02 August 2019 New York State issues updated draft business apportionment factor rules On July 18, 2019, the New York State Department of Taxation and Finance (Tax Department) posted for comment revised draft corporate franchise tax regulations under Article 9-A of the New York Tax Law (N.Y. Comp. Codes and Regs. tit. 20, Part 4, Subparts 4-1 through 4-4). These draft rules address the sourcing of business receipts for purposes of determining a taxpayer's apportionment fraction. These provisions replace earlier draft regulations posted on August 31, 2017. The Tax Department specifically requests comments on the definition of "business receipts" and the elimination of the apportionment rule regarding unusual events as further described below. The discretionary adjustment rules were also revised replacing a previous draft of these rules issued on March 4, 2016. The draft rules include examples throughout to illustrate application of the rules. The Tax Department noted that the draft rules for sourcing receipts from digital products and other services and other business receipts were separately posted and will later be incorporated into these draft regulations.1 Additionally, the Tax Department stated that draft rules for corporate partners will be released later and incorporated into a separate subpart dedicated to corporate partner issues.2 Comments are due by October 18, 2019, but the Tax Department indicated on its website that it will consider comments submitted after the due date.3 Subpart 4-1: General apportionment rules, including combined reports (N.Y. Tax Law Section 210-A) — Draft N.Y. Comp. Codes and Regs., tit. 20, Sections 4-1.1 through 4-1.3 Under these rules, taxpayers would apportion their total business income and business capital by a business apportionment fraction, the numerator of which is the sum of all New York business receipts and the denominator of which would be their everywhere receipts. "Business receipts" is generally defined to mean items included in the computation of the taxpayer's federal gross income (IRC Section 61) and entire net income (ENI) for the tax year.4 Business receipts would not include:
Significantly, these draft regulations delete an exclusion for business receipts related to gains from "unusual events" (i.e., gains from the sale of assets used in the taxpayer's trade or business, including intangibles. Receipts from the sale of intangibles are now specifically sourced using the rules for other services and other business receipts (see Tax Alert 2019-1311) ). For sales of multiple assets in one transaction, the draft regulations provide that the sale proceeds are to be reasonably divided among the asset types sold by the taxpayer, and the receipts or net gains are to be apportioned by asset type using the applicable statutory rule for such assets. The taxpayer's report must include full details of the sale and division of the proceeds and the gain among the asset classes. For asset sales where the sale proceeds are received in installments (IRC Section 453), the portion of the receipts or net gains attributable to New York would be determined in the year of the sale by applying the statutory apportionment rules. The same ratio of New York receipts to everywhere receipts from the installment income for each asset type would be used in later years to determine how much of the installment payment is included in New York receipts. All business receipts for the period covered by the report would be computed on a cash or accrual basis according to the accounting method used in the ENI computation. The New York and everywhere receipts from such a transaction must be computed following the provisions of N.Y. Tax Law Section 210-A, but the draft regulations provide additional guidance for certain types of receipts. Section 4-1.2 of the draft regulations provides rules for apportionment among members filing a combined report. For purposes of a combined report, "taxpayer" means all corporations included in a combined report, regardless of whether the individual members are subject to tax. A combined group's apportionment factor would be computed as though the included corporations are treated as a single corporation (unless otherwise provided). Thus, intercorporate business receipts, income, gains, and losses are to be eliminated in calculating the combined group's New York receipts and everywhere receipts. Additionally, net gains, marked-to-market net gains, net interest income, and net income (with none of these being less than zero) from any respective type of asset on a combined report generally would be computed by aggregating amounts by asset type. Lastly, Section 4-1.3 of the draft regulations includes several definitions, among which are "commercial domicile," "marked-to-market," "real property," "registered broker or dealer," and "tangible personal property." While the definitions may appear to be nearly identical to those used in the original regulatory proposal, modifications were made, which may be meaningful. Among these modifications are:
