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.
After months of bitter fighting, the United States Supreme Court vacancy left by the death of Justice Antonin Scalia has finally been filled with the confirmation of Justice Neil Gorsuch on April 7, 2017. What this means for state tax issues that are ripe for Supreme Court review—retroactivity, the death of Quill, etc.—will certainly be the subject of much debate and prognostication. One thing that seems quite clear, based on his record in the Tenth Circuit, is that when given the chance, Justice Gorsuch will likely conclude that the deference standard that currently applies to judicial review of agency regulations is too lenient, and that the power of the administrative state should be curtailed.