New York finalizing corporate business tax reform


As part of the state’s corporate tax reform effort, the New York Department of Taxation and Finance (Department) expects to submit all Article 9-A Business Corporation Franchise Tax draft regulations for final submission under the State Administrative and Procedure Act (SAPA) in the fall.1 The Department has been in the process of issuing draft regulations over the past several years in response to the major corporate tax reform legislation that was effective for tax years beginning on or after Jan. 1, 2015.2


Some of the most significant changes in the current draft regulations concern apportionment and the scope of Public Law (P.L.) 86-272 protection.3 Specifically, the Department has updated its rules for digital products and services, services generally, and other business receipts. Additionally, the Department’s updates address the application of P.L. 86-272 protection to internet transactions. Some of the major revisions to New York State’s (NYS) corporate income tax draft regulations concerning apportionment and P.L. 86-272 as well as their potential implications on corporations are discussed below.




Significant draft apportionment regulation updates


For tax years beginning on or after Jan. 1, 2015, NYS made significant statutory changes for computing the business apportionment factor (BAF) and adopted market-based sourcing.4 The new apportionment statute is extensive and includes intricate customer-based sourcing rules. Specific provisions exist for various types of sales including other business receipts, rents and royalties, and digital products. Receipts from intangible property, such as patents and trademarks, are sourced to NYS based on the extent the activities related to the intangible take place in the state.5 Also, receipts from services and other business receipts are sourced to the state based on a customer location hierarchy, specifically starting with where the customer receives the benefit of the transaction.6


The Department’s detailed draft apportionment regulations interpret and implement the apportionment statute that is effective beginning with the 2015 tax year and include numerous examples.7 However, the draft regulations do not provide an effective date for their enactment. While unstated, the regulations potentially could apply on a retroactive basis for tax years open under the statute of limitations. Some important revisions to the apportionment rules include the following changes summarized below.



Revised terminology and items included in the BAF


Throughout the draft regulations, the Department replaces the term “taxpayer” with “corporation.” In its summary of notable changes, the Department explains that this change is necessary because “the rules apply to corporations determining if the economic nexus standard is met and also non-taxpayer members of combined groups.”8 Additionally, the Department clarifies that the numerator and denominator of the BAF generally “includes only those receipts, net income, net gains, and other items described in [the apportionment statute and the applicable regulations] that are included in the computation of entire net income for the taxable year.”9 However, certain amounts from investment capital, exempt income from stocks, statutory amounts excluded from entire net income, and certain reimbursement of expenses are not included in either NYS receipts or everywhere receipts.10



Lump sum payments


The revised draft regulations discuss the apportionment of lump sum payments for multiple types of goods.11 When a sale is comprised of a digital product and a digital service, both of which are sourced under the digital product rules, the receipt cannot be divided into separate components and is considered to be one receipt regardless of whether the receipts are separately stated for billing purposes.12 Under a significant new provision, a corporation could not use the rules for intermediary transactions “unless ‘almost all’ of the activities carried on under the agreement are intermediary transactions.”13 For intermediary transactions, the receipt is sourced using the hierarchy of methods based on the location of the consumers rather than the intermediary.14



Installment sales


The draft regulations also address the apportionment treatment of installment sales.15 If there is an asset sale where the seller receives payment on an installment basis,16 the apportionment statute or rules are used to source the receipts or gains in the year of sale. The same apportionment ratio is used to source the installment income for each type of asset in subsequent years. The rule includes a detailed example.



Alternative apportionment


A detailed section of the draft regulations concerns alternative apportionment and the power of the Commissioner of Taxation and Finance to adjust the BAF.17 If the BAF does not properly reflect the corporation’s activities, business income or business capital in the state, the commissioner may adjust the BAF to properly reflect the corporation’s activities in NYS, or the corporation may request an adjustment.18 The party seeking to change the BAF has the burden to show by clear and convincing evidence that the statutory computation of the BAF does not properly reflect the corporation’s business income or business capital in the state and that the proposed adjustment is appropriate.19


The draft regulations provide three detailed examples to illustrate the alternative apportionment concepts. In a new example, a corporation that owns an interest in a partnership for four years computes the tax on its partnership interest under the aggregate method. In the fifth year, the corporation’s only business receipts are from selling financial investments, with 75% of its business receipts arising from the net gain on the sale of its partnership interest.20 Under the current statute, the net gain from the partnership sale would not be included in the BAF (to the extent the corporation did not make the fixed percentage election to source such gain).21 However, the example implies that the Department would determine in this instance that because of the significance of the net gain in comparison to the overall amount of receipts reported by the corporation, the net gain should be included in order to properly reflect the corporation’s business income.



