USA – NEW YORK Trends and Developments Contributed by: Eugene J. Gibilaro and Joshua M. Sivin, Blank Rome LLP
diligence, it lacks sufficient information to apply that method. The regulations also provide standards for exercising due diligence. For services provided to individual customers, the regulations generally look to the customer’s billing address. For services pro - vided to business customers, the regulations focus on where the customer uses or receives value from the service. See N.Y. Tax Law § 210-A(10); 20 NYCRR § 4-4.2. For digital products, the statute and regulations simi - larly look to the customer’s location. The regulations include a “reasonable approximation” standard that allows taxpayers to use alternative methods when precise customer location information is unavailable, provided the method reasonably reflects the market for the taxpayer’s services or products. See N.Y. Tax Law § 210-A(4); 20 NYCRR §§ 4-3.1–4-3.11. Areas of ambiguity and complexity Even with the regulations now finalised, several areas of market-based sourcing remain complex and poten - tially ambiguous. The sourcing of services to busi - ness customers presents particular challenges. When a business provides services to a corporate client with operations in multiple states, determining where that client “receives the benefit” is not always obvious. The regulations offer some guidance, but applying them to real-world situations may not be so simple. Digital goods and software-as-a-service transac - tions also present challenges. Where does a cus - tomer “use” a cloud-based software product? Where is the “benefit” of a digital service received? These questions get increasingly complex when customers access services from multiple locations. Things get even more complicated when the primary sourcing rule cannot be applied due to lack of infor - mation and taxpayers must use secondary or tertiary rules. Documentation challenges make matters worse, as taxpayers may not possess the customer informa - tion necessary to apply the sourcing rules precisely. Practical guidance for taxpayers With the regulations now finalised, taxpayers should carefully review their current sourcing methods to ensure they are aligned with New York’s market-based
approach. Taxpayers should evaluate whether their current positions might create refund opportunities or potential exposure. A taxpayer that has been sourcing receipts in a manner inconsistent with the final regula - tions may be able to file amended returns or refund claims if the correct methodology produces a better result. Conversely, a taxpayer may have exposure if its current sourcing methodology understates New York receipts. It is also important to understand the evolution of the regulatory landscape. During the first decade of market-based sourcing while the regulations were still in proposed form, the Department of Taxation and Finance was in many ways “feeling its way” through these new rules. As a result, most audits involving market sourcing disputes were resolved through set - tlement. Both taxpayers and the Department had incentives to negotiate given the lack of definitive guidance. Now that the regulations are final, the Department will likely take a stricter view of its published rules and may be less willing to compromise on market sourcing issues. Taxpayers should expect to see more con - tested audits and potentially more litigation. Importantly, taxpayers should remember that the Department’s interpretation of the regulations is just that – its interpretation. The regulations provide a framework, but applying them to specific facts often requires judgement calls. Taxpayers who have taken principled, well-documented positions should not feel pressured to concede simply because the Depart - ment disagrees. When the Department overreaches or applies the rules in a manner inconsistent with the statutory framework, taxpayers should be ready to challenge those positions through the administrative process and, when necessary, in court. State and City Divergence: Traps for the Unwary While New York’s corporate tax reforms aimed to sim - plify the system, businesses operating in New York City face an additional layer of complexity. The City imposes its own corporate taxes separate from State taxes, and although the City’s Business Corporation Tax was reformed to generally mirror the State’s Article 9-A regime, important differences remain. These dif -
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