On the heels of its loss in Matter of TransCanada Facility USA, Inc. DTA NO. 827332, on May 14, the New York State Department of Taxation and Finance proposed draft regulations addressing the Article 9-A Franchise Tax treatment of Qualified New York Manufacturers (“QNYMs”). These draft regulations, which are not currently in effect but which do shed light on the Department’s current thinking, amplify a position that the Department has taken in prior informal guidance and on audit regarding contract manufacturing arrangements and the scope of activities that constitute “manufacturing” that is not in the statute. The position that a taxpayer that engages in contract manufacturing cannot qualify as a QNYM is contrary to prior New York authorities addressing “manufacturing” in the investment tax credit context and contrary to judicial authorities defining “manufacturing” under relevant federal tax law. In addition, the draft regulations set out a new position—again, one not found in the statute—that “digital manufacturing” is not manufacturing, and that only manufacturing that results in the production of “tangible” goods will qualify for QNYM treatment.
The New York State Department of Taxation and Finance (“Department”) has been releasing draft regulations to implement the extensive corporate franchise (income) tax reform that is generally effective for tax years beginning on or after January 1, 2015. Prior coverage can be found here. Recently, the Department issued new draft apportionment regulations on certain statutory categories of receipts, including receipts from sales of tangible personal property, rents and royalties, qualified financial instruments, loans, reverse repurchase agreements and securities borrowing agreements, commodities, marked to market net gains, other financial instruments, credit card and similar activities, credit card processors, services to investment companies, railroad, trucking and omnibus businesses, and advertising.