Subpart 4-2: Specific apportionment rules — Draft N.Y. Comp. Codes and Regs., tit. 20, Sections 4-2.1 through 4-2.18 Specific apportionment rules would apply to receipts from: the sale of tangible personal property; rents and royalties; net income from qualified financial instruments for corporations other than non-captive real estate investment trusts (REITs) and non-captive regulated investment companies (RICs); interest income and net gains from loans, asset backed securities and other government agency debt, and corporate bonds; net interest income from reverse repurchase agreements and securities borrowing agreements and federal funds; net income from commodities; marked-to-market net gains; interest, net gains, and other income from financial instruments; brokerage commissions; receipts from credit cards and credit card processors; receipts from railroad, trucking, omnibus businesses, and advertising. Separately posted draft regulations address specific apportionment rules that would apply to receipts from the sale of licenses to use digital products, as well as receipts from granting remote access to digital products and receipts from other services/ business activities. (See Tax Alert 2019-1311.) Receipts from the sale of tangible personal property (N.Y. Tax Law Section 210-A(2)): All receipts from the sale of tangible personal property would be included in the taxpayer's everywhere receipts, and would be included in its New York receipts if certain requirements are met. These requirements include: (1) if the property is shipped by common or contract carrier, or by the taxpayer's vehicle or other transportation means, to a point in New York State (NYS); (2) if possession of the property is transferred to a purchaser or designee in NYS, unless the property's final7 destination is outside NYS; or (3) if possession of the property is transferred to a purchaser or designee outside NYS, where the property's final destination is at a point within NYS. Examples of evidence that ordinarily would be sufficient to demonstrate the property's final destination include a bill of lading or other shipping document designating the final destination location, regardless of the free on board (FOB) point, and a purchase invoice designating the final destination location. Receipts from rents and royalties (N.Y. Tax Law Section 210-A(3)): Receipts from rentals of real and tangible personal property located in NYS would be included in the taxpayer's New York receipts, and all of these receipts would be included in its everywhere receipts. Rental receipts include all amounts the taxpayer receives for the use or occupation of tangible personal property or real property, regardless of whether the taxpayer owns it. Gross receipts from real and tangible personal property that is subleased from the taxpayer must be included in the apportionment factor. The draft regulations further provide for the apportionment of receipts from the rental of motor vehicles and other rolling stock. Additionally, receipts from patents, copyrights, trademarks, licenses, and other similar intangible rights are included in the taxpayer's New York receipts if used in NYS and all of these receipts are included in its everywhere receipts. A patent, copyright, trademark, license or other similar intangible would be deemed to be used in NYS to the extent that such activities are carried out there.8 Net income from qualified financial instruments for corporations other than non-captive REITs and non-captive RICs (N.Y. Tax Law Section 210-A(5)(a)): The draft regulations define a qualified financial instrument as any financial instrument that has been marked-to-market in the tax year and meets certain statutory criteria,9 as set forth in the following clauses of N.Y. Tax Law Section 210-A(5)(a)(2): (A) loans, (B) federal, state or municipal debt, (C) asset backed securities and other government agency debt, (D) corporate bonds, (G) stock or partnership interest, (H) other financial instruments, or (I) physical commodities. If a taxpayer has marked-to-market any instrument that is described in either (A), (B), (C), (D) or (I) above, then any other corresponding financial instrument that has not been marked-to-market is also a qualified financial instrument in the tax year. Each of these is treated as an individual type of financial instrument. Financial instruments described in (G) and (H) are treated differently. Stock is treated as one type of financial instrument and partnership interests as another despite being within the same clause of the N.Y. Tax Law (i.e., N.Y. Tax Law Section 210-A.5(a)(2)(G)). Therefore, if a taxpayer has marked-to-market a stock, then any other stock that has not been marked-to-market is also treated as a qualified financial instrument in the tax year; however, a partnership interest will not be deemed a qualified financial instrument in that scenario unless a partnership interest has been similarly marked-to-market. Likewise, under the draft regulations, "other financial instruments" described in clause (H) are separated into subtypes for purposes of the qualified financial instrument determination. For instance, if a taxpayer has marked-to-market a specific "other financial instrument," then according to the draft regulations only a financial instrument of the same type would be deemed a qualified financial instrument in the tax year. Therefore, some types of other financial instruments may be qualified financial instruments while other types may not. The following financial instruments will always be nonqualified financial instruments: (1) loans secured by real property; (2) loans not secured by real property, if the only loans the taxpayer has marked-to-market are loans secured by real property; (3) stock that is investment capital as defined in the N.Y. Tax Law; (4) stock that generates other exempt income that is not marked-to-market; (5) partnership interests that do not meet the IRC Section 475(c) definition of "security"; and (6) instruments the receipts from which are subject to N.Y. Tax Law Section 210-A(5)(b) (i.e., receipts sourced