Broker-Dealer succeeds in fighting look-through sourcing in New York | Pillsbury – SeeSalt Blog

A New York State Division of Tax Appeals administrative law judge has rejected the New York State Division of Taxation’s use of a look-through approach to procurement fees paid to a broker for marketing, record keeping and support services. The decision of April 28, 2022 in TD Ameritrade, Inc. Caseconfirms that these charges are correctly charged to the location of the paying customer, in this case two banks.

TD Ameritrade offered its brokerage clients a cash sweep option in which excess cash from the brokerage account would be transferred daily to an insured deposit account (IDA), where it would earn interest. IDAs were managed by TD Bank, NA or TD Bank USA, NA, two national banks headquartered in New Jersey that were operated and managed independently of TD Ameritrade. Excess liquidity in the CIDs was pooled into a single omnibus account.

Banks have contracts with TD Ameritrade for CDI-related services. TD Ameritrade has maintained books and records for the banks, including daily balances, accrued interest, and names, addresses, and social security or tax identification numbers of brokerage clients; provided independent auditors, reviewers and regulators with access to books and records; and maintained an emergency backup system for books and records. It has also provided banks with reports as part of their asset and liability management and forecasting programs. In exchange for these services, the banks paid TD Ameritrade a fee based on the weighted average return of customers’ IDA balances, less interest paid to customers, annual service fees, FDIC deposit insurance fees, and some other adjustments.

For purposes of calculating the revenue factor, the New York brokerage rules in effect for the 2012-2014 tax years assigned the charges at issue to “the mailing address on file with the client’s taxpayer who is responsible for the payment” the fees . The Division asserted that the fees must originate from the location of the brokerage clients. The Division argued that the brokerage’s customers were “responsible for payment” because the fees were based on the total return earned on cash in CIDs. The ALJ flatly rejected this argument. The ALJ found that the banks were customers of TD Ameritrade and that the banks incurred and paid the costs for TD Ameritrade’s marketing, record keeping and support services. Since the banks were responsible for paying the fees, the fees had to come from the banks location in New Jersey.

Transparent sourcing, i.e. sourcing receipts at the customer’s customer location, is gaining popularity with state tax authorities, especially when the taxpayer’s customer is outside the jurisdiction. tax. Like TD Ameritrade, Inc. Case illustrates, whether a look-through approach is appropriate obviously depends on what the relevant laws say. In most cases, the source of funds used to pay a service provider’s fees should have no impact on procurement.

The deal is TD Ameritrade, Inc. Case, DTA No. 829523 (April 28, 2022). The determination is available here.

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