The recent update by New York City’s Department of Finance concerning its alignment with state corporate tax regulations brings a relief that many in the business community had anticipated. The city has revealed its intent to follow the state’s market-based sourcing method, simplifying tax determinations for New York City’s corporations receiving partnership income. This decision aligns with the position outlined by New York state, which requires corporate taxpayers to compute apportionment factors received from partnerships using market-based sourcing rules. This method is centered around customer location rather than the location where services are performed, as expanded on by Bloomberg Tax.
Initially, it appeared the city might diverge from the state by utilizing the unincorporated business tax rules, which would consider where services are performed. However, this would counteract the 2015 corporate tax reform’s aim of fostering a supportive business environment in New York City. Such a move could have encouraged businesses to relocate operations outside the city. This potential outcome underlines the importance of a consistent market-based sourcing method to maintain New York’s competitive advantage.
Another highlight in the announcement addresses the city’s direction regarding the sourcing of fee income from Passive Investment Customers (PICs). Unlike the state’s all-or-nothing approach, which sources all receipts from a PIC to the state if ultimate investor locations are unknown, the city proposes a bifurcated sourcing method. This involves using investor location details where available and applying a fixed 8% rate for unknown investor locations, departing from the state’s stance as noted in the 2015 corporate tax reform, reinforcing the notion of taking a market-based approach.
The city’s efforts to synchronize with state regulations appear to be a step in the right direction for many corporate taxpayers who benefit from market-based sourcing. However, the city plans to finalize its corporate tax regulations by early 2025, retroactively applying these to open years since 2015. This move reflects a commitment to business-friendly tax policies while allowing some flexibility to adopt methods distinct from state rules if necessary. Aaron Shafer of KPMG perceives the forthcoming changes as favorable to taxpayers preferring a market approach, a sentiment shared by many in the local business community. For more detailed insights from Aaron Shafer, refer to the full article on Bloomberg Tax.