under the broker-dealer sections of the N.Y. Tax Law). For members of a combined reporting group, the determination of whether an instrument is a qualified financial instrument is made as if all of the members of the combined reporting group are a single corporation. Therefore, if one corporation in the combined group marks-to-market a specific financial instrument as noted above, then all such financial instruments of that type reported by every member of the combined reporting group are considered qualified financial instruments. If a corporation is a partner in a partnership and is using the aggregate method to compute its tax for its interest in the partnership, and the partnership marks-to-market a type of financial instrument, the corporation is deemed to have marked-to-market that type of financial instrument for determining whether that type of financial instrument is a qualified financial instrument. Generally, the amount of receipts, net income (not less than zero), and net gains (not less than zero) from qualified financial instruments included in a taxpayer's New York receipts or everywhere receipts is determined using the statutory customer-sourcing method. However, a taxpayer (or the designated agent for a combined report) may irrevocably elect the fixed-percentage method to include 8 percent of net income from qualified financial instruments in New York receipts and 100 percent of all net income from qualified financial instruments in the taxpayer's everywhere receipts (regardless of whether such income would otherwise be included in the taxpayer's New York receipts or everywhere receipts by statute). The draft amendments provide how to calculate net income from qualified financial instruments, including for members of a combined reporting group. Net income from qualified financial instruments is the sum of (1) net gains (not less than zero), (2) marked-to-market net gains (not less than zero), (3) net income (not less than zero), and (4) receipts from each type of qualified financial instrument that would be subject to the same customer-sourcing method in the N.Y. Tax Law if not for the making of a fixed-percentage method election. Additionally, the draft regulations provide that a binding fixed-percentage method election would be made annually on an original, timely filed report, including extensions and is binding and irrevocable by both the taxpayer and the Tax Department. For taxpayers that make the fixed-percentage election, other exempt income (as defined by law) generated by a stock that is marked-to-market will be reclassified as business income and will be included in the taxpayer's New York and everywhere receipts. A partnership cannot make a fixed percentage method election. Interest income and net gains from loans (N.Y. Tax Law Section 210-A(5)(a)(2)(A)): A loan secured by real property is defined to mean that real property constitutes 50 percent or more of the aggregate value of the collateral used to secure a loan, when valued at fair market value (FMV), as of the time the loan is originated. Interest income from loans secured by real property located in NYS would be included in the taxpayer's New York receipts, and interest income from loans not secured by real property would be included in New York receipts if the borrower's location is in NYS as of the time the loan is originated. The borrower's location is deemed to be the billing address as set forth in the lender's books and records if the borrower is an individual, or the commercial domicile if the borrower is a business entity. If one or more of the properties that secure a loan are located outside of New York, the amount of interest income from the loan included in the taxpayer's New York receipts would be apportioned based on the FMV of real property located in NYS used to secure the loan compared to the FMV of all the borrower's real property. The draft regulations also provide information about how to apportion the amount of New York net gains (not less than zero) from the sale of loans secured by real property and not secured by real property, as well as (1) how to compute gains and losses, (2) how to calculate net gains (such as subtracting out carrying costs), and (3) how to apportion gross proceeds from the sale of loans secured and not secured by real property. The draft regulations provided that determinations of the type of loan, FMV of real property, and borrower's location are made only at the time the loan is originated and would be redetermined only if the loan is refinanced. Interest income and net gains from asset-backed securities and other government agency debt (N.Y. Tax Law Section 210-A(5)(a)(2)(C)): Eight percent of interest income and net gains (not less than zero) from asset-backed securities or other securities issued by government agencies or asset-backed securities issued by other entities held by a taxpayer would be included in its New York receipts. Additionally, 8 percent of net gains (not less than zero) from sales of asset-backed securities or other securities issued by government agencies, or asset-backed securities that are sold through a registered securities broker or dealer or through a licensed exchange held by a taxpayer would be included in New York receipts. Further, the draft regulations provide how to apportion other net gains (not less than zero) from the sale of asset-backed securities included in the taxpayer's New York receipts. The taxpayer must compute the gain or loss for each sale of an asset-backed security by subtracting basis from the sales price of the security. To