Short-period apportionment


The final general apportionment draft regulation discusses short-period apportionment.22 A corporation with a short tax period computes its BAF only for the time that it is subject to NYS tax.23 The business income and business capital for the short period are apportioned by a BAF using only the receipts, net income, net gain and other items for the period that the corporation is subject to tax in NYS, and the corporation must disclose complete details with its return showing how it computed its BAF for the short period.24



Treatment of net gains


A subpart of the draft regulations is comprised of 17 specific apportionment rules interpreting many of the statutory changes made in 2015.25 Two of these draft rules address the treatment of net gains from the sales of tangible personal property and real property.26 To determine the amount of net gains from the sales of tangible personal property or real property to be included in the numerator and denominator of the BAF, the corporation first would subtract the sum of all losses from the sum of all gains. If the result is equal to or less than zero, no amount would be included in NYS receipts and everywhere receipts. The revised draft rules would limit the amount included in the numerator (NYS receipts) to the amount included in the denominator (everywhere receipts).27 Accordingly, for these sales, the BAF could not be less than zero or greater than 100%.



Services to passive investment customers


The draft regulations include a subpart that addresses receipts from other services and other business activities, including rules for determining where the benefit of the service is received.28 The Department revised its sourcing rule for the provision of services to passive investment customers in a manner similar to the Multistate Tax Commission (MTC) model rules.29 In the case of a passive investment customer, the benefit of the service would be “presumed to be received at the location where the contract is managed by the passive investment customer.”30 This rule applies to services provided to passive investment customers unless a special rule for determining where the benefit is received is applicable.31



Digital products and cryptocurrency


A subpart of the draft regulations discusses the apportionment of receipts from digital products and services.32 In addition to adding examples for sourcing receipts from digital products and services,33 the Department clarifies that the definition of “digital product” includes cryptocurrency.34 As a result, cryptocurrency would be sourced using the following hierarchy of methods that applies to digital products or services: (i) customer’s primary use location; (ii) location where the digital product or service is received by the customer; (iii) sourcing used in the preceding tax year; or (iv) sourced in the same way as the corporation’s other digital products or services.35



Billing address safe harbor


Further, the Department includes in its draft regulations a billing address safe harbor for receipts from digital products/services, other services, and other business receipts.36 For digital products or services, the billing address safe harbor would allow a corporation to use a customer’s billing address as the primary use location.37 For other services and business activities, a corporation could use a customer’s billing address as the benefits received location.38 A corporation could use the billing address safe harbor if it has: (i) more than 10,000 business customers purchasing substantially similar services or activities, and (ii) no more than 5% of receipts from those services or activities are from one particular customer.39




Limitations on Public Law 86-272 protections for internet vendors


P.L. 86-272, enacted in 1959, prohibits states from taxing out-of-state corporations on income derived from business activities within the state if their activities are limited to mere solicitation of orders for the sale of tangible personal property and the orders are then approved and filled from outside the state.40 In August 2021, the MTC issued a revised statement of information addressing the application of P.L. 86-272 to the modern economy and internet transactions. The MTC’s revised statement includes 11 examples that tend to narrow the scope of P.L. 86-272 as it relates to internet vendors.


