Judge rules in favor of stockbroker on New York Broker-Dealer Sourcing application | Vide Rome LLP

Although more than 20 years have passed since client-based sourcing was enacted for registered stockbrokers under the New York State corporate franchise tax, there has been little of cases interpreting it. Therefore, a recently decided case regarding obtaining receipt of certain fees by an out-of-state broker deserves attention. In re TD Ameritrade, Inc. (NY Div. of Tax App. DTA No. 829523, April 28, 2022). In TD Ameritradean administrative law judge ruled that none of this fee had to come from New York under broker sourcing rules because the mailing addresses of the “customers” who paid the fee – two related national banks – were located outside of New York State.

Facts: TD Ameritrade is an online stockbroker headquartered in Omaha, Nebraska, with significant operations in New Jersey and Texas. Individual and institutional investors maintain brokerage accounts with TD Ameritrade. As usual, brokerage clients deposit funds into their brokerage accounts and direct TD Ameritrade on how the funds should be invested and what corporate actions to perform.

Under Section 9-A, a registered securities or commodities dealer generates in its revenue factor prescribed categories of revenue, including brokerage commissions, margin interest and account maintenance fees , usually based on the “customer’s” mailing address.[s] responsible for payment” of receipts. Former tax law § 210(3)(a)(9). At issue was the source of so-called “marketing fees” paid to TD Ameritrade by related banks with out-of-state mailing addresses. The fee is in exchange for TD Ameritrade directing billions of dollars in customer deposits into a pooled omnibus account and for providing certain record keeping services.

Dispute: In its Section 9-A filings for the years 2012 through 2014, TD Ameritrade included marketing expenses in the denominator of its revenue factor, but not in the numerator. During the audit, the Ministry determined the fees based on the same percentages used by TD Ameritrade to determine its brokerage commissions, that is, based on the mailing addresses of its brokerage clients. The Department’s position was that TD Ameritrade’s brokerage customers, not the banks, were the “customer[s] liable for payment” of marketing fees, arguing that the fees represented interest paid by the brokerage’s clients.

Decision: The ALJ ruled in favor of TD Ameritrade, finding that the banks paid the fees in exchange for TD Ameritrade depositing large sums of money with them and performing certain recordkeeping services. According to the ALJ, this made the banks the “customer[s] liable for payment” of such fees under the Broker Funding Rules. The ALJ found no evidence in the record to treat the fees as interest that TD Ameritrade received from its brokerage clients. Because the banks’ mailing addresses were in New Jersey, the Department could not charge the state for the charges. The ALJ also ruled in the alternative that if the banks were not the customers, then the broker sourcing rules were unenforceable, and the charges would then come from where the services were performed by TD Ameritrade, which was in Nebraska and Texas, not New York.

Comments: Although subject to appeal, the ALJ’s decision that the banks were “customers” of TD Ameritrade[s] liable for payment” of the costs is supported by two factual determinations. First, that it was the banks that paid the fees to TD Ameritrade. Second, that TD Ameritrade’s brokerage clients themselves could not have commanded the higher yield received from the banks, which the ALJ said proved fatal to the Department’s assertion that clients brokerage were customers paying interest to TD Ameritrade.

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