determine the amount of net gains from such sales, the taxpayer would subtract the sum of all losses from the sale of such asset-backed securities from the sum of all such gains, and if the result is equal to or less than zero, no amount is included in New York receipts and everywhere receipts. Gross proceeds would be determined after the deduction of transactional costs (which would not include the taxpayer's basis) incurred to acquire the asset-backed security but could not be less than zero. Interest income and net gains from corporate bonds (N.Y. Tax Law Section 210-A(5)(a)(2)(D)): Interest income of a taxpayer from corporate bonds would be included in its New York receipts if the issuing corporation's commercial domicile is in New York. Eight percent of the net gains (not less than zero) from corporate bonds sales sold through a registered securities broker or dealer or through a licensed exchange by the taxpayer would be included in its New York receipts. The draft regulations also provide information on: (1) how to apportion the amount of net gains (not less than zero) from the sale of corporate bonds (other than bonds sold through a registered securities broker or dealer or through a licensed exchange), (2) how to compute the gain or loss from a bond sale, (3) how to determine the amount of net gains from the sale of corporate bonds sold through a registered securities broker or dealer or through a licensed exchange, and (4) how to determine the amount of net gains from the sale of corporate bonds that are not sold through a registered securities broker or dealer or through a licensed exchange. Net interest income from reverse repurchase agreements and securities borrowing agreements (N.Y. Tax Law Section 210-A(5)(a)(2)(E)): Eight percent of net interest income (not less than zero) from reverse repurchase agreements and securities borrowing agreements would be included in a taxpayer's New York receipts. The draft regulations also provide information about how to calculate net interest income from such agreements, after the deduction of the interest expense from the corporation's repurchase agreements and securities lending agreements (but such amounts cannot be less than zero). Net interest income from federal funds (N.Y. Tax Law Section 210-A(5)(a)(2)(F)): Eight percent of net interest income (not less than zero) from federal funds would be included in a taxpayer's New York receipts. Interest income from federal funds includes interest income paid directly by the federal reserve on deposits at a federal reserve bank10 and interest income paid by another institution on the taxpayer's deposits at a federal reserve bank that are borrowed by another institution in the federal reserve system. Interest expense from federal reserve funds includes the interest the taxpayer paid to another institution in the federal reserve system for the use of the other institution's funds deposited at a federal reserve bank. Net interest income from federal funds is determined after deducting interest expense from federal funds. Net income from commodities (N.Y. Tax Law Section 210-A(5)(a)(2)(I)): The net income amount (not less than zero) from the sale of all commodities included in the taxpayer's New York receipts or everywhere receipts (including for members of a combined reporting group) would be determined separately for the sale of commodities actually delivered and income from commodities where delivery does not actually occur. A "commodity" is defined under IRC Sections 475(e)(2)(A), (B) and (C). If the sale of tangible personal property is not traded as a commodity, see draft regulation Section 4-2.1. The draft regulations discuss (1) how to apportion income from the sale of commodities actually delivered and income from commodities where delivery does not occur, (2) how net income is determined (e.g., by subtracting out the cost to acquire or produce all commodities from the gross proceeds), and (3) how the net income (not less than zero) from each would be included in the taxpayer's everywhere receipts. Marked-to-market net gains (N.Y. Tax Law Section 210-A(5)(a)(2)(J)): If a taxpayer (or a combined group's designated agent) elects the fixed-percentage method, then 8 percent of its marked-to-market net gains (not less than zero) from each type of qualified financial instrument would be included in its New York receipts, and all such net gains would be included in its everywhere receipts. However, when no such election is made, the draft regulations provide guidance on how to apportion the amount of marked-to-market net gains (not less than zero) from each type of financial instrument. In addition, the draft regulations set forth rules for apportioning marked-to-market net gains when an actual sale is made as well as when no actual sale takes place or when the taxpayer has an overall net loss from the actual sale of that type of financial instrument. Lastly, the draft regulations provide that marked-to-market net gains (not less than zero) from stock and partnership interests are not included in New York receipts or everywhere receipts, unless the Commissioner makes a discretionary adjustment requiring their inclusion. Interest income, net gains, and other income from other financial instruments (N.Y. Tax Law Section 210-A(5)(2)(a)(H)): Interest income, net gains (not less than zero), and other income (not less than zero) from other financial instruments includes interest income, net gains, and other income from financial instruments not described in N.Y. Tax Law Sections 210-A(5)(a)(2)(A)-(G), (I), and (J), and