New York State Tax Department Releases Final Draft Corporate Tax Apportionment Regulations
Since the enactment of New York State corporate tax reform beginning in 2015, the New York State Department of Taxation and Finance (the “Department”) has been periodically posting for comment draft regulation sections interpreting the law. Things took a decidedly more accelerated turn when, this past April, the Department posted two sets of revised “final drafts” covering all topics except apportionment, and announced that it would be posting a final draft of the apportionment regulation sections by this summer. On July 1, 2022, the Department posted the revised apportionment regulations, combining into one final draft what had been three separate sets of regulation sections, which were last updated in 2019.
The newly-released draft apportionment regulations are now broken down into four subparts: (i) General (including discretionary adjustments to the apportionment factor); (ii) Specific Apportionment Rules (17 categories, including net gains from sales of real property and receipts from securities broker-dealer sourcing); (iii) Digital Products and Digital Services (such as rules for determining primary use location and reasonable approximations); and (iv) Other Services and Other Business Activities (addressing the sourcing of receipts and net gains from services and other business activities not otherwise enumerated in the tax law).
Given the broad scope of the apportionment regulations, these latest revisions are surprisingly modest. Among the new revisions are the following:
- With respect to both digital products and other business services and activities, a “billing address safe harbor” has been added for a corporation having more than 10,000 business customers purchasing substantially similar products and services (where no more than 5 percent of those receipts are from a particular customer), whereby that the “primary use location” of the product or service is presumed to be the customer’s billing address.
- Now defines a “digital product”—the receipts from which are sourced under a hierarchy, primarily at the customer’s “primary use location”—to include cryptocurrency.
- Substantially changes the rule for “services” provided to “passive investment customers”—defined generally as non-corporate collective investment vehicles that do “not otherwise conduct a trade or business”—presuming the benefit to be received by the customer “where the contract is managed” by the customer. The prior draft applied to management and advisory services, but not to accounting, legal and similar services, and sourced the receipts based on where the customer “makes the decision to utilize the investment or management decisions.”
- Elaborates on the sourcing of lump sum payments received (e.g., when a sale consists of both a digital product and a digital service, the receipt is considered one receipt even if separately stated for billing purposes).
The Department is requesting comments on the new draft by August 26, 2022. It anticipates commencing the formal promulgation process under the State Administrative Procedure Act by the end of 2022. This would likely mean that the regulations would be effective sometime next year. It has been more than eight years since New York State corporate tax reform was enacted, with no regulatory guidance in place throughout that time. The Department has consistently cautioned that taxpayers could not rely on its posted draft regulations. Its decision earlier this year to finally proceed toward promulgating corporate tax reform regulations is a much needed and long overdue step.
This article is one in a series of articles written for the July 2022 edition of The BR State + Local Tax Spotlight.