New York State Department of Taxation and Finance
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New York State Department Intends to Finalize Corporate Tax Regulations This Fall

Almost seven years after it started releasing draft regulations concerning sweeping corporate tax reforms that went into effect back in 2015, the New York State Department of Taxation and Finance (Department) has issued guidance, stating that “the Department intends to begin the State Administrative Procedure Act (SAPA) process to formally propose and adopt” its draft corporate tax regulations this fall.

The Department has released many versions of “draft” regulations addressing corporate tax reform since September 2015. However, these draft regulations have been introduced outside of the SAPA process because the Department intended to formally propose and adopt all draft regulations at the same time. In the meantime, the Department warned taxpayers that so long as the regulations remain in draft form, they are not “final and should not be relied upon.”

Now, the Department has given its first public signal that it is prepared to formally adopt the draft regulations later this year. On April 29, 2022, the Department released “final drafts” of regulations that address a variety of topics, including nexus and net operating losses, and indicated that it will release final draft regulations addressing “apportionment, including rules for digital products/services and services and other business receipts” this summer.

Notably, the draft regulations released on April 29 include new provisions, “largely modeled after the [Multistate Tax Commission (MTC)] model statute . . . to address PL 86-272 and activities conducted via the internet.” Like the MTC model statute, the new draft regulations take a broad view of internet activities that would cause a company to lose PL 86-272 protection. In one example, the draft regulations state that providing customer assistance “either by email or electronic ‘chat’ that customers initiate by clicking on an icon on the corporation’s website” would exceed the scope of protections provided under PL 86-272.

As it intends to formally propose the draft regulations this fall, the Department is “strongly” encouraging “timely feedback” on all final draft regulations. With respect to the final draft regulations released on April 29, the Department is asking for comments by June 30, 2022.




NYS Tax Department Relaxes Investment Income Identification Rules

The New York State Department of Taxation and Finance has announced that it would extend the time for certain taxpayers to identify stocks as being held for investment so that income from those stocks would be tax-exempt [TSB M-15(4.1)C, (5.1)I]. Instead of having to make the identification on the date on which the stock is purchased, many corporations will now have a 90-day grace period to make the identification. This relaxation of the identification rules will come as a major relief to many companies that otherwise may have been ambushed by New York’s new rules, particularly out-of-state corporations that start doing business in New York after acquiring investment securities. The announced change is effective immediately.

Under corporate tax reform legislation enacted in 2015, corporations—to treat income from stock held as an investment as tax-exempt investment income—must identify the stock on the date of purchase as being held for investment and follow certain procedures. This requirement has been widely criticized as being unrealistic since a corporation’s investment people are unlikely to know about arcane tax rules on the date that they make trades. Securities dealers, to qualify for tax-free investment income treatment, must identify the stock as being held for investment pursuant to Section 1236 of the Internal Revenue Code (IRC), which requires the identification to be made on the date of purchase. Non-dealers must still make the identification on the date of purchase under the statute, but they need not make the federal election under Section 1236 since that provision applies only to dealers.

The Department’s new rules significantly relax the requirement for many non-dealer corporations. They do not apply to dealers, which will still be subject to the Section 1236 election requirements.

One criticism that has been made of the identification requirement is that a corporation that had not been doing business in New York and, hence, had not been a New York taxpayer and acquired stock as an investment would not have made the New York identification because it would not have cared about, or known about, New York taxes. If such a corporation later starts doing business in New York and becomes subject to New York taxes, it will be too late to make the identification for previously acquired stock and, hence, the income from that stock will not be exempt investment income. Under the Department’s new announcement, a corporation that first becomes a New York taxpayer on or after October 1, 2015, can make the identification within 90 days after becoming a New York taxpayer or, if it became a New York taxpayer before January 7, 2016, by April 6, 2016. Stock purchased after this extended period must still be identified as being held for investment on the date of purchase.

Ordinarily, a corporation becomes taxable in New York on the first day on which it does business, employs capital, owns or leases property, or maintains an office in New York. Under new economic nexus rules, a corporation also becomes taxable in New York on [...]

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NYS Tax Department Revised Sales Tax Publication Answers Some Questions but Not Others

The New York State Department of Taxation and Finance (Department) has just revised its Guide to Sales Tax in New York State, Publication 750.

The Guide will be particularly useful for companies that are just starting to do business in New York State. It provides a well-organized and easy-to-read outline of the steps that should be taken to register as a vendor selling products that are subject to the sales tax and to collecting and remitting taxes. Small businesses and their advisors will find the Guide particularly useful.

