New York State Department of Taxation and Finance Archives

New York State Department of Taxation and Finance

ITFA Is Alive and Well: New York Advisory Opinion Reaffirms Sales Tax Exemption for Internet Access Services

by Eric D. Carstens and Jonathan C. Hague | Oct 2, 2024 | Constitutional Issues, Local Tax, Nationwide Importance, New York, Sales Tax

In its latest Advisory Opinion, TSB-A-24(4)S (June 26, 2024), the New York State Department of Taxation and Finance (the Department) reaffirmed the broad protections offered by the Internet Tax Freedom Act (ITFA) against state and local taxation of internet access. The Petitioner, a New York-based business, sought clarity on whether its subscription to a secure hosted exchange service, which facilitates critical email functions without requiring internal IT infrastructure, would be subject to New York State sales tax.

KEY FACTS AND BACKGROUND

The Petitioner subscribes to a secure hosted exchange service from a provider located in Florida. This service offers comprehensive email management, including mobile device synchronization and Microsoft Exchange functionalities. The service includes (1) unlimited mailbox storage, (2) premium email security protection, (3) anti-virus protection, and (4) live phone support. The service relies on the Petitioner maintaining its own internet connection, with software licensing obligations dictated by agreements with third-party vendors.

THE DEPARTMENT’S RULING

After acknowledging that email service qualifies as taxable telephony or telegraphy service under New York Tax Law § 1105(b)(1), the Department concluded unequivocally that “[e]lectronic mail services are included in the ITFA definition of Internet access, regardless of whether such services are provided independently or packaged with Internet access” and are, therefore, not subject to New York State sales tax. This decision hinges on the protections established by ITFA, which precludes state and local governments from imposing taxes on Internet Access.

ITFA: A CRITICAL SAFEGUARD AGAINST STATE TAXATION

ITFA, enacted in 1998 and made permanent in 2016, has consistently served as a bulwark against state efforts to impose tax on Internet Access and multiple or discriminatory taxes on electronic commerce. See ITFA § 1101(a). Under ITFA’s Internet Access prong, services that enable users to access content, information, email, or other services offered over the internet are shielded from state and local sales taxes.[1] The Advisory Opinion underscores this federal protection, categorizing the Petitioner’s email services as an Internet access service, which is exempt from New York State sales tax under ITFA.

REINFORCING ITFA’S PREEMPTIVE POWER: RECENT CASES

This is not an isolated application of ITFA. ITFA has recently been at the center of significant legal challenges, reinforcing its importance in protecting digital services from state taxation. For example, in Petition of Verizon New York Inc., DTA No. 829240 (N.Y. Div. Tax App. May 4, 2023), an administrative law judge (ALJ) ruled that the gross receipts tax on transportation and transmission corporations could not be applied to revenues from asymmetric digital subscriber line and fiber broadband services because these services are federally preempted under ITFA as Internet Access. In rejecting the Department’s narrow interpretation of internet access services, which only included services provided to end-user consumers, the ALJ emphasized that US Congress intended ITFA’s prohibition on taxing Internet Access to be broad, using the definition from ITFA rather than state tax law.

ITFA’S ONGOING RELEVANCE

New York’s Advisory Opinion highlights the continued importance of ITFA in today’s digital economy. As businesses increasingly [...]

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New York Formally Adopts Corporate Tax Reform Regulations

by Stephen P. Kranz, Richard C. Call, Michael J. Hilkin and David Jasphy | Dec 28, 2023 | New York

On December 27, 2023, the New York State Department of Taxation and Finance (Department) adopted corporate tax reform regulations addressing New York’s corporate tax reform effective in 2015. The adopted regulations are consistent with the proposed regulations released in August 2023 and only include what the Department has called “minor clarifying and technical changes.”

Although public comments submitted in response to the proposed regulations expressed various concerns over the possibility that the regulations would be applied retroactive to their formal adoption, the Department announced that the regulations will “generally apply to taxable years beginning on or after January 1, 2015.” However, the Department announced that, “based on a totality of the circumstances,” it “may choose not to apply penalties in cases where taxpayers took a position in their tax filings prior to adoption of the proposed rule in reliance upon prior [adopted corporate tax] regulations or prior drafts of the proposed” regulations.

At the 10-Yard Line: New York Formally Proposes Corporate Tax Reform Regulations

by Stephen P. Kranz, Richard C. Call, Michael J. Hilkin and David Jasphy | Aug 11, 2023 | Allocation/Apportionment, Income Tax, Local Tax, Nationwide Importance, New York, Nexus, Unitary Business

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 [...]

