroll, and order-processing all ran through New York. Applying that rule to Glen Oaks's facts, the Department held that commissions on sales made by salesmen working out of the company's California and Illinois offices (and presumably any other non-New-York location) were not attributable to New York -- New York's share was limited to whatever commissions were earned by salesmen actually based in a New York office (which, on these particular facts, appears to have been none).

What this means for you

Commission sourcing follows the salesman's office, not the sale's location or your company's headquarters

If you run a multi-state sales operation from a New York administrative base, don't assume your New York headquarters pulls in commission income earned by salesmen physically stationed elsewhere -- the source-of-service test looks specifically at where each individual salesman is attached, regardless of where deals are processed or paid.

You cannot simply source commissions to wherever each individual sale occurred

Glen Oaks's proposed sale-by-sale geographic allocation was rejected -- the correct unit of analysis is the salesman's home office, not the transaction's location.

Common questions

Q: If my company processes and pays all commissions from a New York office, does that make all the commission income New York-sourced?
A: No -- what matters is where the salesman earning the commission is attached to or works out of, not where administrative processing or payroll happens.

Q: Can I allocate commissions based on the state where each individual sale was completed?
A: Not under this ruling -- allocation follows the salesman's home office, not the location of the specific transaction.

Citations and references

Statutes and guidance:

• Tax Law § 210.3
• 20 NYCRR § 4-4.3

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/h81_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-H-81(18)C
Corporation Tax
March 5, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C810112C

On January 12, 1981, a Petition for Advisory Opinion was received from Glen
Oaks Sales Co., Inc., 16 East 34th Street, New York, New York 10016.
Petitioner inquires as to the proper method of allocating receipts for
commissions on sales, made within and without New York State, under the Franchise
Tax on Business Corporations imposed under Article 9-A of the Tax Law.
Petitioner states that it is a New York Corporation which is a selling
agent for a Delaware corporation doing business in the State of Texas. Petitioner
employs resident salesmen in various states in the United States and in addition
maintains sales offices in California and Illinois. None of the salesmen are
required to nor do they come to the New York office of Petitioner. All orders are
mailed to the New York office. Contact with the salesmen is maintained by
telephone or at various trade shows throughout the United States. The salesmen
are supervised by district managers who also live outside New York State. All
employees are paid from the administrative office in New York. Petitioner seeks
to allocate income from sales commissions according to the state where earned.
Section 210.3 of the Tax Law, contained in Article 9-A, provides for an
allocation of a taxpayer's entire net income within and without New York. A
taxpayer's business income is allocated to New York by multiplying the same by
a business allocation percentage. One of the factors making up this business
allocation percentage is the ratio, expressed as a percentage, of the taxpayer's
receipts attributable to New York to its receipts from all sources. The Franchise
Tax Regulations provide rules for determining which receipts are so attributable
to New York and which are not. Sales commissions are treated as receipts from
compensation for services, to which the following applies:
"(a) The receipts from services performed in New York State are allocable
to New York State. All receipts from such services are allocated to New York
State whether the services were performed by employees, agents or subcontractors
of the taxpayer, or by any other persons. It is immaterial where such receipts
are payable or where they are actually received.
(b) Commissions received by a taxpayer are allocated to New York State if
the services for which the commissions were paid were performed in New York
State. If the services for which the commissions were paid were performed by the
taxpayer or by salesmen attached to or working out of a New York State office of
the taxpayer, the taxpayer's services will be deemed to have been performed in
New York State." 20 NYCRR 4-4.3
Accordingly, receipts from commissions where the services for which the
commissions were paid were performed in New York are attributable to New York.
Where such services were performed by Petitioner's salesman other than in New
York the commission income may not, as Petitioner suggests, simply be attributed
to the state where the services were performed. Rather, such commission income
would be attributable to New York in those instances where the salesman

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-H-81(18)C
Corporation Tax
March 5, 1981

performing the service giving rise to the income was "attached to or working out
of a New York State office of the taxpayer." Based on Petitioner's statement of
facts, its receipts from commissions are attributable to New York except for
commissions on sales made by salesmen working out of or attached to Petitioner's
offices in California or Illinois.

DATED:

March 3,1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau