![]() ![]() By aggregating data from hundreds of disparate databases, the taxpayer provided its customers a portal through which it could access the financial data needed to adequately serve its customers.Īt issue was the proper method to allocate the taxpayer’s receipts where both its customer and the customer’s customers benefited from the taxpayer’s service. The ruling supersedes two earlier taxpayer-specific rulings, Chief Counsel Ruling (CCR) 2015-3 and CCR 2017-1.ĬCR 2015-3 concerned a taxpayer that provided to its business customers integrated financial information services and analytical applications that, in turn, provided financial services to its own customers. In March the California Franchise Tax Board released Legal Ruling 2022-1, which explains the state’s new approach to market-based sourcing. Thus, the court concluded, the taxpayer’s receipts were properly allocated to the lender’s location, not the borrower. The value to the lender of the taxpayer’s service is the referral of a potential borrower moreover, the lender’s follow-up with the borrower is no guarantee that a loan will be granted. Indeed, the court pointed out, lenders and potential borrowers have no contact with each other until the lender reaches out to the buyer through the taxpayer’s website. The taxpayer, it said, uses its website to drive potential borrowers to use its services, not the services of individual lenders. On audit, the revenue agency determined that the taxpayer misallocated its income because it made the allocations by the lender’s location.Īccording to the agency, the taxpayer should have used the borrower’s location because that was the party that benefited from the taxpayer’s service, justifying its position with the argument that the taxpayer’s service is to procure customers for the lenders by promoting, marketing, and maintaining its website. It, not the lenders, collected the borrower’s information and then distributed it to the pool of lenders. The taxpayer provided a service that matched potential borrowers to participating lenders. In LendingTree TREE, a Washington appellate court came to a similar conclusion. In short, the banks were the taxpayer’s customers because they were the parties that benefited from the taxpayer’s services, not the taxpayer’s brokerage clients.īank sign on glass wall of business center getty The ALJ further found that even if the taxpayer’s brokerage clients, and not the banks, were the taxpayer’s customers, the fees paid by the banks could not be sourced to New York because the taxpayer’s services were not performed in the state. As none of the fees paid by the banks to the taxpayer for its services occurred in or were from a New York customer, the taxpayer’s receipts could not be sourced to New York. The fees paid by the banks were for the services enumerated above, and for the banks’ use of, for its own purposes, a large pool of funds that belonged to the taxpayer’s brokerage clients. In TD Ameritrade, an administrative law judge ruled that the taxpayer’s receipts paid by two New Jersey banks for marketing, recordkeeping, and support services regarding a fund that collectively belonged to the taxpayer’s brokerage clients could not be sourced to New York because it was the banks who were the taxpayer’s customers, not the individual brokerage clients. Yet that does not mean a look-through approach is always appropriate.Īlthough there is little case law on the validity of the look-through approach, thus far, most courts have sided with the taxpayer. Of course, there may be instances in which the look-through approach might be appropriate, but if so, that can only be determined case by case, depending on the peculiarities of a taxpayer’s business. The actual benefit, however, falls on the taxpayer’s customer because the taxpayer’s services enhance its customer’s ability to provide its customers with the service for which they have contracted with the taxpayer’s customer. The taxpayer’s customer’s customers undoubtedly benefit from the taxpayer’s services. Also, assigning receipts based on a third party that a revenue agency perceives to have received the ultimate benefit of the taxpayer’s services is suspect. The taxpayer is paid for its services by the customer, not the customer’s customers. For sourcing purposes, even if the taxpayer knows the identity and locale of its customer’s customers - which, in some cases, it does not - that knowledge is irrelevant. First, there is no privity of contract between the taxpayer and its customer’s customers. ![]()
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