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New York Budget Legislation Contains Significant Tax Provisions

by Richard C. Call, Michael J. Hilkin and David Jasphy | May 2, 2023 | False Claims Act, Franchise Tax, Income Tax, Interest and Penalties, New York, Procedure

New York Governor Kathy Hochul and the New York State Legislature have reached an agreement on the state’s fiscal year 2024 budget legislation. Most surprisingly, the legislation grants the New York State Department of Taxation and Finance the right to petition for judicial review of New York State Tax Appeals Tribunal decisions that are “premised on interpretation of the state or federal constitution, international law, federal law, the law of other states, or other legal matters that are beyond the purview of the state legislature.” If the Department appeals a Tribunal decision, any interest and penalties that would otherwise accrue on the underlying tax liability would be stayed until 15 days after the issuance of a final judicial decision. This represents a significant change in law as currently, only taxpayers (and not the Department) may appeal Tribunal decisions.

Other notable provisions in the budget legislation include the following:

The False Claims Act will now apply to a person who is alleged to have knowingly or improperly failed to file a tax return.

The top metropolitan commuter transportation mobility tax rate on employers in New York City has been increased from 0.34% to 0.6% of payroll expense.

The “temporary” top corporate franchise tax rate for taxpayers with a business income base of more than $5 million will stay at 7.25% through 2026 (rather than expiring in 2024), and the scheduled expiration of the franchise tax business capital base has been delayed from 2024 to 2027.

The budget legislation containing these changes in law passed both houses of the New York State Legislature on May 1, 2023, and is expected to be signed by Governor Hochul.

New York State Department Intends to Finalize Corporate Tax Regulations This Fall

by Michael J. Hilkin, Richard C. Call and McDermott Will & Emery | May 2, 2022 | Allocation/Appointment, Federal Tax, Local Tax, Nationwide Importance, New York

Almost seven years after it started releasing draft regulations concerning sweeping corporate tax reforms that went into effect back in 2015, the New York State Department of Taxation and Finance (Department) has issued guidance, stating that “the Department intends to begin the State Administrative Procedure Act (SAPA) process to formally propose and adopt” its draft corporate tax regulations this fall.

The Department has released many versions of “draft” regulations addressing corporate tax reform since September 2015. However, these draft regulations have been introduced outside of the SAPA process because the Department intended to formally propose and adopt all draft regulations at the same time. In the meantime, the Department warned taxpayers that so long as the regulations remain in draft form, they are not “final and should not be relied upon.”

Now, the Department has given its first public signal that it is prepared to formally adopt the draft regulations later this year. On April 29, 2022, the Department released “final drafts” of regulations that address a variety of topics, including nexus and net operating losses, and indicated that it will release final draft regulations addressing “apportionment, including rules for digital products/services and services and other business receipts” this summer.

Notably, the draft regulations released on April 29 include new provisions, “largely modeled after the [Multistate Tax Commission (MTC)] model statute . . . to address PL 86-272 and activities conducted via the internet.” Like the MTC model statute, the new draft regulations take a broad view of internet activities that would cause a company to lose PL 86-272 protection. In one example, the draft regulations state that providing customer assistance “either by email or electronic ‘chat’ that customers initiate by clicking on an icon on the corporation’s website” would exceed the scope of protections provided under PL 86-272.

As it intends to formally propose the draft regulations this fall, the Department is “strongly” encouraging “timely feedback” on all final draft regulations. With respect to the final draft regulations released on April 29, the Department is asking for comments by June 30, 2022.

NYS Tax Department Relaxes Investment Income Identification Rules

by McDermott Will & Emery | Jan 11, 2016 | Income Tax, New York

The New York State Department of Taxation and Finance has announced that it would extend the time for certain taxpayers to identify stocks as being held for investment so that income from those stocks would be tax-exempt [TSB M-15(4.1)C, (5.1)I]. Instead of having to make the identification on the date on which the stock is purchased, many corporations will now have a 90-day grace period to make the identification. This relaxation of the identification rules will come as a major relief to many companies that otherwise may have been ambushed by New York’s new rules, particularly out-of-state corporations that start doing business in New York after acquiring investment securities. The announced change is effective immediately.

Under corporate tax reform legislation enacted in 2015, corporations—to treat income from stock held as an investment as tax-exempt investment income—must identify the stock on the date of purchase as being held for investment and follow certain procedures. This requirement has been widely criticized as being unrealistic since a corporation’s investment people are unlikely to know about arcane tax rules on the date that they make trades. Securities dealers, to qualify for tax-free investment income treatment, must identify the stock as being held for investment pursuant to Section 1236 of the Internal Revenue Code (IRC), which requires the identification to be made on the date of purchase. Non-dealers must still make the identification on the date of purchase under the statute, but they need not make the federal election under Section 1236 since that provision applies only to dealers.

The Department’s new rules significantly relax the requirement for many non-dealer corporations. They do not apply to dealers, which will still be subject to the Section 1236 election requirements.