Consistent with the MTC’s position, the Department’s revised draft regulations acknowledge P.L. 86-272 protections solely for corporations engaged in the solicitation of online orders in NYS for the sales of tangible personal property where the orders are sent outside NYS for approval or rejection.41 The scope of P.L. 86-272 protection includes an out-of-state internet vendor presenting static text or images on its website.42 The NYS draft regulation includes the 11 examples provided in the MTC’s statement and reaches the same conclusions regarding whether each transaction is protected by P.L. 86-272.43


While the NYS draft regulation generally is consistent with the MTC’s statement, the draft regulation differs from the MTC’s statement by providing that “[s]olicitation activities [that are protected] do not include those activities that the corporation would have reason to engage in apart from the solicitation of orders but chooses to allocate to its New York State sales force, or to engage in via the Internet, including interacting with customers or potential customers through the corporation’s website or computer application.”44 This fairly broad language conceivably could be used to further reduce the P.L. 86-272 protection for internet sellers beyond the intent of the MTC’s statement.






The Department’s numerous changes to its draft apportionment regulations will affect virtually all industries. While it is currently uncertain as to when the draft regulations will take effect and be adopted as final official regulations, it is expected that the Department will effectuate these regulations prior to the end of the year. The most recent draft regulations were issued for final comments prior to formally commencing the SAPA process for regulatory review and procedure. These regulations may apply retroactively. Further, New York City (City) may substantially adopt these business tax apportionment regulations in circumstances where NYS and City have similar statutes.


The draft apportionment regulations are very thorough and provide numerous examples. As a result, corporations should carefully evaluate the draft regulations and consider whether some of their apportionment methodologies will need to be changed. Also, corporations should be cognizant that the draft regulations would require that corporations maintain documentation and records to support their apportionment methodologies and determinations.45 A regulation would provide that a “corporation must take reasonable steps to update its existing systems of recording transactions or the current format of its books and records to capture the information required by these rules.”46 As a result, some businesses may be required to change their existing systems to comply with the regulations.


The regulations currently are not final, but they display the Department’s intention to align with other states’ sourcing treatment of digital products/services as well as limiting P.L. 86-272 protection given the current power of maintaining an online presence.47 The practical result of the Department’s draft regulation revisions would mean that an out-of-state retailer of tangible personal property with no physical presence within NYS would lose P.L. 86-272 protection by engaging in otherwise typical online customer engagement activities. Therefore, it is imperative that out-of-state businesses that maintain an active online presence and generate sales in NYS reevaluate their online activities as they relate to apportionment and mere solicitation as defined (or refined) under P.L. 86-272. “Physical presence” and “primary-use location” are terms that have undergone drastic change given the advent of seller internet presence in an age where customer engagement, safe-harbor location, and solicitation is a mere click away. Most importantly, corporations should evaluate the impact of the draft regulations on transactions with their customers and for future business expansion of operations conducted within NYS.


While this SALT Alert addresses the NYS corporate franchise tax draft regulations relating to apportionment (Part 4) and P.L. 86-272 (Part 1), we plan to issue a separate future SALT Alert for Parts 1–3 that will delve further into the Department’s revisions on the imposition of tax (Part 1), accounting periods and methods (Part 2), the computation of tax once assessed, and new rules for net operating losses (Part 3). We also plan to release a SALT Alert for Parts 5–10 of the draft regulations addressing the Department’s key revisions regarding tax credits (Part 5), reports (Part 6), payments and collections of tax and estimated tax (Part 7), tax assessments and refund review (Part 8), New York Metropolitan Transportation Business Tax’s surcharge (Part 9), and special entities (Part 10).