applicable regulations. Interest income from other financial instruments includes, without limitation, interest income on deposit accounts, money market mutual funds, and debt issued by a non-US country or political subdivision. A new addition to this category in the draft regulations is income from stock of a Federal Reserve Bank.11 Under the previous draft of the regulations, such investments and the income therefrom was considered to be part of clause (G) (i.e., income from stock interests only if such stock was not "investment capital" as that term is defined in the N.Y. Tax Law). Under the draft regulations, this interest income would be included in the taxpayer's New York receipts if the payor is in NYS, and all of this interest income would be included in the taxpayer's everywhere receipts. An individual payor or purchaser would be in NYS if its billing address is in NYS, while a business entity payor or purchaser would be in NYS if its commercial domicile is in NYS. A government entity's location as payor or purchaser depends on the government entity type. The draft regulations provide how to calculate gain or loss on financial instrument sales. A taxpayer would not be able to use gains from one type of financial instrument to offset losses from another type of financial instrument. Other income (not less than zero) from other financial instruments includes substitute payments in lieu of dividends and income received from stock of a Federal Reserve Bank. Brokerage commissions (N.Y. Tax Law Section 210-A(5)(b)(1)): Receipts that are brokerage commissions derived from the execution of purchase or sale orders for securities or commodities for customers would be deemed to be generated within NYS if the taxpayer's records indicate the mailing address of the customer responsible for paying the commissions is in NYS. Receipts from credit cards and similar activities (N.Y. Tax Law Section 210-A(5)(c)(1)-(3)): Receipts received by issuer banks from credit card receivables that constitute interest, and fees and penalties in the nature of interest and service charges and fees from credit cards, would be included in NYS receipts if the customer's mailing address in the issuer bank's records is in NYS. If the credit card receivables are purchased from an issuer bank, the purchaser would include the receipts in its New York receipts if the card holder's mailing address as set forth in the purchaser's records is in NYS. Further, receipts from merchant discounts would be included in the taxpayer's New York receipts if the merchant is located within NYS. If the merchant has locations both within and outside NYS, only receipts from merchant discounts attributable to sales made from locations within NYS would be included in the taxpayer's New York receipts. The merchant's location would be presumed to be its address shown on the invoice submitted by the merchant to the taxpayer. Receipts received by credit card processors (N.Y. Tax Law Section 210-A(5)(c)(4)): Generally, the amount of receipts from authorization processing, clearing processing, and settlement processing earned by credit card processors (specifically defined and determined on a corporation-by-corporation basis and only available to corporations that qualify) included in New York receipts would be the product of all such receipts and the percent of the credit card processor's NYS access points that could generate such receipts. In the case of a third-party credit card processor that cannot identify the access points for its authorization, clearing, and settlement processing transactions on behalf of issuer banks or acquirer banks after exercising due diligence, the amount of receipts from those transactions earned from banks with billing addresses in NYS, kept in the normal course of the credit card processor's operations, would be included in its New York receipts. All of these receipts would be included in everywhere receipts. Additionally, the draft regulations provide guidance for apportioning the amount of all other receipts, including receipts from volume-based activities, received by credit card processors not specifically addressed by statute. The draft regulations provide that an alternative apportionment calculation may be available if it is demonstrated that the receipts included in the taxpayer's New York receipts do not accurately reflect the locations where such credit card processor receipts are earned because the credit card processor has receipts arising from activities outside the United States. Receipts from railroad, trucking, and omnibus businesses (N.Y. Tax Law Section 210-A(6)): Receipts received by a corporation for its conduct of a railroad, trucking, or omnibus business would be apportioned using a formula based on the number of revenue miles operated by the taxpayer in NYS compared to all of its revenue miles. A revenue mile is defined to mean the transportation for consideration of passengers or freight for the distance of one mile, and excludes nonrevenue miles, such as deadheading (i.e., driving an unladen truck). Receipts from the sale of advertising (N.Y. Tax Law Section 210-A(8)): The draft regulations define receipts from the sale of advertising and receipts for providing an advertising or marketing service, and provide guidance on how to apportion such receipts. The apportionment calculation for advertising sales would vary according to the advertising medium used by the taxpayer. If after due diligence information is lacking for sourcing receipts based upon the number of viewers or listeners within NYS, the taxpayer