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July 14, 2022

"Final updates" to New York's draft business corporate franchise tax regulations will affect all industries

  • The New York State (NYS) Department of Taxation and Finance (Department) expects to finalize all corporate tax reform draft regulations at once within the next 6-12 months.
  • The recently issued Part 4 draft apportionment regulations included numerous changes affecting all industries.
  • The draft regulations do not provide an effective date and could apply retroactively.
  • Interested parties should consider submitting comments on the Part 4 draft apportionment regulations by August 26, 2022, but comments on all draft regulations can still be submitted before the final promulgation process begins later this year.
  • Although the draft regulations are not yet final and "should not be relied upon" until final, they demonstrate the State's treatment in this area.
  • New York City could adopt these regulations to the extent the City's corporate business tax is the same or substantially similar to NYS law.

Based upon NYS corporate tax reform effective for tax years beginning on or after January 1, 2015, the Department recently released "final updates" to all its Article 9-A Business Corporation Franchise Tax draft regulations (draft regulations) with the expectation of submitting them to the State Administrative Procedure Act (SAPA) process in Fall 2022 for final promulgation.

Draft apportionment regulations

On July 1, 2022, the Department posted "final updates" to its Part 4, apportionment regulations (draft apportionment regulations). This draft includes the general apportionment provisions and rules for digital products/services and services and other business receipts, which were previously posted as separate drafts. The major revisions to these parts include the following:

  1. Replacing "taxpayer" with "corporation." This change stems from the rules applying to corporations determining if the economic nexus standard is met and non-taxpayer members of combined groups.
  2. Clarifying the items included in the business apportionment factor (BAF). The Department continues to exclude rules pertaining to "unusual events."1 Therefore, receipts generated from activities outside the ordinary course of business would be apportionable unless they are not "included in the computation of entire net income for the taxable year."2
  3. Addressing the apportionment of lump-sum payments. While some of the language included in this section remains unchanged from the prior versions of the draft apportionment regulations, one particularly noteworthy, new provision for lump sum payments would prohibit "a corporation [from using] the rules for intermediary transactions unless almost all of the activities carried on under the agreement are intermediary transactions."3 The intermediary transaction rule would allow for a type of look-through sourcing approach for taxpayers to the underlying beneficiary/consumer of the product or service.
  4. Including rules for net gains from the sale of tangible personal property and real property. The new rules would, among other things, limit the amount included in New York receipts to the amount included in everywhere receipts when determining net gains from sales of tangible personal property or real property if "the total amount of net gains (not less than zero) from sales … located in New York exceed the net gains (not less than zero) from sales … located within and [outside NYS]."4
  5. Including new examples for sourcing sales of tangible personal property, royalties, advertising receipts, and receipts from digital products/services. A new example in the discretionary authority section of the draft apportionment regulations would require a corporate partner to include in apportionment the gains/losses from the sale of the underlying assets of a partnership when the corporate partner's net gain from the sale of the partnership interest was 75% of its business receipts for the tax year.5 The general statutory rule excludes gain on the sale of a partnership interest unless the Commissioner determines that the inclusion of such net gains is necessary to properly reflect the taxpayer's business income or capital.
  6. Updating the rules for federal funds and other financial instruments. The draft apportionment regulations would not consider "interest paid to [a] corporation directly by the [F]ederal [R]eserve for reserves maintained at the [F]ederal [R]eserve [B]ank [to] constitute interest income from federal funds" and would require that interest be "apportioned under the rules for other financial instruments."6 The other financial instrument section of the draft apportionment regulations require that such interest income be apportioned 1/12 to NYS because "[o]nly one of the twelve Federal Reserve Banks is located in New York."7
  7. Clarifying that cryptocurrency falls under the definition of digital product. Draft apportionment regulation section 4-3.1(c) would define "cryptocurrency or similar asset digitally delivered" as "digital products" and source them using the digital product or digital services rules, i.e., a hierarchical sourcing method first looking to the customer's primary-use location.
  8. Including a billing-address safe harbor for receipts from digital products/services and services, as well as other business receipts. In addition to the "inquiries safe harbor," the Department also would include a "billing address safe harbor" whereby the corporation may use a customer's billing address as either the primary use location (for digital products/services) or the benefits received location (for other services and other business activities) for sourcing purposes. The corporation could use the "billing address safe harbor" if it had more than 10,000 business customers purchasing substantially similar products or services and no more than 5% of receipts from those products or services come from one particular customer.8
  9. Revising the rule for provision of services to passive investment customers based on rules adopted by other states and the Multistate Tax Commission. The Department updated its sourcing rules for other services and other business activities to exclude the rule for sourcing services to passive investment customers from the "special rules" list. The benefit of the service to a passive investment customer would be "presumed to be received at the location where the contract is managed by the passive investment customer."9 "Location where a contract is managed by the customer" would be defined as "the primary location at which an employee or other representative of a customer serves as the person with responsibility for monitoring or managing the day-to-day execution of the contract or sale with the corporation."10

Comments on the draft apportionment regulations are due to the Department by August 26, 2022.

