New York's Corporate Tax Reform Has Muddied the Rules Even More

New York’s long-awaited corporate tax regulations were supposed to help make the state’s tax code more business-friendly, but the 417-page document has introduced new layers of complexity.

This environment requires vigilance and adaptability, as further clarifications and legal challenges are likely on the horizon. Businesses that stay informed and prepared will be better-positioned to navigate these changes and minimize their tax liabilities.

One of the most concerning aspects of these regulations, introduced in December, is their retroactive application—stretching back to the original enactment of corporate tax reform more than 10 years ago. The Department of Taxation and Finance has hinted at possible penalty relief, but this is cold comfort to businesses that recently completed their 2023 tax filings or are about to do so. Companies must now reassess prior years’ returns in light of the new regulations.

While some businesses are amending returns to claim refunds based on applying favorable provisions to their facts, others are struggling to understand how to apply entirely new concepts retroactively. The retroactive nature of these regulations, including provisions that may favor businesses, adds an unnecessary burden and complicates compliance.

Since 1959, Public Law 86-272 has shielded retailers from having to file state income taxes based solely on their in-state sales activities. But the new regulations significantly narrow this protection. Any business with a website that does more than display static information may now trigger nexus and a filing requirement in New York.

Many retailers that previously relied on federal protections now must reevaluate their position and decide whether they need to come forward and file for prior years. The new regulations don’t explicitly mention an intention to erode these federal protections. But their effect is clear, leaving businesses in a precarious position.

The guidance on market-based sourcing for services and other business receipts is perhaps the new regulations’ most critical element. Businesses now must navigate a complex hierarchy of sourcing methods to determine the correct rule to apply.

If a service isn’t classified as a digital service, businesses first must assess where the customer receives the benefit of the service. Then they must consider whether the customer is an individual or a business, whether the service is provided in person or related to real property, and whether their books and records indicate where the benefit is located.

Additional factors—such as a safe harbor for businesses with 250 similar customers, the intermediary transaction rule, and the potential use of a reasonable approximation or census-based approach—further complicate the process. Companies must document these steps annually, adding to the administrative burden.

Several new provisions seem to contradict the statute and the original intent of corporate tax reform. For instance, sales of stock and partnership interests are now included in the apportionment factor to prevent distortion if such sales constitute 75% of total business receipts. However, the statute suggests that these receipts should be excluded unless the state tax department exercises its discretionary authority.

Unlike prior drafts, the final regulations don’t exclude receipts from unusual or extraordinary events from the receipts factor. The regulations also introduce a “look-through” approach for services provided to passive investment customers, reverting to where the contract is managed if the look-through information is unavailable. These new concepts aren’t found in the original statute, raising questions about their legitimacy.

Special advertising rules also vary depending on the media used, such as billboards. Interest from reserves held at the Federal Reserve Bank and income from investments in the Federal Home Loan Bank are sourced based on the relative number of locations of these entities. Interestingly, New York City has indicated plans to diverge from several of these state provisions, despite its statute being nearly identical to the state law.

The new regulations provide essential guidance for implementing key provisions of New York’s decade-old tax reform, but they leave businesses and their advisers grappling with numerous unanswered questions. As the era of strict reliance on regulations has shifted, particularly at the federal level, we can expect to see businesses challenging these provisions on appeal with protracted litigation likely.

In the months since the regulations were introduced, business may be uncertain about how to comply with some provisions that appear to go beyond, or even contradict, the original statute. They must closely monitor these developments, seek professional advice, and consider proactive steps to address potential risks of the new corporate landscape.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Robert Zonenshein is senior director at RSM with expertise in New York and New Jersey tax matters.

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