could use a reasonable method based on other data metrics available to the taxpayer. However, if a taxpayer uses an estimation method for apportionment purposes, which the Commissioner of the Tax Department determines is unreasonable, the Commissioner could substitute an appropriate method. The Commissioner of the Tax Department also could require the taxpayer to apply a reasonable method consistently, if the taxpayer applies it inconsistently. The apportionment of gross receipts from advertising or marketing services (e.g., the creation and/or implementation of an advertising or marketing campaign) would be determined by comparing the number of such intended advertising or marketing targets in NYS to such targets everywhere (intended target fraction), relying primarily on statistics and information compiled or utilized as part of the taxpayer's market research and advertising strategy for its customer. If no statistics or information are available, the taxpayer could then use other information sources that attempt to determine the intended targets' location. The Commissioner of the Tax Department could substitute a reasonable intended targets method if necessary, and the taxpayer would have the burden to establish such method was not reasonable. Additionally, the Commissioner of the Tax Department could require the taxpayer to apply a reasonable method consistently. If a taxpayer receives a lump sum as payment for advertising or marketing services, with services including a combination of activities such as the creation of the advertising or marketing campaign and the actual purchase of advertising space or time, the taxpayer must allocate the lump sum among each of the activity types based on both the costs of purchasing the advertising or marketing space or time and the intended targets of the advertising or marketing by some other reasonable method. The taxpayer's report must include full details. Subpart 4-3: New York S corporations (N.Y. Tax Law Section 210-A) — Draft N.Y. Comp. Codes and Regs., tit. 20, Sections 4-3.1 through 4-3.3. Definition of business receipts for New York S corporations (N.Y. Tax Law Section 210-A): Business receipts for an S corporation means all receipts, net income (not less than zero), net gains (not less than zero), and other items provided by law that are included in the New York S corporation's nonseparately computed income and loss or in the New York S corporation's separately stated items of income and loss, determined under IRC Section 1366(a) (pass-through items to shareholders). These include amounts that otherwise would have been characterized as investment income from investment capital or other exempt income from New York C corporations. Additionally, in applying the draft regulations related to financial instruments,12 the term "qualified financial instrument" applicable to C corporations has the same meaning for S corporations, except that instruments excluded from qualified financial instruments for New York S corporations would be limited to: (1) loans secured by real property; (2) loans not secured by real property, if the only loans the taxpayer has marked-to-market are loans secured by real property; and (3) partnership interests that do not meet the IRC Section 475(c) "security" definition. Since under the N.Y. Tax Law a New York S corporation does not have any investment capital or other exempt income, stock that otherwise would have been investment capital or could generate other exempt income for a New York C corporation may be a qualified financial instrument for a New York S corporation. Nonresident and part-year resident shareholders of New York S corporations (N.Y. Tax Law Sections 631 and 632): A nonresident shareholder of a New York S corporation, in determining amounts from New York sources for personal income tax purposes, would multiply its pro-rata share of the New York S corporation's items of income, gain, loss, and deduction (and any related N.Y. Tax Law Section 612 modifications) that are included in the nonresident shareholder's New York adjusted gross income by a fraction comparing the New York S corporation's New York receipts and its everywhere receipts (i.e., apportionment factor). For part-year resident shareholders, this rule applies only to the New York S corporation's items received during the nonresident period of the tax year (and any related N.Y. Tax Law Section 612 modifications) that are included in the part-year resident's New York adjusted gross income.13 Subpart 4-4: Other rules (N.Y. Tax Law Section 210-A(11)) — Draft N.Y. Comp. Codes and Regs., tit. 20, Sections 4-4.1 through 4-4.2. Power of the Commissioner of Tax Department to adjust the business apportionment factor: If the business apportionment factor does not fairly reflect the taxpayer's activities, business income, or business capital in NYS, the Commissioner of the Tax Department has discretion or the taxpayer can request to adjust the business apportionment factor to properly and fairly reflect such activities within NYS. (Designated agents would have the power to make such a request for the members of a combined reporting group.) Before applying a non-statutory business apportionment formula on an original report for a tax year, the taxpayer must receive the consent of the Commissioner of the Tax Department. A taxpayer may also be able to: (1) request reconsideration during an audit of its report, or (2) file an amended report later, depending on the circumstances of the taxpayer's request and the Commissioner's response. Short period business apportionment