• New York: Draft Amendments Issued On Rules for the Franchise Tax on General Business Corporations
  • November 4, 2015 | Authors: David H. Godenswager; David M. Kall
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • The New York Department of Taxation and Finance (New York Department of Tax) issued draft amendments to the Business Corporation Franchise Tax Regulations which incorporate changes made by tax reform legislation contained in the 2014-15 and 2015-16 New York state budgets.

    Significant tax reform in 2014-15

    The New York Department of Tax characterized New York’s 2014-15 budget as the “most significant reform of its corporate tax system since the 1940s,” much of which is effective for the tax years beginning Jan. 1, 2015. The 2015-16 budget, enacted on April 13, 2015, contains technical and clarifying amendments to the corporate tax reform statute enacted in 2014, which are also effective for tax years beginning on or after Jan. 1, 2015.

    One critical matter that the reform achieved was to impose the same rules on banks and financial institutions that offer equivalent services and perform comparable functions. Prior to this, these entities were taxed under different sections of the tax code, a system that had fallen out of step with changes in the financial services industry that allowed such firms to offer the same services.

    Another feature of the reform was the elimination of impediments to locating or expanding a business in New York state. This was intended to encourage companies to capitalize on New York’s highly educated and creative workforce, and robust technology infrastructure, without increasing their tax burden. In recognition of the shift to a service and knowledge-based economy, the reform adopted a comprehensive market sourcing approach for state income taxes.

    Corporate tax reform draft regulations

    In an effort to incorporate these and other changes, the New York Department of Tax has crafted regulatory amendments that it will post to its website for public comment prior to their formal proposal and adoption.

    In particular, on Oct. 15, 2015, the New York Department of Tax released draft amendments to two sections of the New York state corporate franchise tax regulations: Receipts from Sales of Digital Products and Receipts from Other Services and Other Business Activities.

    With respect to both, the drafts set forth a list of principles and standards for identifying the source of such receipts, defines terms, and provides numerous examples of how to source receipts under a wide variety of circumstances. Public comments are due by Jan. 16, 2016.

    Last month, the New York Department of Tax issued draft regulations addressing circumstances under which a firm is subject to the franchise tax by way of corporate nexus. Nexus refers to whether an entity has sufficient physical ties to a state to justify imposing certain taxes on it.