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August 11, 2023

FIRST IMPRESSIONS | New York's proposed regulations implementing corporate franchise tax reform from 2014 are largely the same as prior drafts and include some notable changes

On August 9, 2023, the New York State (NYS) Department of Taxation and Finance (Department), in accordance with the NYS State Administration and Procedures Act (SAPA), proposed regulations under Article 9-A corporate franchise tax (Parts 1-9) and Article 33 insurance corporation franchise tax (Part 32).1 The proposed regulations, once finalized, will implement comprehensive franchise tax reform for corporations, banks and insurance companies, which was enacted in 2014, with subsequent technical and conforming amendments enacted in 2015 and 2016.

The proposed regulations cover a wide range of areas, such as imposition of tax (nexus) and protected/unprotected activities under PL 86-272; apportionment; computation of tax; combined unitary reporting; and qualified NYS manufacturers (NYQMs). These and other areas addressed in the proposed regulations may impact NYS taxpayers in various industries.

Interested parties have until October 10, 2023, to submit comments on the proposed regulations.


Since September 2, 2015, the Department has released various Parts of Article 9-A corporate franchise tax regulations for comment via its website. According to the Department's Regulatory Impact Statement, "[i[ndustry representatives and individuals submitted over 80 highly detailed and carefully considered comments and suggestions … .While the [D]epartment implemented many comments and suggestions, it resolved some of the issues raised in a different manner than suggested. The [D]epartment also rejected some suggestions as inconsistent with the Tax Law, established Tax Department policy, related Federal provisions or the legislative objectives of Tax Reform, as lacking statutory authority, or as administratively impracticable."

A general table of contents of the proposed regulations is as follows:

  • Part 1 — Imposition of tax (pages 1-39), including corporations that may be subject to tax based upon economic nexus, corporate partner rules and protected/unprotected activities under PL 86-272
  • Part 2 — Accounting periods and methods (pages 39-47)
  • Part 3 — Computation of tax (pages 47-171), including rules on investment and business income and capital, with examples; and capital loss, prior net operating losses (PNOLs) and net operating loss (NOL) provisions, with examples
  • Part 4 — Apportionment (pages 172-305), including general and specific rules; rules on receipts from digital products and services, and from other services and other business activities, with examples
  • Part 5 — Credits (pages 305-313), including the investment tax credit, employment incentive tax credit, and security training tax credit
  • Part 6 — Reports (pages 313-341), including general requirements, and combined reporting
  • Part 7 — Payment of tax, declaration and payment of estimated tax, and collection (pages 341-353)
  • Part 8 — Metropolitan Transportation Business Tax Surcharge (pages 353-367), including the Metropolitan Commuter Transportation District Apportionment Percentage rules
  • Part 9 — Special entities (pages 367-404), including NYQM and contract manufacturers provisions; corporate partner rules with examples; NYS S corporation provisions; and rules for real estate investment trusts (REITs) and regulated investment companies (RICs)
  • Part 32 — Combined reports for insurance corporations (pages 404-417)

Based upon our review of all prior draft submissions issued by the Department, this First Impressions Alert outlines our observations around certain key provisions in the latest proposed regulations.

Part 1 — Imposition of tax

Section 1-2.3(d) — Foreign corporations — partnership interests — Consistent with prior drafts of the proposed regulations, the rules for foreign corporate limited partners would apply to corporate partners in a non-managing limited liability company (LLC).

Section 1-2.10(i) — Foreign corporations — Public Law-86-272 — Consistent with prior drafts of the proposed regulations, the examples on internet activities demonstrate conformity with the Multistate Tax Commission (MTC) regulations. (See Tax Alert 2022-0734.)

Part 3

Section 3-4.1(c) — Definition of investment capital — For corporate partners using the aggregate method to compute their tax, the corporation's proportional part of the stock owned by the partnership could qualify as investment capital only if the requirements were satisfied at the partnership level. This includes the identification requirement, which has been the subject of consistent controversy and comment by industry groups. Industry groups have advocated for the identification requirement to be done at the corporate partner level rather than at the partnership level. The Department "rejected this alternative because it was inconsistent with the aggregate theory of partnership taxation employed in New York and generally treats the corporate partner as doing what the partnership is doing. In addition, identifying investment capital at the partnership level ensures that all amounts that flow from partnerships are treated consistently between partners." These requirements are consistent with prior drafts.

Section 3-4.2Constitutionally protected investment capital — If a corporation is incorporated and commercially domiciled outside of NYS, the U.S. Constitution prohibits NYS from apportioning income or gain from intangible assets when the income or gain lacks a sufficient connection to activities or presence in the state. Section 3-4.2 illustrates this concept with specific examples.