The Guide confirms the State’s required adherence to the United States Supreme Court decision in Quill Corp. v. North Dakota (a case in which the taxpayer was represented by McDermott Will & Emery) to the effect that an out-of-state company must have a physical presence in New York to be required to collect use tax on sales to New York customers. It confirms that a company need not collect use tax on sales to New York buyers if its only contact with the State is the delivery of its products into the State by the U.S. Postal Service or a common carrier. It cautions, however, that use tax must be collected if the company has employees, sales persons, independent agents or service representatives located in, or who enter, New York. Although the law has been clear for many years that a sales representative can create nexus for an out-of-state company even though he or she is an independent contractor and not an employee, some companies still seem to be under the mistaken impression that this is not the case. Moreover, although there is no New York authority directly in point, cases in other states have established the principle that nexus can be created by the presence in the state of a single telecommuting employee, even if the employee’s work is not focused on the state.

The Guide contains a cryptic reference to New York’s click-through nexus rule under which an out-of-state company can be compelled to collect use tax on sales to New York purchasers if people in the state refer customers to the company and are compensated for doing so. Such persons are presumed to be soliciting sales for the company and, although the presumption can be rebutted, that will prove to be impossible in the vast majority of cases. The Guide contains cross-references to Department rulings that explain the presumption and the manner in which it can be rebutted, but it would have been helpful if the Guide could have provided more detail about these rules.

One attractive feature of the Guide is that people accessing it online can use links in the Guide to get to relevant rulings.

In addition to the state-wide sales and use tax, special sales taxes that are imposed only within New York City are discussed. These include taxes on credit rating services and certain localized personal services such as those provided by beauty salons, barber shops, tattoo parlors and tanning [...]

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New York State Tax Department Releases Guidance on Tax Reform Legislation

The New York State Department of Taxation and Finance (the Department) has been issuing guidance explaining the 2014 corporate tax reform legislation (generally effective on January 1, 2015) through a series of questions and answers (known as FAQs), recognizing that providing guidance through regulations is cumbersome and takes a long time.  On April 1, the Department issued a new set of FAQs explaining some aspects of the legislation.  Some of the highlights are discussed below.

Under the new law, related corporations may, and may be compelled to, file combined returns if they are engaged in a unitary business.  The old requirement that separate filing distort the incomes of the companies, which led to much controversy, has been repealed.  An issue that has been highlighted by the legislation is whether a newly acquired subsidiary can be considered to be instantly unitary with the parent so that the corporations can file combined returns beginning on the date of the acquisition.  The FAQs explain that this will depend on the “facts and circumstances” of each case, which is not very informative.  We understand from informal conversations with senior Department personnel that their approach, which they have not published, is that corporations will generally be considered to be instantly unitary if they had a significant business relationship before the acquisition (e.g., the subsidiary was a supplier of goods to the parent).  If no such pre-existing relationship exists, the corporations will generally not be found to be unitary until the beginning of the next taxable year after the acquisition.  The FAQs also clarify that corporations with different taxable years can be included in a combined return.  When a related corporation does not have the same taxable year as the company designated as the group’s agent for filing purposes, the related corporation’s income and activities for its taxable year ending within the agent’s taxable year are included in the combined report for the agent’s taxable year.

The FAQs explain that the corporate tax reform legislation has not changed the method for determining the partnership income of a corporate partner in a partnership.  The current approach, under which partnership items of income and expense flow through to the corporate partner, has been retained.  This approach is reflected in Department regulations.  The New York City Department of Finance has not adopted regulations on this subject and we understand that the City does not feel itself bound by the State approach.  Taxpayers should be aware that corporations that are limited partners with limited liability and no voting rights may be able to argue successfully that they do not have nexus with New York if they have no other contacts with New York besides their limited partnership interest.  Courts in other states have so held, although the case law in New York is not favorable.

Several FAQs focus on the new economic nexus rule in New York State.  The FAQs indicate that franchisors that sell goods and services or licenses to franchisees located in New York [...]

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NYS Tax Department Reverses Position on Statutory Residence Rule

The New York State Department of Taxation and Finance (the Department) has backed off from an aggressive position that it has been taking in cases involving New York residence issues.

Under New York law, a person who is not domiciled in the state can be treated as a resident for income tax purposes (and, hence, taxed on all of his or her worldwide income) for a taxable year if the person maintains a “permanent place of abode” in the state and is in the state for more than 183 days during the year.  This is known as the statutory residence rule.  New York City has an identical rule for purposes of taxing individuals as city residents.

The Department has historically taken the position that a house or apartment is a “permanent place of abode” if it is capable of being lived in as a regular residence even though the taxpayer does not so use it.  This has presented a significant problem for people who live in the Connecticut and New Jersey suburbs of New York City and work in the city and keep a small apartment that they use occasionally when they work late or attend the theater.  The Department has been treating them as residents because the apartment was a “permanent place of abode” even if they used it for only a few nights a year and their presence in the city for more than 183 days was a result of their jobs and had no relationship to the apartment.  Similarly, out-of-state residents who commute to New York jobs and keep a vacation home in New York State have been held to be income tax residents even though they only use the vacation home for a few weeks each year.

