Judge Rules in Favor of Securities Broker-Dealer on Application of New York Broker-Dealer Sourcing | Blank Rome LLP

Although it has been more than 20 years since the enactment of customer-based sourcing for registered securities broker-dealers under the New York State corporate franchise tax, there have been few cases interpreting it. Therefore, a recently decided case involving the sourcing of an out-of-state broker-dealer’s receipt of certain fees merits attention. In re TD Ameritrade, Inc. (N.Y. Div. of Tax App. DTA No. 829523, Apr. 28, 2022). In TD Ameritrade, an Administrative Law Judge held that no portion of those fees should be sourced to New York under the broker-dealer sourcing rules because the mailing addresses of the “customers” that paid the fees—two related national banks—were outside New York State.

Facts: TD Ameritrade is an online securities broker-dealer headquartered in Omaha, Nebraska, with significant operations in New Jersey and Texas. Individual and institutional investors maintain brokerage accounts with TD Ameritrade. As is typical, brokerage clients deposit funds into their brokerage accounts, and direct TD Ameritrade on how the funds should be invested and what securities trades to make. 

Under Article 9-A, a registered securities or commodities broker-dealer sources in its receipts factor prescribed categories of receipts, including brokerage commissions, margin interest, and account maintenance fees, based generally on the mailing address of the “customer[s] responsible for paying” the receipts. Tax Law former § 210(3)(a)(9). At issue was the sourcing of fees denominated as “marketing fees” paid to TD Ameritrade by related banks having mailing addresses outside the State. The fee is in exchange for TD Ameritrade having directed billions of dollars of client deposits into a pooled omnibus account, and for performing certain recordkeeping services. 

Dispute: In its Article 9-A returns for the years 2012 through 2014, TD Ameritrade included the marketing fees in the denominator of its receipts factor, but not in the numerator. On audit, the Department sourced the fees based on the same percentages that TD Ameritrade used to source its brokerage commissions—that is, based on the mailing addresses of its brokerage clients. The Department’s position was that TD Ameritrade’s brokerage clients, not the banks, were the “customer[s] responsible for paying” the marketing fees, arguing that the fees represented interest being paid by the brokerage clients.

Decision: The ALJ held in favor of TD Ameritrade, finding that the banks paid the fees in exchange for TD Ameritrade having deposited large amounts of funds with them and performing certain recordkeeping services. According to the ALJ, this made the banks the “customer[s] responsible for paying” those fees under the broker-dealer sourcing rules.  The ALJ found no support in the record for treating the fees as interest that TD Ameritrade received from its brokerage clients. Since the mailing addresses of the banks were in New Jersey, the Department could not source the fees to the State. The ALJ also held in the alternative that if the banks were not the customers, then the broker-dealer sourcing rules were inapplicable, and the fees would then be sourced to where the services were performed by TD Ameritrade, which was in Nebraska and Texas, not New York.

Observations: Although subject to appeal, the ALJ’s decision that the banks were TD Ameritrade’s “customer[s] responsible for paying” the fees finds support from two factual determinations. First, that it was the banks that actually paid the fees to TD Ameritrade. Second, that TD Ameritrade’s brokerage clients could not have themselves commanded the higher yield that was received from the banks, which the ALJ felt proved fatal to the Department’s claim that the brokerage clients were the customers paying interest to TD Ameritrade.

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