Previously issued "final updates" to other draft regulations on corporate tax reform

On April 29, 2022, the Department posted "final updates" to its Parts 1-311 and Parts 5-1012 draft regulations. The major revisions to these parts include:

  1. Including a modified separate accounting election for corporate limited partners. This new provision would revert to the pre-corporate tax reform rule, which imposed nexus on a foreign (non-NYS) corporate limited partner if the underlying partnership is doing business, employing capital, owning or leasing property, maintaining an office, or deriving receipts from activity in NYS and the foreign corporation has a 1% or more interest in the partnership and/or the basis of the foreign corporation's interest in the limited partnership is more than $1 million.13
  2. Providing an appendix of separate documents illustrating examples for the capital loss,14 unabsorbed net operating loss,15 prior net operating loss16 and net operating loss rules.17 This will help with the SAPA submission process.
  3. Confirming that the designated agent of a combined report may be changed between tax years.18
  4. Including real estate mortgage investment conduit (REMIC) rules in the special entities section of the draft regulations.19 These REMIC rules:
    1. List modifications that are not allowed when taxpayer's federal taxable income (FTI) is limited to excess inclusion (EI) under IRC Section 860E (i.e., investment income, other exempt income, prior net operating loss conversion subtraction, and net operating loss deduction (NOLD))
    2. Define business income as the sum of EI and the amount of income from presumed investment capital that is from an immediately preceding tax year and must be added back
    3. Permit a taxpayer to still generate an NOL in a year when a taxpayer is limited to EI and the NOL is computed without regard to EI
    4. Include rules for combined groups
  5. Identifying which activities conducted over the internet would be protected by P.L. 86-272 (See Tax Alert 2022-0734)

Although comments on these Parts were due to the Department by June 30, 2022, interested parties may still be able to submit comments before the SAPA process begins.


The Department said that this is the final update for public comment and that it intends to begin the SAPA process to formally propose and adopt these regulations. It is unclear how long it will take for the draft regulations to be adopted as final.20

Even though the draft regulations are not yet final and "should not be relied upon," per the Department, until final, the draft regulations demonstrate the State's treatment in this area. Therefore, taxpayers should consider these rules when preparing their 2021 tax returns and 2022 quarterly estimated payments. The draft regulations could also affect certain planning and business transactions as well. In addition, taxpayers should consider filing protective amended returns to claim the benefit of any of these provisions while they wait for finalization of the regulations through the SAPA process.

The draft regulations do not provide an effective date and could apply retroactively.

In addition, New York City may adopt the draft regulation for corporation business tax purposes to the extent that its law is the same or substantially similar to the New York State law at issue.

Additional information on the draft regulation, as well as other draft regulations related to New York's corporate franchise tax reform, is available on the Department proposed regulation webpage.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
For general/non-financial New York State taxpayers:
   • David Schmutter (
   • Sam Cohen (
For financial institutions that are New York State taxpayers:
   • Karen Ryan (
   • Matthew Musano (
   • Annie Yang (


1 Prior versions of the draft regulation, specifically old section 4-1.1(b), contained rules excluding "unusual events" from business receipts.

2 See, draft regulation 4-1.2(a).

3 Draft regulation 4-1.3(b).

4 See, draft regulation 4-2.1(b)(2) and 4-2.2(c).

5 See, generally, draft regulation 4-1.6(e)(3). In this example, the corporate partner used the aggregate method of partnership taxation.

6 Draft regulation 4-2.9(c).

7 Draft regulation 4-2.12(f), Example 3.

8 See, draft regulation 4-3.2(d)(1)(iii) and 4-4.2(d)(1)(iii). The "billing address safe harbor" rule in the digital products and digital services section is not identical to the comparable rule in the other services and other business activities rule, as their language around the 5% standard differs.

9 Draft regulation, 4-4.4(c)(1) and (2).

10 Id. at 4-4.1(e).

11 Part 1 provides rules on imposition of tax, Part 2 provides rules on accounting periods and methods, and Part 3 provides rules on computation of tax.

12 Part 5 provides rules on credits against tax; Part 6 provides rules on reports; Part 7 provides rules on payment of tax, declaration and payment of estimated tax, and collection; Part 8 provides rules on assessment, revision, refund and review; Part 9 provides rules on the metropolitan transportation business tax surcharge, and Part 10 provides rules on special entities.

13 See, generally, draft regulation 1-2.3(b).

14 See, generally, draft regulation 3-7.8, appendix, subpart 3-7.

15 See, generally, draft regulation 3-8.3, appendix, subpart 3-8.

16 See, generally, draft regulation 3-8.9, appendix, subpart 3-8.

17 See, generally, draft regulation 3-9.7, appendix, subpart 3-9.

18 Draft regulation 6-2.1(c).

19 See, generally, draft regulation Subpart 10-6.

20 For a discussion of the SAPA process, see D. Schmutter, K. Ryan, S. Cohen, M. Musano, "New York State Draft Regulations: Now, Next and Beyond" (State Tax Notes Nov. 9, 2020).