factor: A taxpayer is only required to compute its business apportionment factor for the period it is subject to tax in NYS, including when the taxpayer is subject to tax for a period of less than its taxable period for federal income tax purposes. The short period business apportionment factor must be applied to business income and business capital that have been prorated to represent business income and business capital for the period for which the taxpayer is subject to tax in NYS. As previously stated, the due date for submitting comments on the draft regulations to the Tax Department is October 18, 2019, but the Tax Department has indicated on its website that comments submitted after the due date may still be considered. Taxpayers should also be aware that the Tax Department has indicated on its website that these regulations are not to be relied upon until they are finalized. While the New York City Department of Finance has not yet issued its own version of these draft regulations, it has indicated on its website that taxpayers may rely on the Tax Department's draft regulations by substituting the City for the State where necessary and disregarding provisions that do not correspond to New York City Admin. Code tit. 11, ch. 6, sub. 3-A. The draft regulations make significant modifications to some of the provisions appearing in prior drafts of the proposed regulations. Many of these changes are made to defined terms as well as to the mechanics of various apportionment methodologies. As discussed above, modifications have been made which may be meaningful and special attention should be paid to such definitions and the examples included with the draft regulations. In some cases, the definitions and rules in the draft regulations appear to be contrary to the relevant provisions of the Tax Law. Moreover, under the prior version of these draft regulations (issued on September 30, 2016), receipts from sales of "unusual events" were not included in the receipts factor. However, the updated draft regulations delete the "unusual event" provision and generally state that such sales including sales of multiple assets are included in the receipts factor under N.Y. Tax Law Section 210-A and presumably the other draft regulations. If this provision excluding the "unusual event" exception to the receipts factor remains in the final regulation, that change alone would represent a significant departure from decades of NYS's historic treatment of such types of receipts. (See N.Y. Comp. Codes and Regs., tit. 20, Section4-4.6(e) promulgated in or about 1981.) Further, because the effective date of these regulations is unknown at this point, taxpayers should consider the statute of limitations for refunds and assessments, provisions for financial statement purposes, and compliance with respect to certain provisions therein. Accordingly, taxpayers should consider consulting with their tax professional before applying any of these sourcing provisions.
1 Draft N.Y. Comp. Codes and Regs., tit. 20, §§ 4-2.3 and 4-2.18; see Tax Alert 2019-1311. 3 N.Y. Dept. of Taxn. and Fin., Corporate tax reform draft regulations are posted at: (https://www.tax.ny.gov/bus/ct/corp_tax_reform_draft_regs.htm) (last visited July 30, 2019). Additionally, while the New York City Department of Finance has not yet issued its own version of draft regulations on these topics, it has indicated on its website that taxpayers may rely on the Tax Department's draft regulations by substituting the City for the State where necessary and disregarding provisions that do not correspond to New York City Admin. Code tit. 11, ch. 6, sub. 3-A. 4 Please note that this definition was significantly modified from that used in the previous draft of the regulations and which defined business receipts as "receipts, net income (not less than zero), net gains (not less than zero) and other items described in section 210-A of the [N.Y.] Tax Law and the applicable regulations that are received in the regular course of the taxpayer's business, provided such amounts are includible in the computation of the taxpayer's entire net income for the taxable year." Emphasis added. 7 The Tax Department made specific reference to "final" destination in the draft regulations, which was not included in the previous version. 8 The Other Business Receipts regulations have a sourcing rule for income from intangibles, which requires taxpayers to look to where the value of the intangible is accumulated. 10 This treatment of deposits with the federal reserve appears contrary to the FAQ on the topic previously issued by the Tax Department. (See Tax Department Corporate Tax Reform FAQs ("Q: How is interest income on funds deposited with the Federal Reserve (other than federal funds) apportioned? A: Receipts from interest income on funds deposited with the Federal Reserve (other than federal funds) are considered receipts from other financial instruments under [N.Y.] Tax Law [§] 210-A.5(a)(2)(H) and apportioned to the payor's location, which is the location of the Federal Reserve branch where the corporation made the deposit.") (available on the internet at: https://www.tax.ny.gov/bus/ct/corp_tax_reform_faqs.htm (last accessed July 30, 2019)). 11 Query as to whether income from such stock, to the extent not considered income from investment capital, should properly have been classified under clause (G) (income from stock) instead of clause (H) (income from other financial instruments). 13 N.Y. Dept. of Taxn. and Fin., TSB-M-15(7)C, (6)I (December 1, 2015). Document ID: 2019-1410 | |||||||||||||||||
