The Department has formally proposed regulations corresponding to the sweeping reform of New York state’s corporate tax framework as a result of Part A of Chapter 59 of the Laws of 2014 (hereinafter referred to as the Proposed Regulations). The Notice of Proposed Rulemaking and the Department’s summary can be viewed in the August 9, 2023 issue of the New York State Register. The Proposed Regulations follow a series of draft versions of the regulations shared by the Department over the past several years, and like all of the draft versions, the Proposed Regulations include numerous substantive changes.
This alert provides a brief explanation of New York’s rulemaking process and summarizes the most noteworthy substantive updates in the Proposed Regulations. We encourage all New York corporate taxpayers that may be impacted by these changes to contact us directly to discuss how the Proposed Regulations may affect their New York corporate tax reporting.
Background on New York’s rulemaking process
On August 9, 2023, the Department published the Proposed Regulations in the New York State Register, seeking to repeal and wholly replace 20 NYCRR Chapter 1, Subchapter A, the Business Corporation Franchise Tax, Parts 1 through 9. The Proposed Regulations are the culmination of an almost decade-long rewrite of the corporate franchise tax regulations following the comprehensive corporate tax law changes enacted as part of the 2014 corporate tax reform. Since drafting began in 2015, the Department has released over 40 draft versions of the regulations. Since the first draft was released, we have participated in countless meetings with the Department, the New York State Bar Association, and taxpayers alike to contemplate the impact, legality, and administrability of each such version.
The clock is now running on a 60-day public comment period, expiring October 10, 2023, after which the Proposed Regulations may be formally adopted. However, adoption is not automatic after the 60-day comment period. Based on an assessment of public comments, the Department could further revise the Proposed Regulations. Any substantial revisions would require the Department to submit a Notice of Revised Rule Making and extend the public comment period. Accordingly, the tax community is strongly encouraged to use this time to provide any additional comments to the Proposed Regulations.
Noteworthy inclusions in the Proposed Regulations
We highlight the following provisions of the Proposed Regulations that are notably different than the previously released version:
- Safe harbors for sourcing receipts. New York tax law requires taxpayers to source receipts from the sale of digital products and services using a hierarchy of methods.1 The methods impose an administrative recordkeeping burden on businesses. The Department recently proposed a “billing address safe harbor” and “inquiries safe harbor” to alleviate the administrative burdens the hierarchies impose on taxpayers with large numbers of customers. In the Proposed Regulations, the billing address safe harbor was amended to apply to taxpayers with more than 250 business customers, and the inquiries safe harbor was eliminated.
- Sales from unusual events. The Proposed Regulations eliminate the codification of an “unusual events” rule, whereby receipts from sales of real, personal and intangible property that arise from “unusual events” are excluded from the business allocation percentage. It is the Department’s intention that any such adjustment would be handled through a request for alternative apportionment.
- Receipts for services provided to non-regulated investment funds. The Department has advanced several methods for sourcing receipts for services provided to “passive investment customers” in prior versions of its draft regulations. These methods have proposed sourcing receipts from passive investment customers to (i) the location where the passive investment customer makes the decision to utilize the investment advice, (ii) the location where the service contract for such customer is managed, and (iii) the location where the investment decisions are made. The Proposed Regulations now include a rule that primarily sources such receipts to the location of the investors, and includes a secondary rule that applies when the investor location cannot be determined.
We also note that the Proposed Regulations continue to take an affirmative position on issues that have garnered much attention during audits and appeals, and bolster Department positions that are arguably beyond the scope of the statute. For example, the Proposed Regulations assert that a taxpayer cannot qualify for the benefits available to a “qualified New York manufacturer” if it uses contract manufacturers, and that the term “goods” does not include any digital products. The Proposed Regulations also assert that all members of a combined group must be a qualified emerging technology company in order to qualify for such benefits. These are examples of issues in which the Department is seemingly seeking to support questionable audit positions with regulatory guidance contrary to the plain language of the taxing statute. The Proposed Regulations also continue to include stringent procedural rules associated with the timing for requesting alternative apportionment and the computation of the prior net operating loss. Finally, the Proposed Regulations include questionable provisions regarding PL 86-272, nexus, receipts from financial institutions, alternative apportionment standards, and many other provisions which have generated criticism and concern in the taxpayer community. While we commend the Department for the herculean task of drafting the Proposed Regulations, we nonetheless cannot ignore that there are many provisions that remain ripe for disagreement.
Finally, the Proposed Regulations do not include an effective date. With or without a retroactive effective date, the multiple, prior iterations of draft regulations leave room for taxpayers and the Department to contemplate the application of various interpretations of the Tax Law that may have been reasonable under the available guidance.
If you are undergoing a New York state or city corporate tax audit or are otherwise subject to New York corporate income tax, we encourage you to contact us to discuss how these updates may impact your business.
- See N.Y. Tax Law § 210-A(4).
Client Alert 2023-182