Section 3-4.3 Investment capital identification — Consistent with prior drafts of the proposed regulations, different requirements are provided in this area for dealers in securities and all corporations other than dealers in securities.

Section 3-4.5(c) — Gross investment income limitation — Industry groups have commented previously that the 8% limitation on investment capital should be the "sum of income from constitutionally protected investment capital and 8% of [entire net income (ENI)]." Consistent with prior drafts, the proposed regulations do not include this alternative because "it would expand the exemption for investment income beyond what is contemplated in the statute."

Section 3-9.6(c)Carryforwards in certain corporate reorganizations and acquisitions — A "separate return limitation year" (SRLY) would no longer apply if there were an overlap with IRC Section 382. In prior draft regulations, the Department incorrectly applied the "greater" of the two limitations when both SRLY and IRC Section 382 applies to a single taxpayer (i.e., the "overlap" scenario). The Department resolved this issue in the proposed regulations.

Part 4

Section 4-1.2 — General rules for apportionment — The initial draft of the proposed regulations would have excluded from the BAF receipts from sales of real, personal and intangible property that arise from "unusual events." The Department later determined that the unusual-events rule should be eliminated and removed it from the proposed regulations.

Section 4-1.6 — Power of the Commissioner to adjust business apportionment factor (BAF) — A taxpayer would be required to report under the statutory method. If the Department did not respond to a request for alternative apportionment before the original return was filed, the taxpayer could file an amended return using its proposed or alternative BAF.

Section 4-3.1(c) — Definition of digital product — The prior draft regulation included the following within the digital products definition: "cryptocurrency or other similar assets digitally delivered." This language, however, was not included in the proposed regulation. Thus, controversy still exists as to the proper treatment of income from digital assets for NYS apportionment purposes.

Sections 4-3.2(d)(1)(ii) and 4-4.2(d)(1)(ii) — Billing address safe harbor — For purposes of determining where a customer receives the benefit of a service or other business activity and for purposes of determining where a customer primarily uses a digital product or service, sections 4-3.2(d)(1)(ii) and 4-4.2(d)(1)(ii) would presume that the benefit from that service or activity is received at the customer's billing address when:

  • The taxpayer has more than 250 business customers purchasing substantially similar services or activities (or digital products or services)
  • No more than 5% of receipts from those services or activities (or digital products and services) come from a particular customer

Previously the Department utilized a 10,000-business-customer threshold before a taxpayer could use the "billing address safe harbor." In its Regulatory Impact Statement, the Department indicated that, "[i]n response to additional comments on this issue, the proposed rule [would adopt] the [250-customers-billing-address] safe harbor as advocated by the commenters and [eliminate] as unnecessary the inquiries safe harbor." The reduced customer threshold is a welcome update to the regulatory draft.

Section 4-4.3(e) — Sales of intangible property — Consistent with prior drafts, section 4-4.3(e)(1) would source net gains from the sale of intangible property to the location where the intangible's value accumulated. The Department further expanded on this rule, so section 4-4.3(e)(3) would require goodwill to be apportioned based upon an average three-year BAF, unless facts and circumstances indicate another period is better to measure where the value of goodwill accumulated.

Part 6

Section 6-2.1(e) — Qualified Emerging Technology Company — Consistent with prior drafts, all members of a combined group would have to be a qualified emerging technology company (QETC) to be qualify for preferential tax treatment.

Part 9

Section 9-1.3 — Contract manufacturing — Consistent with prior drafts, the proposed regulations include a process for determining whether a contracting company/production company is a qualified New York manufacturer.

Section 9-2.6(a)Election by certain foreign limited partners — Consistent with prior drafts, a foreign corporation could include a non-managing corporate LLC member for purposes of this election.

Provisions specific to the financial services industry

While the previous sections may apply to all taxpayers, the following provisions apply only to those in the financial services industry.

Section 4-4.4(c)(2) — Passive investment customer — In response to industry comments, significant changes were made to the sourcing of receipts for management, distribution and administration services provided to a "passive investment customer" (PIC). Such receipts would be presumed to be received at the location of the PIC's investors unless the investor were holding the interest in the PIC for a beneficial owner. If held for a beneficial owner, the benefit would be presumed to be received at the location of the beneficial owner. The location would be either the billing address for individual investors/beneficial owners or principal place of business, if not an individual. This amount would be apportioned based on the "average value of the interests in the [PIC]" held by investors and beneficial owners. If the investor location cannot be determined, then fees for such services would be sourced to the location where the PIC managed the contract.

Per the Department's regulatory impact statement, the Department "advanced several methods for sourcing receipts from [PIC]. Alternatives included treating these non-regulated funds as investment companies subject to the [RIC] sourcing rules, sourcing to the location where the [PIC] (or the party that is granted authority to make executive decisions on behalf of the [PIC]) makes the decision to utilize the investment or management advice, and sourcing to the location where the service contract is managed by the PIC."

