New York’s corporate tax landscape has gone through major changes over the past decade. In 2014-2015, New York State completed a comprehensive overhaul of its corporate franchise tax regime under Article 9-A in an effort to modernise the tax system and bring it in line with national trends. New York City followed with parallel reforms to its Business Corporation Tax. These reforms impacted nearly every aspect of corporate taxation from apportionment and sourcing rules to the treatment of various entity types.

Nearly a decade later, New York State finalised its regulations, and taxpayers and tax professionals are still working their way through the complexities of the reformed system. While reform has brought clarity in some areas, there remain several key issues that businesses need to keep on their radar, such as the new market sourcing rules, continued differences between State and City regimes, and evolving nexus standards that may expose businesses to tax obligations to which they were previously immune.

Market-Based Sourcing: Final Regulations and Practical Considerations

Background and national context

One of the most significant changes in New York’s corporate tax reform was the adoption of “market-based sourcing” for apportioning receipts from services and intangibles. When a company does business in more than one state, each state may tax only the portion of that company’s income attributable to activities within the state. States use apportionment formulas to determine this allocation. While traditional formulas looked at a company’s property, payroll, and sales within the state, the sales factor has become the dominant or exclusive factor in most states’ formulas. New York now uses a single sales factor, meaning a company’s New York taxable income is determined entirely by the proportion of its sales attributed to New York. See N.Y. Tax Law § 210-A.

The critical question then becomes: how to determine where a sale is attributed? For tangible goods, the answer is usually relatively straightforward – sales are generally sourced to where the product is delivered. N.Y. Tax Law § 210-A(2). But for services, states have taken different approaches over the years. Under the traditional “cost-of-performance” method, receipts from services are sourced to the state where the service provider performs the work. Under “market-based sourcing”, receipts are sourced to where the customer receives the benefit of the service. This rule, while straightforward in theory, can create significant uncertainty in practice, especially since businesses do not always know where their customers receive the benefit of services and may not have access to such information.

The national trend has moved toward market-based sourcing, and the majority of states have now adopted this approach based on their thinking that, in a modern economy, services can be performed in a single location but then be received by customers across the country. New York adopted market-based sourcing as part of its 2014 reform, but the implementing regulations were not finalised until nearly a decade later, in December 2023. See 20 NYCRR §§ 4-1.1–4-4.11. Prior to that, the Department of Taxation and Finance issued a series of draft regulations.

New York’s market sourcing rules

Under New York’s current framework, corporations subject to the Article 9-A franchise tax apportion their business income using a single receipts factor. The statute, N.Y. Tax Law § 210-A, establishes this single-factor apportionment and sets forth general sourcing principles, while the regulations promulgated by the Department of Taxation and Finance (20 NYCRR Part 4) provide detailed rules for applying these principles. The sourcing rules vary depending on the type of receipt.

For sales of tangible personal property, the statute provides that receipts are sourced to New York if the property is delivered to a purchaser in New York. This destination-based approach is consistent with the rules in most other states and is generally straightforward to apply.

For receipts from services, the statute provides a hierarchical approach for sourcing receipts, beginning with where the customer receives the benefit of the service. The regulations then flesh out this hierarchical approach and provide that the hierarchy of methods must be applied sequentially and that a corporation may abandon a method only if, after exercising due diligence, it lacks sufficient information to apply that method. The regulations also provide standards for exercising due diligence. For services provided to individual customers, the regulations generally look to the customer’s billing address. For services provided to business customers, the regulations focus on where the customer uses or receives value from the service. See N.Y. Tax Law § 210-A(10); 20 NYCRR § 4-4.2.

For digital products, the statute and regulations similarly look to the customer’s location. The regulations include a “reasonable approximation” standard that allows taxpayers to use alternative methods when precise customer location information is unavailable, provided the method reasonably reflects the market for the taxpayer’s services or products. See N.Y. Tax Law § 210-A(4); 20 NYCRR §§ 4-3.1–4-3.11.

Areas of ambiguity and complexity

Even with the regulations now finalised, several areas of market-based sourcing remain complex and potentially ambiguous. The sourcing of services to business customers presents particular challenges. When a business provides services to a corporate client with operations in multiple states, determining where that client “receives the benefit” is not always obvious. The regulations offer some guidance, but applying them to real-world situations may not be so simple.

Digital goods and software-as-a-service transactions also present challenges. Where does a customer “use” a cloud-based software product? Where is the “benefit” of a digital service received? These questions get increasingly complex when customers access services from multiple locations.

Things get even more complicated when the primary sourcing rule cannot be applied due to lack of information and taxpayers must use secondary or tertiary rules. Documentation challenges make matters worse, as taxpayers may not possess the customer information necessary to apply the sourcing rules precisely.

