When I was in law school, Constitutional Law and Tax Policy were my least favorite subjects. Little did I know I would grow up to be a SALT expert and these subjects would be the foundations of my chosen practice area. Not on a day-to-day basis, but as the essential foundation to everything we do.
While my eyes may have occasionally glazed over in class, I did manage to learn that tax policy is what makes the law and it isn’t the law that should be making tax policy. This distinction might seem subtle or nonexistent, but I think is illustrated in all its grandeur in a New York State ALJ Decision, In the Matter of Moody’s Corporation & Subsidiaries, (DTA Nos. 828094 and 828203, October 24, 2019.)
There were four separate issues in this case, but the focus will be on the apportionment of receipts to New York State by the taxpayer, Moody’s Investors Services (MIS). MIS is hired by issuers of corporate debt to perform what we all know as bond rating services used by the investment public in making decisions regarding the appropriateness and the risk of investing in specific debt issues. Both the Tax Department and the taxpayer agreed that MIS performs these services for debt issuers with commercial domiciles throughout the world, the services are “used” by investors throughout the world, but most of the activities (roughly fifty seven percent) in formulating the ratings are performed in New York State.
Prior to New York’s recent switch to market-based sourcing (2015) which now requires receipts to be sourced where the “customer” receives the “benefit” of the services (clearly a new source of confusion and litigation is waiting to happen), services of the type performed by MIS were required to attributed to the location of where the services were performed. So why the litigation?
As we all know, the Tax Law provides for specific apportionment methods, but also permits discretionary adjustments to the application when the formula would achieve an unfair result. If the taxpayer requests the adjustment, the statute requires seeking permission in advance. MIS claimed an adjustment was in order and despite the Department’s contention, did provide ample proof of the request to use a method like that used for publishers and broadcasters, which allowed looking to the audience. Accordingly, MIS compared the population of New York State to the rest of the U.S. to apportion receipts.
The Department objected on audit and insisted that MIS look to where the services were performed as provided for in the statute. While the ALJ agreed with the statutory interpretation of the Department, he did not agree with the result. Now is where you will see the policy-law inversion which I refer to.
First, the ALJ did find ample proof for the MIS permission request, although all sides admit the Department never formally responded in the earlier years at issue. But more importantly, MIS documented that it’s biggest competitor, S&P, was granted permission to apportion receipts to New York using an audience proxy; exactly what MIS was doing on its returns.
The agreement was made public during related tax litigation. It was clear that S&P was granted alternative apportionment to prevent its move to New Jersey and taking three thousand plus jobs from New York. While keeping New York competitive is certainly vital, is this a job for lawmakers, the Commissioner, tax auditors or some combination of all the above?
Is this problem behind us with the new and improved market-based sourcing rules? I think it is just beginning.