On October 15, 2015, two sets of comprehensive draft Article 9-A corporate franchise tax regulations were released by the New York State Department of Taxation and Finance relating to the State corporate tax reform legislation that went into effect for tax years beginning on or after January 1, 2015. The first draft is a complete revision of an existing regulation (20 NYCRR § 4-4.6) for sourcing receipts from services and other business receipts that are not otherwise enumerated in the Tax Law. The second draft is an entirely new section of the regulations (20 NYCRR § 4-4.9) that would apply to the sourcing of receipts from sales of digital products. Corporate tax reform draft regulations: Business Apportionment Factor, N.Y.S. Dep’t of Taxation and Fin.
Unenumerated Business Receipts. Under the corporate tax reform legislation, corporations are now required to source unenumerated business receipts – that is, receipts not otherwise specifically addressed in the Tax Law – based on a hierarchy, the first level of which looks to where “the benefit is received” by the customer. The law requires that taxpayers exercise due diligence before rejecting a sourcing method and moving to the next level in the hierarchy. Among the areas addressed by the draft regulations are the following:
- Setting forth the general principles for sourcing unenumerated receipts, including the due diligence standard that taxpayers would have to apply in moving from one hierarchy level to another;
- The rules for determining where the “benefit” of a taxpayer’s services are received by its customer, including when a taxpayer may use a “reasonable approximation” to determine where the benefit is received, and how the approximation should be determined;
- The application of the other three hierarchy methods for sourcing other business receipts (delivery destination, use of the preceding year apportionment, and use of current year apportionment information for all other services and business receipts); and
- The sourcing of receipts from services provided to a consumer through an “intermediary,” where the intermediary passes the service on to the consumer.
Sales of Digital Products. Another significant aspect of the corporate tax reform legislation is the introduction of detailed sourcing rules for receipts from sales of digital products. Such receipts are generally sourced to the locations of the customer’s “primary use” of the product, but the new law also provides a hierarchy of sourcing methods and a due diligence requirement in moving from one hierarchy method to another. Among the issues covered by the draft regulations regarding digital products are:
- As with the draft regulations for other business receipts, setting forth the general principles for sourcing receipts from sales of digital products, including the due diligence standard in moving from one hierarchy level to another;
- The rules for determining the customer’s “primary use” location — that is, where the customer “derives the value” of the digital product purchased — including when and how a taxpayer may use a reasonable approximation;
- The application of the other three hierarchy methods for sourcing receipts from sales of digital products (where the digital product is received, use of the preceding year apportionment, and use of current year apportionment information for all other digital products); and
- The sourcing of receipts from digital products provided through an intermediary to a consumer, with several examples (for instance, where a corporation develops an Internet-based information database and contracts with a retailer “intermediary” that in turn markets and sells access to that database).
As was the case with the Department's prior release of draft nexus regulations, it has not yet formally proposed these draft regulations under the State Administrative Procedure Act. The Department is inviting comments by January 16, 2016.