One criticism that has been made of the identification requirement is that a corporation that had not been doing business in New York and, hence, had not been a New York taxpayer and acquired stock as an investment would not have made the New York identification because it would not have cared about, or known about, New York taxes. If such a corporation later starts doing business in New York and becomes subject to New York taxes, it will be too late to make the identification for previously acquired stock and, hence, the income from that stock will not be exempt investment income. Under the Department’s new announcement, a corporation that first becomes a New York taxpayer on or after October 1, 2015, can make the identification within 90 days after becoming a New York taxpayer or, if it became a New York taxpayer before January 7, 2016, by April 6, 2016. Stock purchased after this extended period must still be identified as being held for investment on the date of purchase.

Ordinarily, a corporation becomes taxable in New York on the first day on which it does business, employs capital, owns or leases property, or maintains an office in New York. Under new economic nexus rules, a corporation also becomes taxable in New York on [...]

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NYS Tax Department Revised Sales Tax Publication Answers Some Questions but Not Others

by McDermott Will & Emery | Dec 4, 2015 | New York, Nexus, Sales Tax

The New York State Department of Taxation and Finance (Department) has just revised its Guide to Sales Tax in New York State, Publication 750.

The Guide will be particularly useful for companies that are just starting to do business in New York State. It provides a well-organized and easy-to-read outline of the steps that should be taken to register as a vendor selling products that are subject to the sales tax and to collecting and remitting taxes. Small businesses and their advisors will find the Guide particularly useful.

The Guide confirms the State’s required adherence to the United States Supreme Court decision in Quill Corp. v. North Dakota (a case in which the taxpayer was represented by McDermott Will & Emery) to the effect that an out-of-state company must have a physical presence in New York to be required to collect use tax on sales to New York customers. It confirms that a company need not collect use tax on sales to New York buyers if its only contact with the State is the delivery of its products into the State by the U.S. Postal Service or a common carrier. It cautions, however, that use tax must be collected if the company has employees, sales persons, independent agents or service representatives located in, or who enter, New York. Although the law has been clear for many years that a sales representative can create nexus for an out-of-state company even though he or she is an independent contractor and not an employee, some companies still seem to be under the mistaken impression that this is not the case. Moreover, although there is no New York authority directly in point, cases in other states have established the principle that nexus can be created by the presence in the state of a single telecommuting employee, even if the employee’s work is not focused on the state.

The Guide contains a cryptic reference to New York’s click-through nexus rule under which an out-of-state company can be compelled to collect use tax on sales to New York purchasers if people in the state refer customers to the company and are compensated for doing so. Such persons are presumed to be soliciting sales for the company and, although the presumption can be rebutted, that will prove to be impossible in the vast majority of cases. The Guide contains cross-references to Department rulings that explain the presumption and the manner in which it can be rebutted, but it would have been helpful if the Guide could have provided more detail about these rules.

One attractive feature of the Guide is that people accessing it online can use links in the Guide to get to relevant rulings.

In addition to the state-wide sales and use tax, special sales taxes that are imposed only within New York City are discussed. These include taxes on credit rating services and certain localized personal services such as those provided by beauty salons, barber shops, tattoo parlors and tanning [...]

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New York State Tax Department Releases Guidance on Tax Reform Legislation

by McDermott Will & Emery | Apr 8, 2015 | Income Tax, New York, Nexus

The New York State Department of Taxation and Finance (the Department) has been issuing guidance explaining the 2014 corporate tax reform legislation (generally effective on January 1, 2015) through a series of questions and answers (known as FAQs), recognizing that providing guidance through regulations is cumbersome and takes a long time. On April 1, the Department issued a new set of FAQs explaining some aspects of the legislation. Some of the highlights are discussed below.

Under the new law, related corporations may, and may be compelled to, file combined returns if they are engaged in a unitary business. The old requirement that separate filing distort the incomes of the companies, which led to much controversy, has been repealed. An issue that has been highlighted by the legislation is whether a newly acquired subsidiary can be considered to be instantly unitary with the parent so that the corporations can file combined returns beginning on the date of the acquisition. The FAQs explain that this will depend on the “facts and circumstances” of each case, which is not very informative. We understand from informal conversations with senior Department personnel that their approach, which they have not published, is that corporations will generally be considered to be instantly unitary if they had a significant business relationship before the acquisition (e.g., the subsidiary was a supplier of goods to the parent). If no such pre-existing relationship exists, the corporations will generally not be found to be unitary until the beginning of the next taxable year after the acquisition. The FAQs also clarify that corporations with different taxable years can be included in a combined return. When a related corporation does not have the same taxable year as the company designated as the group’s agent for filing purposes, the related corporation’s income and activities for its taxable year ending within the agent’s taxable year are included in the combined report for the agent’s taxable year.