Section 4-2.4(c)(1)(i) and 4-2.4(d)(i) — Qualified financial instrument (QFI) netting — Despite industry comments, the proposed regulations retain various provisions affecting the QFI election and the other financial instrument (OFI) bucket. Taxpayers could not net one type of QFI against other types of QFIs when the QFI election is made. Section 6-2.4(c)(1)(i) would require netting "of each type of [QFI] that would be subject to the same customer sourcing method … ." According to the Regulatory Impact Statement:

Interested parties have argued that one aggregate net value should be determined encompassing all types of QFIs when the election is made. The practical implication of this would be that gains from one type of QFI, such as corporate bonds, could be offset by losses from a totally different type of QFI, such as commodities. The [D]epartment rejected this alternative because the netting of receipts is required to be performed within each receipt sourcing category before the QFI election is applied to determine the amount to include in New York and everywhere receipts.

Section 4-2.4(a)(2)(iii) — Other financial instrument (OFI) bucket — In addition to the netting of QFI receipts, the Department rejected industry comments around the treatment of the OFI bucket when the QFI election is made. Section 4-2.4(a)(2)(iii) continues to provide that, "[i]f a corporation has marked to market a specific financial instrument in section 210-A(5)(a)(2)(H), then only a financial instrument of the same type also is a [QFI] in the taxable year. Therefore, some types of financial instruments described in section 210-A(5)(a)(2)(H) may be [QFIs] while other types of financial instruments subject to such clause may be nonqualified financial instruments." According to the Department's Regulatory Impact Statement, "[c]ommenters have argued that the [D]epartment should consider all assets in this category as one type for receipts netting purposes. The [D]epartment has rejected this alternative as inconsistent with the requirements to determine QFIs by type."

Section 4-1.1(c)(1) — Definition of mark-to-market — Consistent with prior drafts and contrary to industry comments, the definition of mark-to-market would continue to exclude financial instruments if a security, as defined in IRC Section 475(c)(2), comes within one of the exceptions described in IRC Section 475(b)(1), whether or not the corporation identifies the security under IRC Section 475(b)(2). This result may produce tracking differences for federal and NYS purposes.

Sections 3-5.1(a)(2)(h), 4-2.12(a)(4), 4-2.12(e) and 4-2.12(f) Examples 3 and 4 — Stock in the Federal Reserve Bank and Federal Home Loan Bank — Consistent with prior drafts of these regulations, section 3-5.1(a)(2) would treat "investments in a Federal reserve bank or a Federal home loan bank" as business capital. Industry groups and taxpayers have advocated for the ability to claim these investments as "investment capital" if the stock investments meet all necessary criteria under the tax law. Also consistent with prior drafts, the proposed regulations would continue treating income received from stock of the Federal reserve bank as OFIs. In an example, such income would be sourced at 1/12 given that "only one of the twelve Federal Reserve Banks is located in New York." Similarly, another example would source income received from stock of a federal home loan bank at 1/11 given that "only one of eleven Federal Home Loan Banks is located in New York."

Section 3-3.1(a)(2)(v) Excess inclusion income — In response to comments from industry groups and taxpayers on reading the interplay of how excess inclusion income received by a REMIC residual interest holder interacts with NY NOL provisions, the Department appears to have decoupled from IRC Section 860E. Examples previously included in prior regulation drafts have been deleted so taxpayers should receive full benefit for NOLs generated. According to the Department's Regulatory Impact Statement, "pre-proposal drafts took varying positions on whether or not an NOL can be generated and, if so, how much. The [D]epartment reconsidered its previous policy, and the proposed rule eliminates the tie to IRC [S]ection 860E as the starting point for calculating ENI. Under this policy, taxpayers sustaining a loss would calculate an NOL under existing law."


NYS taxpayers in all industries should consider the NYS tax implications of the proposed regulations for various purposes including, but not limited to, tax compliance, audits (controversies), acquisitions and dispositions, reorganizations and planning. The effective date of the proposed regulations is uncertain. The NYS Department website has removed its prior caveat that taxpayers may not rely on the prior draft regulations until final. At this time, however, it is unclear how much taxpayers may rely on the proposed regulations. The NYC Department of Finance has yet to comment on the NYS proposed regulations.


Contact Information
For additional information concerning this Alert, please contact:
For general/non-financial New York State taxpayers:
   • David Schmutter (
   • Sam Cohen (
For financial institutions that are New York State taxpayers:
   • Zal Kumar (
   • Karen Ryan (
   • Matthew Musano (
   • Arthur Gold (

Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor


1 The notice of proposed rulemaking was published in the August 9, 2023 NYS Register.