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New York Issues Draft Apportionment Regulations

The New York State Department of Taxation and Finance recently issued draft regulations relating to sourcing of receipts from digital products and other business receipts. Comments on the rules are due by January 16, 2016. Draft Reg. Sec 4-4.9 deals with sourcing of receipts from digital products and Draft Reg. Sec. 4-4.6 deals with sourcing of receipts from services and other business activities not otherwise enumerated in section 210-A of the tax law. 
Both of the draft regulations explain a primary method for determining where the above receipts are sourced followed by a hierarchy of steps to source the receipts at question should the primary method not apply. The regulations also explain in both situations how to source receipts to the related sales when an intermediary is used, i.e., when the purchaser isn’t the recipient of the benefit from the service or digital product. The regulations also provide steps in order to exercise the proper due diligence.
Beginning with 4-4.9, which relates to sourcing of receipts from digital products, it states that the primary method (general rule) is to source a receipt from digital products to New York State based on the primary use location. The state provides guidance on determining the primary use location when the customer is an individual or business as follows:

  1. Individual – If the customer is an individual, the primary use location is presumed to be at the billing address of the customer in the taxpayer’s records.
  2. Business – If the customer is a business, the primary use location is presumed to be in New York State to the extent that the contract between the taxpayer and the taxpayer’s customer, or the taxpayer’s books and records kept in the normal course of business, without regarding to the billing address of the customer, indicate use of the digital product is in New York State. 

Draft regulation 4-4.6, relating to the sourcing of receipts from service and other business activities, state that the primary method (general rule) is to source a receipt of service or other business activity to New York State where the benefit is received by the taxpayer’s customer in New York State. The state provides the following instructions to where the customer is an individual or business.

  1. Individual – If the customer is an individual, the benefit is presumed to be received at the billing address of the customer.
  2. Business – If the customer is a business, the benefit is presumed to be received in New York State to the extent the contract between the taxpayer and the taxpayer’s customer, or the taxpayer’s books and records kept in the normal course of business, without regard to the billing address of the taxpayer’s customer, indicate the benefit of the service is in New York State.

If the primary method fails to apply in either instance above, the following hierarchy of methods should be used to source the receipts based on:

  1. Where the digital product is received;
  2. The apportionment fraction for the preceding taxable year; and
  3. The apportionment fraction for the current taxable year.

The methods directly above are to be used for both sourcing of digital products and services or other business activities. The state also provides examples for each primary method and subsequent methods for both scenarios. Please refer to the draft regulations linked above for more information and examples for each method.

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