On August 9, 2023, the New York State Department of Taxation and Finance (the “Department”) formally proposed Business Corporation Franchise Tax Regulations under the State Administrative Procedure Act (“SAPA”). The proposed regulations implement the wholesale reform of New York State’s corporate tax framework enacted by Part A of Chapter 59 of the Laws of 2014. The formal proposal of these regulations marks the culmination of an eight-year process involving multiple versions of draft regulations and over 80 detailed comments from industry members and individuals. Now that the regulations have been formally proposed, SAPA requires that the State provide an additional comment period of at least 60 days before it can adopt the proposed regulations, giving interested parties an additional (and possibly final) opportunity to comment on the proposed regulations. The Department has asked that all comments be submitted by October 10, 2023.
While the regulations have undergone numerous changes during the multi-year drafting process, in its Regulatory Impact Statement, the Department expressly notes some areas in which the final proposed regulations make changes to former draft versions of the regulations. Some of the more noteworthy changes include:
- The proposed regulations no longer treat all members of an LLC as subject to tax in New York, and instead treat corporate members of LLCs (that are treated as partnerships for tax purposes) in a comparable manner to limited partners of partnerships for purposes of determining whether the corporate members are subject to tax.
- The proposed regulations eliminate the “unusual events” rule and related examples under which receipts not earned in the regular course of business were generally excluded from the receipts factor.
- The proposed regulations expand the safe harbor that allows taxpayers sourcing receipts from digital products to source those receipts based on customer billing addresses for taxpayers with more than 250 customers (as opposed to 10,000) and eliminates the requirement that taxpayers must first make a reasonable inquiry to attempt to source those receipts under the digital products hierarchy.
- The proposed regulations provide additional guidance on the general attributes of a unitary business and set forth presumptions that, when met, will be indicative of a unitary business.
- The proposed regulations remove a provision allowing the Department to undo the election of a corporation meeting the capital stock requirement to be included in a combined report regardless of whether the corporation is conducting a unitary business.
Once formally adopted, the proposed regulations will repeal existing Business Corporation Franchise Tax regulations (20 NYCRR Subchapter A, Parts 1 through 9) and existing Franchise Tax on Banking Corporations Regulations (20 NYCRR Subchapter B) and will make the necessary changes to the Franchise Taxes on Insurance Corporations (20 NYCRR Subchapter C).