The New York State Department of Taxation and Finance has released draft amendments to the Article 9-A corporate franchise tax regulations to address significant changes relating to statutory nexus under New York State corporate tax reform legislation enacted in 2014 and 2015. Corporate Tax Reform Draft Regulations, N.Y.S. Dep’t of Taxation and Fin. The principal (but not the sole) thrust of the draft amendments is to address the adoption of economic nexus standards that went into effect for tax years beginning on or after January 1, 2015. Corporate tax reform introduced a “bright line” economic nexus standard for taxability for corporations deriving New York receipts of at least $1 million in the taxable year, regardless of whether the corporation itself does business, employs capital, or owns or leases property in the State.

The draft amendments contain several potentially significant proposals:

  • A foreign (i.e., non-New York) corporation would be subject to Article 9-A not only in the year it engages in nexus-creating activities–including where it derives at least $1 million in New York receipts–but also would be deemed to be deriving New York receipts in the subsequent year from the beginning of that year. A foreign corporation would be deemed to be deriving New York receipts from the date of its first receipt from New York activities, and not from when it reaches the $1 million threshold.
  • Economic nexus would be found to exist with respect to corporate general partners of a partnership where the partnership’s sole connection to the State is that the partnership derives at least $1 million in New York receipts. This would appear to subject a corporate general partner to tax even where the corporate partner’s share of New York receipts is less than $1 million. The draft regulations would also modify the existing nexus rules for corporate limited partners.
  • Where a limited liability company (“LLC”) that is treated as a partnership for income tax purposes has either traditional nexus or economic nexus with New York, all corporate members of the LLC would be considered to have nexus. There would be no distinction between members based on the member’s participation in the business or based on the member’s ownership percentage or basis in the LLC. This would be the first time that the regulations address nexus created through a membership interest in an LLC.
  • In determining whether the $1 million New York receipts threshold is met for a unitary group of corporations, the New York receipts of a taxpayer’s unitary affiliate that meets the more than 50% stock ownership requirement for combination would be included in the computation of the unitary group’s New York receipts, even if the affiliate’s activities are limited to those described in Public Law 86-272.
  • An alien (i.e., non-U.S.) corporation would not be subject to Article 9-A, regardless of whether it has traditional or economic nexus, unless it is treated as a domestic corporation as defined under IRC §7701 or has effectively connected income for the taxable year.

These regulations are in draft form, and have not been formally proposed by the Department under the State Administrative Procedure Act. This is the first time that the Department has posted draft regulation amendments on its website seeking public comment prior to formally proposing those amendments. The Department is inviting comments on the draft amendments by December 3, 2015. Some of the draft provisions could be considered controversial or otherwise requiring clarification, and the Department is expected to receive considerable comments in the coming months