NY administrative ruling addresses numerous apportionment issues.

• Author: Amitay, Sharlene

A recent New York Division of Tax Appeals ruling addresses several significant apportionment issues raised by a group of taxpayers filing a combined report for New York corporation franchise tax purposes (In the Matter of the Petition Disney Enterprises, Inc., No. 818378, 2/12/04). Although the taxpayer conceded to file a combined report, the ruling addressed additional issues involving factor representation, factor valuation and application of the throwback rule. The ruling, which was issued by an administrative law judge (ALJ), is not precedential.

The taxpayer argued that New York-destination sales of certain group members should not be sourced to the state. According to the taxpayer, the companies that made the sales were protected from taxation under P.L. 86-272, because they were predominantly remote (i.e., catalog or online) sellers. However, as part of the unitary combined business group, the state sought to include their New York-destination sales in the numerator of the sales factor, in computing the apportionment factor.

Although none of the companies that made the sales engaged in any activities that exceeded P.L. 86-272 protection, the ALJ ruled that the New York activities of the other group members (including affiliates with retail stores in the state) were sufficient to require the nonnexus subsidiaries to source their destination sales to the state. The ALJ noted that the taxpayer's various subsidiaries were engaged in substantial cross-marketing activities and stategies. Further, the retail stores and the remote sellers sold the same or similar merchandise. The ALJ explained that these activities established that the companies' business in New York was not merely limited to remote/protected sales.

The ALJ's approach is commonly referred to as the "Finnigan" approach, after a California ruling interpreted to stand for the basic proposition that a "taxpayer," for purposes of determining P.L. 86-272 protection and subjectivity to throwback, is determined on a unitary-business-group basis; see Appeal of Finnigan Corp., CA State Bd. of Equal. (SBE), No. 88-SBE-022A, 1/24/90. California, however, abandoned the Finnigan rule a few years ago, in favor of the Joyce approach, which evaluates entities on a standalone basis for such purposes; see Appeal of Joyce, Inc., CA SBE, No. 066-SBE-069, 11/13/66.

This is the second administrative ruling in New York in the last two years to employ the Finnigan approach. In 2002, a different ALJ...