The FAQs explain that the corporate tax reform legislation has not changed the method for determining the partnership income of a corporate partner in a partnership. The current approach, under which partnership items of income and expense flow through to the corporate partner, has been retained. This approach is reflected in Department regulations. The New York City Department of Finance has not adopted regulations on this subject and we understand that the City does not feel itself bound by the State approach. Taxpayers should be aware that corporations that are limited partners with limited liability and no voting rights may be able to argue successfully that they do not have nexus with New York if they have no other contacts with New York besides their limited partnership interest. Courts in other states have so held, although the case law in New York is not favorable.

Several FAQs focus on the new economic nexus rule in New York State. The FAQs indicate that franchisors that sell goods and services or licenses to franchisees located in New York [...]

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NYS Tax Department Reverses Position on Statutory Residence Rule

by McDermott Will & Emery | Dec 19, 2014 | Income Tax, New York

The New York State Department of Taxation and Finance (the Department) has backed off from an aggressive position that it has been taking in cases involving New York residence issues.

Under New York law, a person who is not domiciled in the state can be treated as a resident for income tax purposes (and, hence, taxed on all of his or her worldwide income) for a taxable year if the person maintains a “permanent place of abode” in the state and is in the state for more than 183 days during the year. This is known as the statutory residence rule. New York City has an identical rule for purposes of taxing individuals as city residents.

The Department has historically taken the position that a house or apartment is a “permanent place of abode” if it is capable of being lived in as a regular residence even though the taxpayer does not so use it. This has presented a significant problem for people who live in the Connecticut and New Jersey suburbs of New York City and work in the city and keep a small apartment that they use occasionally when they work late or attend the theater. The Department has been treating them as residents because the apartment was a “permanent place of abode” even if they used it for only a few nights a year and their presence in the city for more than 183 days was a result of their jobs and had no relationship to the apartment. Similarly, out-of-state residents who commute to New York jobs and keep a vacation home in New York State have been held to be income tax residents even though they only use the vacation home for a few weeks each year.

The Court of Appeals, New York’s highest court, held recently that a person must actually use a dwelling as a residence for it to constitute a “permanent place of abode”. Matter of Gaied v. New York State Tax Appeals Tribunal, 22 N.Y.3d 592 (2014) (see prior coverage here). The taxpayer in that case lived in New Jersey but owned a house in New York City in which his parents lived. He spent a few nights a year in the house when his parents asked him to come over to help with medical problems. When he did so, he slept on a couch in the living room. He kept no personal effects in the house. The Court held, over the Department’s objections, that the purpose of the statutory residence test was to treat as residents people who really lived in New York but claimed that they were domiciled outside the state for the purpose of avoiding taxes. Mr. Gaied, in contrast, really lived in New Jersey, and the New York house could in no sense be viewed as his real residence.

The Department responded to the Gaied case by revising the internal guidelines that it gives to [...]

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In Case We Didn’t Know the Difference Between “Big” and “Little” Cigars, the New York State Tax Department Tells Us What it is

by McDermott Will & Emery | Sep 5, 2014 | New York, Sales Tax

The New York State Department of Taxation and Finance has addressed one of the major issues in tax administration: defining the difference between “big” and “little” cigars. Tax Bulletin TP-530 (August 28, 2014). First, the Department has defined “cigar.” A cigar is any roll of tobacco wrapped in leaf tobacco or in any substance containing tobacco. A “little” cigar is a cigar that has all of the following characteristics: (1) it is a “roll” for smoking made with any amount of tobacco, (2) the cigar wrapper contains some amount or form of tobacco that is not “natural leaf tobacco,” and (3) the product must either weigh four pounds or less per 1,000 cigars or have a filter made of cellulose acetate (i.e., a cigarette-type filter) or any other integrated filter. A “natural leaf tobacco wrapper” that can prevent a cigar from being classified as being “little” is any wrapper made from one or more natural tobacco leaves. An example of a substance commonly used to wrap cigars that contains tobacco but is not “natural leaf tobacco” is “homogenized tobacco leaf,” which is made from “tobacco scraps that are pulverized, mixed with other products and rolled into sheets that can be used to wrap cigars.”

The importance of the ruling is that little cigars are taxed at the same rate as cigarettes, which is lower than the rate on big cigars.

This is probably the most important tax development to come along since the Internal Revenue Service released Revenue Ruling 63-194, 1963-2 C.B. 670, explaining the requirements that a martini would have to meet to be considered a “dry martini” for tax purposes.

The McDermott State and Local Tax Practice Group is well positioned to advise clients on these important issues. Although none of us smoke cigars, our Firm’s real estate and corporate departments are well stocked with cigar smokers so we have access to the necessary expertise to advise our clients.

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