On July 1, 2022, the New York State Department of Taxation and Finance issued the third set of “final draft” regulations relating to the corporation franchise tax reform that took effect for tax years beginning on or after January 1, 2015. The third set of draft regulations relate to apportionment, and contain revisions to the apportionment rules that were last updated in 2019. The first two sets of “final draft” regulations, which address all rules other than those regarding apportionment, were issued on April 29, 2022.
The Department’s draft apportionment regulations are extensive, and contain a number of notable changes from the last published version. The Department has requested comments on the draft apportionment regulations by August 26, 2022.
Among the changes to the draft regulations include the addition of the terms “cryptocurrency or similar asset digitally delivered” to the definition of “digital product.” The draft regulations provide that receipts from the sale of, rental of, license to use, or granting of remote access to “digital products” are sourced to New York “if the location where the customer derives value from the digital product … according to the hierarchy of methods set forth in [N.Y. Tax Law § 210-A] and [the draft regulations] is in New York.” The hierarchy of methods must be applied sequentially, and receipts are first sourced “to the customer’s primary use location.”
The draft regulations also include a new “billing address safe harbor” for receipts from digital products and services (and a similar safe harbor for receipts from services and other business receipts). The “billing address safe harbor” provides that if a corporation has more than 10,000 business customers purchasing substantially similar digital products or digital services and no more than five percent of such receipts are from one particular customer, “then the primary use location of the digital product or digital service is presumed to be the customer’s billing address.”
In addition, the draft regulations state that, “[f]or digital products that are intangible assets such as cryptocurrency, net gains … are included in the [business apportionment factor]. For this purpose, net gains means gross proceeds minus the adjusted basis in the digital asset.”
The draft regulations also include changes regarding the apportionment of “lump sum payments,” a revision of the rule for services to passive investment customers, and the inclusion of additional sourcing examples, among other changes. Finally, like the 2019 draft regulations, this version does not contain an express exclusion from the business apportionment factor for receipts from the sale of real, personal, or intangible property that arise from “unusual events.” The draft regulations issued prior to the 2019 version contained such an express exclusion.
The Department has indicated that it intends to begin the State Administrative Procedure Act process to formally propose and adopt its regulations in 2022.
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