The Court of Appeals, New York’s highest court, held recently that a person must actually use a dwelling as a residence for it to constitute a “permanent place of abode”.  Matter of Gaied v. New York State Tax Appeals Tribunal, 22 N.Y.3d 592 (2014) (see prior coverage here).  The taxpayer in that case lived in New Jersey but owned a house in New York City in which his parents lived.  He spent a few nights a year in the house when his parents asked him to come over to help with medical problems.  When he did so, he slept on a couch in the living room.  He kept no personal effects in the house.  The Court held, over the Department’s objections, that the purpose of the statutory residence test was to treat as residents people who really lived in New York but claimed that they were domiciled outside the state for the purpose of avoiding taxes.  Mr. Gaied, in contrast, really lived in New Jersey, and the New York house could in no sense be viewed as his real residence.

The Department responded to the Gaied case by revising the internal guidelines that it gives to [...]

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In Case We Didn’t Know the Difference Between “Big” and “Little” Cigars, the New York State Tax Department Tells Us What it is

The New York State Department of Taxation and Finance has addressed one of the major issues in tax administration:  defining the difference between “big” and “little” cigars.  Tax Bulletin TP-530 (August 28, 2014).  First, the Department has defined “cigar.”  A cigar is any roll of tobacco wrapped in leaf tobacco or in any substance containing tobacco.  A “little” cigar is a cigar that has all of the following characteristics:  (1) it is a “roll” for smoking made with any amount of tobacco, (2) the cigar wrapper contains some amount or form of tobacco that is not “natural leaf tobacco,” and (3) the product must either weigh four pounds or less per 1,000 cigars or have a filter made of cellulose acetate (i.e., a cigarette-type filter) or any other integrated filter.  A “natural leaf tobacco wrapper” that can prevent a cigar from being classified as being “little” is any wrapper made from one or more natural tobacco leaves.  An example of a substance commonly used to wrap cigars that contains tobacco but is not “natural leaf tobacco” is “homogenized tobacco leaf,” which is made from “tobacco scraps that are pulverized, mixed with other products and rolled into sheets that can be used to wrap cigars.”

The importance of the ruling is that little cigars are taxed at the same rate as cigarettes, which is lower than the rate on big cigars.

This is probably the most important tax development to come along since the Internal Revenue Service released Revenue Ruling 63-194, 1963-2 C.B. 670, explaining the requirements that a martini would have to meet to be considered a “dry martini” for tax purposes.

The McDermott State and Local Tax Practice Group is well positioned to advise clients on these important issues.  Although none of us smoke cigars, our Firm’s real estate and corporate departments are well stocked with cigar smokers so we have access to the necessary expertise to advise our clients.




New York State Department of Taxation and Finance Releases Guidance on the Taxability of Computer Software

The New York State Department of Taxation and Finance has just released a Tax Bulletin addressing how the state’s sales tax applies to sales of computer software and related services. The Tax Bulletin does not broach new ground, but it does offer a formal expression of the Department’s position—previously articulated in advisory opinions—that the provision of remote access to prewritten software is subject to sales tax. However, that position does not comport with New York authorities, including a recent administrative law judge determination that is directly on point.

Read the full article.




New York Releases Corporate Tax Reform FAQs

Earlier this year, New York enacted sweeping corporate tax reform, generally effective for tax years beginning on or after January 1, 2015, including a new economic nexus standard, changes to New York’s combined reporting regime, changes to the tax base and traditional New York income classifications, changes to the receipts factor computation, and changes to the net operating loss calculation and certain tax credits and incentives.  (For a more detailed discussion of these changes, see our Special Report.

While this corporate reform is quite comprehensive, a number of open issues remain so taxpayers and practitioners have been eagerly awaiting additional guidance from the Department of Taxation and Finance.  As a first step in providing that much-needed guidance, the Department has released its first set of responses to frequently asked questions on a new “Corporate Tax Reform FAQs” section of its website.  Most notably, the responses clarify that the non-unitary presumption based on less than 20 percent stock ownership for purposes of determining exempt investment income is a rebuttable presumption.  The responses also clarify that the business capital base includes items of capital that generate exempt income.  Other topics addressed include economic nexus, credits, the Metropolitan Transportation Business Tax (MTA surcharge) and net operating losses.

The Department plans to update the Corporate Tax Reform FAQs on an ongoing basis as it continues to receive questions from taxpayers and practitioners, which can be submitted on the Department’s website.  We will be submitting questions and comments and can do so on behalf of companies that do not want to be identified.  The Department is also in the process of revising its current regulations (which are expected to be released before the end of 2015) and plans to issue two technical memoranda in the interim, one discussing qualified New York manufacturers and one discussing the new expense attribution rules.  Stay tuned for updates regarding this additional guidance.




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