Income/Franchise:
New York Court Dismisses Taxpayer’s Challenge of Certain Article 9-A Apportionment Rule Provisions

Case No. 904047-24, N.Y. Sup. Ct., Albany County (12/18/24). In a lawsuit brought forth by a payroll services provider challenging certain apportionment provisions within the New York State Department of Taxation and Finance’s (Department) Article 9-A Business Corporation Franchise Tax Regulations (specifically, 20 NYCRR Part 4, Apportionment, Subpart 4-1, sections 4-1.2(b)(6) and 4-l.2(c)) [see Repeal of preexisting 20 NYCRR Subchapter A, Parts 1 through 9, the Business Corporation Franchise Tax, and Adoption of New 20 NYCRR Subchapter A, Parts 1 through 9; Repeal of preexisting 20 NYCRR Subchapter B, the Franchise Tax on Banking Corporations Regulations; and Adopted Amendments to 20 NYCRR Subchapter C, the Franchise Taxes on Insurance Corporations, N.Y. Dept. of Tax. & Fin. (12/11/23); Notice of Adoption, N.Y. Dept. of Tax. & Fin. (12/27/23); and previously issued Multistate Tax Alert for more details on the Article 9-A Business Corporation Franchise Tax Regulations adopted in December 2023], a New York court granted the Department’s motion for summary judgment to dismiss the action in its entirety – concluding, among other reasons, that the taxpayer was sufficiently forewarned of certain changes to former law and the retroactive application of such law changes did not violate due process.

Among its claims, the taxpayer argued that the regulatory provisions at issue (20 NYCRR Part 4, Apportionment, Subpart 4-1, sections 4-1.2(b)(6) and 4-l.2(c)) were inconsistent with New York State tax law because:

1. The amount a professional employer organization (PEO) receives for worksite employees, and other expenses, are within the meaning of “receipt” as the term is commonly known; and
2. The regulation at issue excludes reimbursements and thus “creates a new definition of receipts that is unsupported” by state tax law.

The taxpayer had sought a declaratory judgment as to 20 NYCRR Part 4, Apportionment, Subpart 4-1, sections 4-1.2(b)(6) and 4-l.2(c)), challenging the provisions as “against public policy;” “irrational, unreasonable arbitrary and capricious;” “in excess of the Department’s jurisdiction;” and “a violation of its rights under the equal protection clause of the New York State and United States Constitutions.” The taxpayer also challenged the retroactivity of the provisions as a violation of its due process rights. In response to this argument, the court stated that “[a]lthough nine years appears to be a significant period, under these circumstances, it is possible that it is a reasonable period of time.” Please contact us with any questions.