New York State Tax Department Releases Final Draft Corporate Tax Allocation Rules | Vide Rome LLP

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Since the enactment of New York State’s corporate tax reform beginning in 2015, the New York State Department of Taxation and Finance (the “Department”) periodically publishes for comment draft sections of regulations interpreting the law. Things took a much faster turn when, last April, the Department released two sets of revised “final drafts” covering all topics except dispatch, and announced that it would release a final draft of the sections of the allocation regulations by this summer. On July 1, 2022, the Department released the Revised Allocation Rule, combining into one final draft what had been three separate sets of rule articles, which were last updated in 2019.

The recently published Draft Allocation Rules are now divided into four sub-parts: (i) general (including discretionary allocation factor adjustments); (ii) Specific allocation rules (17 categories, including net gains from sales of real estate and income from supplying securities dealers); (iii) Digital Products and Digital Services (such as rules for determining primary location of use and reasonable approximations); and (iv) Other services and other business activities (concerning the origin of receipts and net gains from services and other business activities not otherwise enumerated in the tax law).

Given the broad scope of the allocation regulations, these latest revisions are surprisingly small. Among the new revisions are the following:

  • With respect to both digital products and other business services and activities, a “safe billing address” has been added for a company with more than 10,000 business customers purchasing substantially similar products and services (where no more than 5% of this revenue comes from a particular customer), whereby the “primary place of use” of the product or service is presumed to be the customer’s billing address.
  • Now defines a “digital product” – whose receipts come from a hierarchy, primarily at the customer’s “primary place of use” – to include cryptocurrency.
  • Substantially changes the rule of “services” provided to “passive investment clients” – generally defined as unincorporated collective investment vehicles that “do not otherwise carry on a trade or business” – on the assumption that the client will receive the benefit “when the contract is managed” by the customer. The previous draft applied to management and advisory services, but not to accounting, legal and similar services, and obtained revenue based on where the client “makes the decision to use investment decisions or Management”.
  • Elaborates on the origin of lump sum payments received (for example, when a sale consists of both a digital product and a digital service, the receipt is considered a receipt even if shown separately for billing purposes) .

The Department is seeking comments on the new draft by August 26, 2022. It expects to begin the formal promulgation process under the State Administrative Procedure Act by the end of 2022. This would likely mean that the regulation would enter into force next year. It has been more than eight years since New York State’s corporate tax reform was enacted, with no regulatory guidelines in place during that time. The Ministry has always warned that taxpayers cannot trust its posted draft regulations. His decision earlier this year to finally proceed with the enactment of corporate tax reform regulations is a necessary and long overdue step.

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