USA – NEW YORK Trends and Developments Contributed by: Eugene J. Gibilaro and Joshua M. Sivin, Blank Rome LLP
New York’s corporate tax landscape has gone through major changes over the past decade. In 2014-2015, New York State completed a comprehensive overhaul of its corporate franchise tax regime under Article 9-A in an effort to modernise the tax system and bring it in line with national trends. New York City followed with parallel reforms to its Business Corporation Tax. These reforms impacted nearly every aspect of corpo - rate taxation from apportionment and sourcing rules to the treatment of various entity types. Nearly a decade later, New York State finalised its regulations, and taxpayers and tax professionals are still working their way through the complexities of the reformed system. While reform has brought clarity in some areas, there remain several key issues that busi- nesses need to keep on their radar, such as the new market sourcing rules, continued differences between State and City regimes, and evolving nexus stand - ards that may expose businesses to tax obligations to which they were previously immune. Market-Based Sourcing: Final Regulations and Practical Considerations Background and national context One of the most significant changes in New York’s corporate tax reform was the adoption of “market- based sourcing” for apportioning receipts from ser - vices and intangibles. When a company does busi - ness in more than one state, each state may tax only the portion of that company’s income attributable to activities within the state. States use apportionment formulas to determine this allocation. While traditional formulas looked at a company’s property, payroll, and sales within the state, the sales factor has become the dominant or exclusive factor in most states’ formulas. New York now uses a single sales factor, meaning a company’s New York taxable income is determined entirely by the proportion of its sales attributed to New York. See N.Y. Tax Law § 210-A. The critical question then becomes: how to determine where a sale is attributed? For tangible goods, the answer is usually relatively straightforward – sales are generally sourced to where the product is delivered. N.Y. Tax Law § 210-A(2). But for services, states have taken different approaches over the years. Under the traditional “cost-of-performance” method, receipts
from services are sourced to the state where the service provider performs the work. Under “market- based sourcing”, receipts are sourced to where the customer receives the benefit of the service. This rule, while straightforward in theory, can create significant uncertainty in practice, especially since businesses do not always know where their customers receive the benefit of services and may not have access to such information. The national trend has moved toward market-based sourcing, and the majority of states have now adopted this approach based on their thinking that, in a mod - ern economy, services can be performed in a single location but then be received by customers across the country. New York adopted market-based sourcing as part of its 2014 reform, but the implementing regula - tions were not finalised until nearly a decade later, in December 2023. See 20 NYCRR §§ 4-1.1–4-4.11. Prior to that, the Department of Taxation and Finance Under New York’s current framework, corporations subject to the Article 9-A franchise tax apportion their business income using a single receipts factor. The statute, N.Y. Tax Law § 210-A, establishes this single- factor apportionment and sets forth general sourc - ing principles, while the regulations promulgated by the Department of Taxation and Finance (20 NYCRR Part 4) provide detailed rules for applying these prin - ciples. The sourcing rules vary depending on the type of receipt. For sales of tangible personal property, the statute provides that receipts are sourced to New York if the property is delivered to a purchaser in New York. This destination-based approach is consistent with the rules in most other states and is generally straight - forward to apply. issued a series of draft regulations. New York’s market sourcing rules For receipts from services, the statute provides a hier - archical approach for sourcing receipts, beginning with where the customer receives the benefit of the service. The regulations then flesh out this hierarchical approach and provide that the hierarchy of methods must be applied sequentially and that a corporation may abandon a method only if, after exercising due
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