New York Bar Group Seeks Changes in Draft Apportionment Rules

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By John Herzfeld

Draft New York business tax regulations on general apportionment for 2015 and subsequent years should be revised to clarify important terms and definitions in the state’s drive to adopt a market-based sourcing regime, the Tax Section of the New York State Bar Association said.

The bar group, in a May 26 letter and report (No. 1369), commended the state Department of Taxation and Finance for its continuing effort in an informal review of draft regulations to provide “workable guidance” on difficult issues. But it said that, “given the significance of the shift to a market-based receipts sourcing regime,” the state should maintain “a workable corporation income tax regime that taxpayers can rely on in completing their returns.”

The business apportionment factor project is among several draft amendments to New York’s corporate franchise tax that the department is considering as part of a series of rulemaking procedures implementing a broad business tax overhaul started in 2014. The state has called the broad changes “the most significant reform” of the state corporate tax system since the 1940s.

The 2014 statutory changes affect the corporate franchise tax under Article 9-A of the state’s tax law beginning in 2015. The informally proposed guidance for the business apportionment factor would clarify and interpret general rules under Section 210-A of the law.

The department has been open in sharing the draft rules for comment before formally proposing them under the state rulemaking process and has “prepared generally clear and comprehensive guidance for businesses and practitioners in this entirely new aspect of the Tax Law,” the bar group said in its comments. However, the report called for several changes and clarifications in definitions and scope set by the draft rules.

‘Difficult’ Questions

Specifically, the bar group sought clarification regarding the exclusion of receipts for “unusual events,” saying that the exclusion is reasonable but lacks specific statutory authority—and lacks a regulatory definition for “unusual event.” It further sought additional guidance and examples on determining commercial domicile, with clarification on how to determine commercial domicile for “alien,” or out-of-state, corporations.

A market-based sourcing system looks to where the customer received the benefit of a service, but determining the answer to that question is “inherently difficult,” the bar group said.

“For many types of receipts, the location of the ‘market’ for the product or service is potentially difficult to determine or may be based on facts that may not be known to the taxpayer or even knowable—and that may be subsequently disputed on audit,” the report said. “The burden placed on taxpayers to gather and maintain information about their customers must be considered, and the need for precision balanced against certainty of outcome.”

Drawing lines and using simplifying assumptions help with administering the rules “but may create opportunities for abuse” or result in the distortion of the taxpayer’s in-state income, raising constitutional concerns, the bar group said.

More Changes Sought

On rents and royalties, the group said, clarification is needed on the interaction between draft rules on receipts from renting real and tangible property and draft rules on reimbursed expenses.

The report also raised questions about the consistency of approaches to treatment of qualified financial instruments, sought technical clarifications on receipts and net gains from loans, and urged modification of the draft rules’ language on net income from reverse repurchase agreements and securities borrowing agreements to ensure consistency with statutory language.

The bar group also questioned extending draft rules on advertising sales to “advertising-related services.”

It further recommended removing an expanded definition of “investment company” that adds any non-corporate entity that “pools capital from passive investors and that trades or makes investments in stocks, bonds, securities, commodities, loans, or other financial assets, but that does not otherwise conduct a trade or business.”

To contact the reporter on this story: John Herzfeld in New York at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

Text of the NYSBA Tax Section letter and report is at

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