On Dec. 27, 2023, the New York State Department of Taxation and Finance (DOTF) published adopted final regulations that are intended to implement the Business Corporation Franchise Tax reform enacted in 2014 which applies to C corporations and S corporations including those corporations that are subject to the DOTF’s mandatory S-corporation treatment under New York Tax Law §660(i).

Prior to adoption of the final regulations, the DOTF had issued drafts of proposed regulations in 2019, 2022, and the final draft in August 2023, which has resulted in significant changes between each set of proposed regulations. The adopted final regulations will apply retroactively to tax years beginning on or after Jan. 1, 2015 to align with the effective date of the corporate tax reform. In addition, it’s important to note that due to public comments on such retroactive treatment, the DOTF does provide in its Assessment of Public Comment that “the department, based on totality of the circumstances, may choose not to apply penalties in cases where taxpayers took a position in their tax filings prior to the adoption of the proposed rule in reliance upon prior article 9-A regulations or prior drafts of the proposed rule.”

Overview of substantial amendments

Economic nexus: As part of the 2014 tax reform, economic nexus rules were enacted which subject a foreign corporation to filing obligations if its receipts exceed an inflation-adjusted annual threshold. For unitary corporations filing combined reports, the receipts of certain affiliates are aggregated to determine whether the threshold has been exceeded. Adopted NYCRR §1-2.8 provides that in determining whether economic nexus exists, receipts from certain financial transactions such as interest from federal funds, interest from federal reserve banks, and interest and net gains from government agency debt are not considered receipts.

P.L. 86-272: Included in the final regulations is NYCRR §1-2.10 which provides information on when P.L. 86-272 protection does not apply. The most impactful of these updates includes the DOTF adoption of protected vs. unprotected activities of certain business activities conducted through the internet. Though there was public contention on this matter, the DOTF believes that the final regulations are “a rational interpretation of law” and that the DOTF’s adopted regulations are in line with the positions taken by the Multistate Tax Commission and other states.

Combined reporting: In the drafts of the proposed regulations, the DOTF was granted permission to undo a combined reporting election with specific limitations which was eliminated from the final regulations.

Investment capital: The regulations also provide an explanation of the restricted definition and classification of investment capital.

REIT: Pursuant to the final regulations, the reformed tax law requires both a non-captive REIT and a qualified REIT subsidiary to file a combined report with a REIT to be eligible for the capital base exemption.

Apportionment: A major part of the final regulations concentrates on the sourcing rules for each of the numerous categories of receipts added as part of the tax reform legislation focusing on "other services and other business activities" and "digital product and digital services.” With respect to “other services and other business activities” and “digital products and digital services,” the final regulations define commercial domicile as the central area where the taxpayer’s business is controlled and provide a hierarchy to be used to make the determination. The hierarchy, in descending order of relevance, are the location where customers derive benefits from the product, the location where the product is primarily used, and the location of delivery. Additionally, the final regulations provide a “business address presumption” rule which uses the customer’s billing address for apportioning such receipts, with restrictions.

Additionally, the final regulations provide definition of “passive investment customer,” adopt a look-through approach to establish where the “benefit is received” for non-regulated investment companies (RIC) and add to the types of services subject to such approach. The look-through rule tailored to passive investment customers specifies that the location of direct investors and underlying investors or beneficial owners is the primary source for apportioning fees received for providing management, administration, and distribution services.

New York qualifying manufacturer: The corporate tax reform provided that certain qualifying New York manufacturers that met certain property and activity criteria are eligible for a 0% tax rate on the business income tax base. The newly adopted regulations, NYCRR §9-1, provide definitions and additional information on contract manufacturers.

What does CohnReznick think?

The adopted final regulations have undergone an almost 10-year process to be finalized and include significant guidance that may not been noted above. Thus, each business is highly encouraged to review their business model and the DOTF’s regulations to see what impact these regulations can potentially have. It is anticipated that the final adoption of these regulations will result in an increase in audit activity within the DOTF. Since the final regulations potentially impact tax years beginning on or after Jan. 1, 2015, taxpayers are encouraged to seek consultation on relevant past and ongoing tax filings to help ensure proper compliance with the final, and in some respects, expanded regulations.

The finalized regulations have provided additional explanations for New York’s post-reform nexus, combined reporting, apportionment, and other provisions requiring many companies to reassess certain tax filing positions that may have been taken based on prior draft regulations. One area that many businesses should review is the application of apportionment methodologies to their revenue streams. In addition, there is still uncertainty related to the DOTF’s retroactive application of these regulations. Although the DOTF has indicated that it may not penalize certain instances of taxpayers filing returns based on versions of prior draft article 9-A regulations, such treatment is subject to the DOTF’s discretion.

Another key impact for some businesses to note is that New York is one of the first states to formally adopt Public Law 86-272 for internet activities within its regulatory guidance. Businesses that are currently taking Public Law 86-272 protection will have to reevaluate whether such protections continue to apply and any new businesses considering Public Law 86-272 protection will need to evaluate the new regulatory guidelines when determining protected activities.

Businesses should also be aware that since the state regulations have been adopted, the New York City Department of Finance (DOF) will now work on its version of draft regulations to be finalized. The DOF may or may not conform to the DOTF’s regulations.

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}