The New York City (“City”) Department of Finance (“DOF”) has taken a significant step forward in implementing its corporate tax reform provisions enacted in 2015 by proposing the first installment of its regulations under a new Chapter 11A of Title 19 of the Rules of the City of New York (“Proposed Rules”). These Proposed Rules come nearly two years after the New York State (“State”) Department of Taxation and Finance (“DTF”) adopted its final regulations under Article 9-A (“NYS Regulations”). The DTF’s approach involved issuing several informal drafts (and redrafts) of its proposed regulations covering various topics before formally proposing and later adopting final regulations in December 2023. The DOF appears to be taking a different approach, opting instead to issue its proposed rules in tranches and to proceed directly to the formal rulemaking process for each tranche of proposed rules. Written comments on the Proposed Rules are due to the DOF on or before the scheduled public hearing date of November 20, 2025.
The City’s Business Corporation Tax (“BCT”), which replaced the General Corporation Tax (“GCT”) and the Banking Corporation Tax (“BTX”) for most taxpayers beginning in 2015, closely mirrors the State’s reforms. Yet, the Proposed Rules are not a carbon copy of the final NYS Regulations. Instead, in “weighing the interests of the City,” the DOF seeks to strike a balance between conformity to the NYS Regulations and departures from the NYS Regulations in areas where the DOF believes “parity [with the State rules] was not historically maintained.” Since the City’s taxing authority is a product of State delegation, these departures raise a foundational question of whether the City has exceeded the scope of its taxing authority by electing to diverge from the State framework.
Key Differences Between NYS Regulations and City Proposed Rules
The DOF has notably diverged from the NYS Regulations in the following areas:
- Definitions – While a majority of the definitions in the City Proposed Rules are consistent with the NYS Regulations, the City indicates that certain entities can elect unincorporated business tax (“UBT”) treatment. The UBT is an entity level tax imposed upon certain unincorporated entities, which is unique to the City and not applicable to taxpayers at the State level.
- Corporate partner nexus – Under the Proposed Rules, a corporate limited partner, in a limited partnership doing business in the City, may be subject to the BCT if the corporate limited partner actively engages in the partnership’s business or exerts control over the partnership or its general partner. This “active engagement” and “control” standard is consistent with the City’s current GCT regulations and stands in contrast to the State’s more fact-intensive approach, which considers whether the corporate limited partner “is engaged, directly or indirectly, in the participation in or the domination or control of all or any portion of the business activities or affairs of the partnership” through factors such as the percentage of ownership held by such corporate partner, the corporate partner’s basis in such partnership, whether an employee or officer of the corporate partner is a general partner of the partnership, etc. For taxpayers, this means that passive partnership interests may be more likely to trigger City tax filing obligations than corresponding State obligations.
- Exempt Entities – Like the current GCT regulations, the Proposed Rules address exempt entities, including certain corporations subject to the utility tax (that are not otherwise subject to the BCT), and corporations conducting an insurance business (which are subject to the State’s Article 33 franchise tax). The Proposed Rules, however, provide that a “corporation subject to the utility tax…is subject to the tax on capital as provided in section 11-654(1)(e)(1)(ii)(C) of the Administrative Code….” Similarly for insurance companies, the Proposed Rules provide that “[c]orporations conducting an insurance business and subject to the franchise taxes on insurance corporations imposed under article 33 of the Tax Law are not subject to tax under this Chapter except that such corporations are subject to the tax on capital as provided in section 11-654(1)(e)(1)(ii)(C) of the Administrative Code….”
The intent of the above provisions may be to require BCT taxpayers to include the value of their investment in utility and insurance company subsidiaries in their capital tax base, rather than subject such subsidiaries directly to tax. Absent clarification, the above rules can create confusion for utility and insurance corporations and a facial conflict with the Administrative Code, which clearly exempts such companies from the BCT.
Additionally, in an apparent attempt to extend the holding of the NYC Tax Appeals Tribunal’s decision in Matter of Aetna, 2017 NY Slip Op 07311 (NY App. Div. Oct. 19, 2017) to tax years after January 1, 2009, the Proposed Rules state that health maintenance organizations (“HMOs”), required to obtain a certificate of authority under Article 44 of the Public Health Law, are not corporations conducting an insurance business, notwithstanding the 2009 state law change defining HMOs as insurance corporations. - Public Law 86-272 – Continuing the trend of jurisdictions whittling away at Public Law 86-272, the federal law that shields certain out-of-state corporations from state and local income taxes if their in-state activities are limited to the solicitation of orders for tangible personal property, the Proposed Rules adopt the State’s already questionable interpretation, including the treatment of internet-based activities (e.g., interactive job applications and the use of cookies to gather customer data for business planning as deemed unprotected activities that may trigger nexus). Consistent with the current GCT regulations, the Proposed Rules also state that the applicability of Public Law 86-272 “is determined by the nature of a foreign corporation’s activities in the entire State,” not just within the City. This statewide lens means that corporations must consider their footprint across the State, not merely within the five boroughs, when assessing their potential BCT exposure. The City’s authority to subject a corporation to BCT based on activities that occur outside its taxing jurisdiction is debatable, and taxpayers should consider whether the City’s broad interpretation of Public Law 86-272 is a valid exercise of its taxing authority.
Looking Ahead and What to Expect Next
In the near term, taxpayers should consider submitting comments or participating in the public hearing scheduled for November 20, 2025 on the Proposed Rules.Â
In addition, taxpayers should be on the look-out for proposed rules addressing allocation. Based on a White Paper issued by the DOF on September 12, 2024, the DOF expressed its intention to deviate from several allocation provisions in the NYS Regulations, such as the burden of proof necessary for overcoming various allocation presumptions, certain provisions relating to the allocation of receipts from passive investment customers, and the billing address safe harbor threshold when allocating receipts from digital products and services and other business activities. Taxpayers should carefully review any deviations from the NYS Regulations as they are released. In doing so, it is crucial to remember that the City’s taxing authority is a product of State delegation, and, therefore, taxpayers should consider whether the City is authorized to promulgate regulations that deviate from State law. Â
Important effective dates of which taxpayers should take note are as follows:
- Effective Date of Proposed Rules: The Proposed Rules (Subchapter 1 of Chapter 11A) will not take effect until all subchapters of Chapter 11A have completed the rulemaking process. The DOF will announce the effective date in a future notice of adoption published in the City Record.
- Economic Nexus Standard: The Proposed Rules highlight that the economic nexus provisions (subjecting corporations to BCT based on deriving receipts from City activity) apply to taxable years beginning on or after January 1, 2022, as codified in the Administrative Code.
- Comment Period and Public Hearing: Written comments on the Proposed Rules are due by November 20, 2025, which is the date of the public hearing on such rules.
Contact the Authors: Maria Eberle, Lindsay LaCava, Michael Tedesco, Niki Ford, Matt Musano
