On August 9, 2023, the New York State Department of Taxation and Finance (Department) released 417 pages of proposed regulations, an important step toward concluding a now almost decade-long process to implement corporate tax reform.
The journey began in 2014 with the enactment of legislation modernizing the state’s corporate tax law. Thereafter, the Department released several versions of draft regulations while warning taxpayers that the drafts were “not final and should not be relied upon.” Even though the Department announced last spring that it intended to formally propose and adopt such regulations in fall 2022, taxpayers had to wait another year.
Comments on the proposed regulations must be provided to the Department by October 10, and the regulations will be finalized thereafter. In this article, we’re taking a closer look at a few of the items included in the proposed regulations.
ADOPTION OF THE MULTISTATE TAX COMMISSION’S INTERPRETATION OF P.L. 86-272
Consistent with the Department’s final version of the draft regulations, the proposed regulations contain rules based on model regulations adopted by the Multistate Tax Commission, which narrowly interpret P.L. 86-272. Under the proposed regulations, “interacting with customers or potential customers through the corporation’s website or computer application” exceeds P.L. 86-272 protection. By contrast, “a corporation will not be made taxable solely by presenting static text or images on its website.” This sweeping change remains surprising because P.L. 86-272 is a federal law, the scope of which is not addressed by the state’s corporate tax reform.
THE ELIMINATION OF THE “UNUSUAL EVENTS” RULE
The proposed regulations omit the “unusual events” rule contained in the 2016 draft regulations. Generally consistent with Department regulations long predating the state’s corporate tax reform legislation, the 2016 draft stated that “business receipts from sales of real, personal, or intangible property that arose from unusual events” were not included in the business apportionment factor. For example, a consulting firm that sold its office building for a gain would not have included the gain in its apportionment factor because the sale was considered to be from an unusual event. The Department claims to have abandoned the rule “because Tax Reform provided significantly more detailed sourcing rules, including guidelines for those transactions that might have been excluded under pre-reform policy.”
SAFE HARBOR SOURCING FOR DIGITAL PRODUCTS AND SERVICES
Post-reform corporate tax law sources receipts from digital products and digital services to New York if the location the customers derive value from is in New York as determined by a complicated hierarchy of methods. The proposed regulations provide a simplified safe harbor in applying this sourcing rule, where “if the corporation has more than 250 business customers purchasing substantially similar digital products or digital services as purchased by the particular customer . . . and no more than 5% of receipts from such digital products or digital services are from that particular customer, then the primary use location of the digital product or digital service is presumed to be the customer’s billing address.”
REMOVAL OF DEPARTMENT DISCRETION TO DISREGARD THE CAPITAL STOCK ELECTION
New York’s tax reform legislation adopted mandatory unitary combined reporting, eliminating additional pre-reform requirements that were either “substantial intercorporate transactions” between potential combined group members or “distortion” would arise if the potential members filed separately. Alternatively, a “group of commonly owned or controlled corporations may elect to file a combined report” (the Capital Stock Election). While the draft regulations contained rules that would have allowed the Department to “essentially undo the election” if it was made for what the Department identified as certain “tax avoidance reasons,” the Department has now removed such provisions from the proposed regulations.
ELIGIBILITY FOR QUALIFIED EMERGING TECHNOLOGY COMPANY TREATMENT
The proposed regulations confirm the Department’s position that all members of a combined group must individually meet the definition of a “qualified emerging technology company” (QETC) to receive preferential tax treatment provided to QETCs. The Department asserts that this “is a rational interpretation of the statute, is consistent with long standing department policy, and is designed to prevent inappropriate tax avoidance.”
ELIGIBILITY FOR QUALIFIED NEW YORK MANUFACTURER TREATMENT
The draft regulations also created limitations on when taxpayers will be eligible for preferential tax treatment (including eligibility for a 0% tax rate on the business income base) as a “qualified New York manufacturer” (QNYM). The STARR Partnership provided comments to the draft regulations, stating that such limitations would make it practically impossible for companies in contract manufacturing arrangements to be eligible for QNYM treatment. Unfortunately, the Department kept such limitations in the proposed regulations.