1 For the full text of the New York corporate tax reform draft regulations, see the Department’s website at
2 Ch. 59 (A.B. 3009 / S.B. 2009); Ch. 60 (A.B. 6721 / S.B. 4610), Laws 2015; Ch. 59 (A.B. 8559 / S.B. 6359), Laws 2014.
3 The Department divided its final updates for the regulations into three segments which are comprised of 10 distinct parts. The first segment includes Parts 1-3 (revised Aug. 2022). The second segment covers Part 4 (revised July 1, 2022) and the third segment includes Parts 5-10 (revised April 2022). This SALT Alert addresses the apportionment provisions contained in Part 4 as well as the P.L. 86-272 provisions contained in Part 1.  
4 See N.Y. Tax Law § 210-A, which was enacted by Ch. 59 (A.B. 8559 / S.B. 6359), Laws 2014.
5 N.Y. Tax Law § 210-A.3.
6 N.Y. Tax Law § 210-A.10.
7 The draft apportionment regulations are provided by N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-1.1 – 4-4.11 (draft).
8 A corporation has nexus with New York if it derives at least $1 million (adjusted for inflation) of apportionable receipts in the state in the taxable year. N.Y. Tax Law § 209.1.(b). For tax years beginning in 2022, the threshold is $1,138,000. TSB-M-21(3)C, New York Department of Taxation and Finance, Dec. 28, 2021. 
9 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.2(a) (draft).
10 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.2(b) (draft).
11 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.3 (draft).
12 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.3 (a) (draft).
13 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.3(b) (draft). An “intermediary” is a corporation’s business customer that derives value from a digital product or service at the location of a consumer in an intermediary transaction. N.Y. Comp. Codes R. & Regs. tit. 20, § 4-3.1(e) (draft). An “intermediary transaction” is a transaction where the business customer (intermediary) derives value from a digital product or service at the location of the consumer rather than the location of the customer itself. N.Y. Comp. Codes R. & Regs. tit. 20, § 4-3.1(f) (draft).
14 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-3.8 (draft).
15 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.4 (draft).
16 The proceeds must be received on an installment basis in accordance with IRC § 453. 
17 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.6 (draft).
18 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.6(a)-(c) (draft).
19 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.6(d) (draft).
20 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.6(e)(3) (draft).
21 See N.Y. Tax Law § 210-A.5.(a)(2)(G).
22 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.7 (draft).
23 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.7(a) (draft).
24 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.7(b), (d) (draft).
25 N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-2.1–4-2.17 (draft).
26 N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-2.1; 4-2.2 (draft).
27 N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-2.1(b)(2); 4-2.2(c) (draft).
28 N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-4.1–4-4.11 (draft).
29 See MTC Model General Allocation and Apportionment Regs. IV.17.(d)(4)(C)1.b, 5, example (xii), (xiii). Note that New York historically has not conformed to many of the MTC’s model apportionment policies.
30 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-4.4(c)(2) (draft). The “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.” N.Y. Comp. Codes R. & Regs. tit. 20, § 4-4.1(e) (draft).
31 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-4.4(c)(1) (draft).
32 N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-3.1–4-3.11 (draft).
33 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-3.11 (draft).
34 A ‘digital product” includes, but is not limited to, an audio work, audiovisual work, visual work, electronic book or literary work, graphic work, electronic database, game, information or entertainment service, website, digital application, or cryptocurrency or similar asset digitally delivered. N.Y. Comp. Codes R. & Regs. tit. 20, § 4-3.1(c) (draft).
35 See N.Y. Comp. Codes R. & Regs. tit. 20, § 4-3.2(b) (draft).
36 N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-3.2(d)(1)(iii); 4-4.2(d)(1)(iii) (draft).
37 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-3.2(d)(1)(iii) (draft).
38 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-4.2(b) (draft).
39 See N.Y. Comp. Codes R. & Regs. tit. 20, §§ 4-3.2(d)(1)(iii); 4-4.2(d)(1)(iii) (draft).
40 15 U.S.C. §§ 381-384.
41 N.Y. Comp. Codes R. & Regs. tit. 20, § 1-2.10(a) (draft).
42 N.Y. Comp. Codes R. & Regs. tit. 20, § 1-2.10(f) (draft).
43 N.Y. Comp. Codes R. & Regs. tit. 20, § 1-2.10(i) (draft).
44 N.Y. Comp. Codes R. & Regs. tit. 20, § 1-2.10(f) (draft).
45 N.Y. Comp. Codes R. & Regs. tit. 20, § 4-1.2(g)-(j) (draft).
46 N.Y. Comp. Codes R. & Regs. tit. 20, § 1-2.10(a) (draft).
47 New York is the second state to address the MTC’s revised statement on P.L. 86-272. In February 2022, California issued administrative guidance on P.L. 86-272 that is consistent with the MTC’s approach, but the California guidance does not explicitly adopt the MTC’s statement. For further information on California’s application of P.L. 86-272 to internet transactions, see GT SALT Alert: California guidance covers P.L. 86-272 protection. Also, New Jersey and Oregon reportedly are planning to issue regulations to address P.L. 86-272 protection as it applies to internet business.





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