New York ALJ rules that a combined group was not a “qualified emerging technology company”

Update: On January 25, 2024, the New York Tax Appeals Tribunal upheld the ruling of the administrative law judge described below. In a footnote, the Tribunal notes, “The Division has taken the same position since the enactment of Tax Law former § 210 (1) (a) (vi) (see TSB-M-08[1]C [January 31, 2008]). Additionally, the Division adopted new corporation franchise tax regulations during the pendency of this exception....Section 6-2.1 (e) of the newly adopted regulations is likewise consistent with the Division’s position herein: ‘For a combined group to be eligible for the preferential tax treatment available to [QETCs], every member of the combined group must be a [QETC].’” Please note, however, that the Tribunal did not rely on the newly adopted regulations in its analysis (i.e., the retroactive application of the regulations was not at issue). The taxpayer has the right to appeal this decision to the Appellate Division, Third Department.  

[In the Matter of the Petition of Charter Communications, Inc. and Combined Affiliates, N.Y. Tax Appeals Tribunal, DTA No. 829691, 1/25/24]

In brief

A New York administrative law judge (ALJ), recently ruled that a combined group did not qualify as a “qualified emerging technology company” (QETC) and, therefore, could not take advantage of the applicable reduced tax rate, because the statute did not allow for the aggregation of the group member’s attributes when determining the applicability of the lower QETC rate. 

The takeaway: The ALJ recognized that the law at issue should be construed “most strongly against the government and in favor of the taxpayer” since it did not provide for a tax exemption or exclusion. Despite this presumption in its favor, the ALJ ruled against the taxpayer. The applicable law allows aggregation of a combined group’s attributes when determining whether a taxpayer meets the definition of a qualified New York manufacturer. Although the QETC provision was part of that same statute, the ALJ found the statutory language clear and unambiguous and did not allow aggregation of a combined group’s attributes when determining whether taxpayers qualify as a QETC.

Action item: The taxpayer has 30 days to appeal the ALJ’s decision to the Tax Appeals Tribunal. Note that the Department of Taxation and Finance’s draft regulations (which are not yet binding) state that “[f]or a combined group to be eligible for the preferential tax treatment available to qualified emerging technology companies, every member of the combined group must be a qualified emerging technology company.”  Taxpayers should separately analyze each entity within a combined group for QETC qualification. Further, taxpayers that do meet the definition of a QETC for each member of the combined return should consider the ALJ’s decision when planning any acquisitions or reorganizations.

[In the Matter of the Petition of Charter Communications, Inc. and Combined Affiliates, Division of Tax Appeals, DTA No. 829691, 12/1/22]  

Qualified NY manufacturers

On appeal, the ALJ explained that the issue on appeal was whether Charter was a QETC under the Tax Law. The ALJ noted that, for pre-2015 years, there were two methods under New York Tax Law Sec. 210(1)(a)(vi) that governed whether a taxpayer can be a qualifying New York manufacturer. 

Under method one, a manufacturer is a “taxpayer which during the taxable year is principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing.” A combined group is a manufacturer only if the combined group during the taxable year is principally engaged in the qualified activity. To be “principally engaged,” the taxpayer or combined group must derive more than 50% of its gross receipts from the sale of goods produced by such qualified activities. A qualified New York manufacturer also must either have property in New York the adjusted basis of which is at least $1 million or have all of its property (real and personal) in New York.

Under method two, a qualified New York manufacturer is a taxpayer that is a “qualified emerging technology company” under the Public Authorities Law, regardless of the $10 million threshold set out in subparagraph (1) of such law below. The Public Authorities Law defines a QETC as a company located in NYS: (1) whose primary products or services are classified as emerging technologies and whose total annual product sales are $10 million or less; or (2) a company that has research and development activities in NYS and whose ratio of research and development funds to net sales equals or exceeds the average ratio for all surveyed companies classified as determined by the National Science Foundation in the most recent published results from its Survey of Industry Research and Development, or any comparable successor survey as determined by the department, and whose total annual product sales are $10 million or less.

ALJ analysis

The ALJ compared the two methods and stated that method one clearly and unambiguously articulates that a combined group can be a qualified New York manufacturer, noting that the test looks at the entire group’s gross income. Moreover, the method one definition also contains very specific property requirements and specifies when it was appropriate to use a combined group’s aggregate attributes to satisfy the requirements. 

The ALJ, contrasted method one with method two, the latter of which does not articulate that a combined group’s attributes should be used to satisfy the test. The failure to include this language “may be construed as an indication that its exclusion was intended . . . . If the legislature had intended that a combined group’s aggregate characteristics should be used for application of Method Two, it easily could have expressly provided for such,” stated the ALJ.

In addition, the ALJ noted that the Public Authorities Law specifically refers to a singular “company” in its QETC defining statute and does not provide that a combined group’s characteristics should be used. Accordingly, the ALJ did not accept Charter’s argument that the QETC definition should be applied based on a combined group’s overall attributes in the absence of an express provision by the legislature providing for such aggregation.