New York proposes corporate tax reform regulations

Update:  The New York Department of Taxation and Finance on December 27 published final regulations implementing the 2014 corporate tax reform legislation and subsequent legislative changes. The final regulations adopt the proposed regulations from August (as discussed below) with minor, non-substantial changes (click here for a description of the Department’s changes).

In brief

The New York Department of Taxation and Finance on August 9 issued its long-awaited proposed regulations implementing the 2014 corporate tax reform legislation and subsequent legislative changes. An outline of the 417-page proposal is available from the Department here.

As noted by the Department, “Since 2015, more than 40 drafts of various portions of the proposed rule have been posted for external review and comment.” The Department aligned the proposed regulations with some taxpayer comments, adopted new language in response to comments in some cases, and did not accept some comments (see the Department’s Regulatory Impact Statement for a summary of its responses).

The positions taken in the proposal and noted by the Department include a narrow interpretation of the federal protections under P.L. 86-272, apportionment rules and variances, special entity rules for manufacturers and technology companies, and rules around pre-reform NOLs and federal changes.

The proposed regulations are subject to a 60-day public comment period, ending October 10, 2023.

For consideration: The proposed regulations are not yet authority, but they reflect the Department’s current thinking on issues regarding the State’s corporate tax reform legislation. Taxpayers should review the proposed regulations to analyze their impact and may wish to consider providing comments prior to October 10, 2023. Note that the New York City Department of Finance intends to propose and adopt its own corporate tax reform regulations as well.

Public Law 86-272 and economic nexus

The Department proposes to align with the Multistate Tax Commission’s (MTC) interpretation of P.L. 86-272 by stating that protected solicitation activities do not include those activities that the corporation “would have reason to engage in apart from the solicitation of orders,” including “interacting with customers or potential customers through the corporation’s website or computer application.” Like the MTC, the proposal allows that “a corporation will not be made taxable solely by presenting static text or images on its website.” 

Regarding the economic nexus standard adopted by tax reform, the Department noted that it did not accept a request to exclude certain financial asset receipts (8% of which are sourced to New York according to the statute) from the economic nexus determination. However, the Department provided that a corporation is not considered to be deriving receipts from New York if its only New York receipts are interest income and net gains from government agency issued securities, interest income from Federal funds, and interest paid directly by the Federal Reserve Bank on reserves maintained at the Federal Reserve. In addition, the Department accepted taxpayer comments in treating corporate members of LLCs “in a comparable manner to limited partners of partnerships for purposes of determining whether the corporate members are subject to tax.”

Special entities: manufacturers, technology companies

The proposed regulations list criteria for determining which party to a contract is the manufacturer for purposes of applying the zero percent manufacturer’s tax rate. The Department states that it “considered, but rejected, alternatives that would have made it easier for a company to claim to be a manufacturer in contract manufacturing situations when, in fact, it was not doing the actual work.”

Regarding qualified emerging technology companies (QETCs), the proposed regulations require that all members of a combined group satisfy the requirements for QETCs in order for the combined group to be eligible for the preferential QETC tax computations. The Department stated that it “rejected alternatives proposed by commenters because the proposed rule is a rational interpretation of the statute, is consistent with long-standing department policy, and is designed to prevent inappropriate tax avoidance.” The proposed regulations would adopt the Department’s position in a controversy currently on appeal (see our Insight on the ALJ’s decision in favor of the Department, here).

Pre-reform NOLs and federal changes

Under tax reform, losses sustained pre-reform were converted into a prior net operating loss conversion (PNOLC) subtraction pool that could be utilized in post-reform years. The Department stated that it rejected comments asking that federal changes be included in the PNOLC computation. “Given that federal changes can occur many years after the close of a tax period and, therefore, many years into the period for claiming the PNOLC subtraction (if not already exhausted), a federal change potentially would impact all years the subtraction was used, including those for which the statute of limitations has already expired,” the Department explained. This would “create cascading impacts and undo the certainty intended by the PNOLC subtraction.”