In a rarely released Update on Audit Issues (“UAI”), the New York City Department of Finance cautions those who are not a “registered securities or commodities broker or dealer” may not rely on the customer-based sourcing rules for sourcing receipts. This update comes even though two prior Department issued Finance Letter Rulings (“FLR”s) permitted unregistered partnerships to apply customer-based sourcing. The Department cautions that FLRs are issued to the Ruling applicant and are not precedential authority that can be applied to other taxpayers.
Under the current law, registered broker-dealers are permitted to source receipts from brokerage commissions, margin interest, certain underwriting revenues, advisory services, certain interest income, and several other categories of income based on the location of the customer. Those who aren’t registered are subject to a different set of sourcing rules which generally requires apportionment of receipts according to where the services were performed. So a New York based registered broker-dealer could source a management fee charged to a California client out-of-state, which an unregistered business performing a similar type activity would need to apportion the receipt to New York.
The “Broker-Dealer Rulings” referred to in the UAI (issued in 2013 and 2014) permitted the requestors to use customer based sourcing largely under the presumption that they were functioning as broker-dealers and were not registered due to an exemption provided by the SEC. In what seems a highly unusual comment in a Department of Finance publication of any sort, the UAI actually warns that not only isn’t the FLR precedent for anyone other than the applicant, but that “. . . DOF has determined that the Representations in the Broker-Dealer Rulings are not reliable.”
It looks like the Department is bracing us for an avalanche of audits to come. Going forward, it seems the word is out: if you want to rely on an FLR, particularly the Broker-Dealer Rulings, don’t even think about doing it without applying for your own.
Questions about the New York City Update on Audit Issues? Contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.
 New York City Department of Finance Updated on Audit Issues, Business Income Taxes – Income Allocation (November 25, 2016) (http://www1.nyc.gov/assets/finance/downloads/pdf/16pdf/audit_issues_11232016.pdf). Note that this is the only UAI issued in 2016, the one before that was issued in 2014 and you would have to go back to 2008 for the previous one, when five were released.