Practical guidance for taxpayers

With the regulations now finalised, taxpayers should carefully review their current sourcing methods to ensure they are aligned with New York’s market-based approach. Taxpayers should evaluate whether their current positions might create refund opportunities or potential exposure. A taxpayer that has been sourcing receipts in a manner inconsistent with the final regulations may be able to file amended returns or refund claims if the correct methodology produces a better result. Conversely, a taxpayer may have exposure if its current sourcing methodology understates New York receipts.

It is also important to understand the evolution of the regulatory landscape. During the first decade of market-based sourcing while the regulations were still in proposed form, the Department of Taxation and Finance was in many ways “feeling its way” through these new rules. As a result, most audits involving market sourcing disputes were resolved through settlement. Both taxpayers and the Department had incentives to negotiate given the lack of definitive guidance.

Now that the regulations are final, the Department will likely take a stricter view of its published rules and may be less willing to compromise on market sourcing issues. Taxpayers should expect to see more contested audits and potentially more litigation.

Importantly, taxpayers should remember that the Department’s interpretation of the regulations is just that – its interpretation. The regulations provide a framework, but applying them to specific facts often requires judgement calls. Taxpayers who have taken principled, well-documented positions should not feel pressured to concede simply because the Department disagrees. When the Department overreaches or applies the rules in a manner inconsistent with the statutory framework, taxpayers should be ready to challenge those positions through the administrative process and, when necessary, in court.

State and City Divergence: Traps for the Unwary

While New York’s corporate tax reforms aimed to simplify the system, businesses operating in New York City face an additional layer of complexity. The City imposes its own corporate taxes separate from State taxes, and although the City’s Business Corporation Tax was reformed to generally mirror the State’s Article 9-A regime, important differences remain. These differences can produce unexpected tax consequences for businesses that assume the State and City rules work the same way.

S-corporation and pass-through entity treatment

One of the most significant differences involves how S-corporations are treated. At the State level, corporations that have made a valid federal S-election can also elect to be treated as a New York S-corporation. When this election is made, the corporation itself is generally not subject to tax on its income; instead, income passes through to shareholders who report it on their personal income tax returns. The S-corporation pays only a fixed dollar minimum tax at the entity level – a nominal amount compared to what a C-corporation would owe. See N.Y. Tax Law §§ 210, 660.

New York City takes a very different approach. The City does not recognise federal or State S-corporation elections for purposes of its General Corporation Tax. As a result, an S-corporation doing business in New York City is still subject to the GCT at the full 8.85% corporate rate at the entity level. And the S-corporation’s shareholders who are New York City residents must also report their pass-through income on their personal New York City returns. See NYC Administrative Code § 11-603.

The practical result is that some S-corporation owners may face double taxation in New York City: the entity pays GCT on its City-allocated income, and the shareholders pay personal income tax on the same income that flows through to them. This is a stark contrast to the State treatment, where the pass-through structure is respected and entity-level tax is minimal.

This divergence goes beyond S-corporations to other pass-through entities. New York State does not generally impose an entity-level income tax on partnerships, limited liability companies, and sole proprietorships; instead income flows through to the owners and is taxed only on their personal income tax returns. In New York City, however, these entities are subject to the Unincorporated Business Tax at a rate of 4% on City-source income. This means a pass-through entity that has no entity-level State tax obligation may nonetheless face a City tax at the entity level. See NYC Administrative Code § 11-503.

Sourcing methodology divergence

Another critical difference involves the sourcing rules used to determine how much of a business’s income is taxable in New York City. As discussed above, New York State uses market-based sourcing for services under Article 9-A, looking to where the customer receives the benefit of the service.

New York City’s Business Corporation Tax – which applies to C-corporations – follows the same market-based sourcing approach as the State. However, the City’s General Corporation Tax (which applies to S-corporations) and the Unincorporated Business Tax (which applies to partnerships and sole proprietors) use cost-of-performance sourcing for services. Under cost-of-performance, receipts are sourced based on where the taxpayer performs the income-producing activity, not where the customer is located. See NYC Administrative Code § 11-508; 19 RCNY 11-65.

This divergence can produce very different results depending on a company’s circumstances. For example, if a New York City-headquartered company performs most of its work at its City offices but serves clients located throughout the country, under market-based sourcing, only the receipts from services benefiting customers located in New York would be sourced to New York. Under cost-of-performance sourcing, however, all of the company’s receipts would be sourced to New York because that is where the work is performed.

For businesses that perform work in New York but have significant out-of-state customers, the choice of entity type can have major tax implications. A C-corporation would benefit from market-based sourcing at both the State and City level, while an S-corporation or partnership might find a greater share of its income subject to City tax under cost-of-performance rules. This is something tax advisers and taxpayers should carefully consider when selecting or restructuring an entity.

Regulatory status

Finally, the regulatory landscape differs between the State and City. New York State finalised its corporate franchise tax regulations in December 2023. New York City’s Department of Finance is still working on regulations under the reformed Business Corporation Tax. The City has indicated that its BCT regulations are expected to be “substantially similar” to the State’s, but some differences will exist to reflect the City tax’s distinct features. Until these regulations are finalised, there is uncertainty about how the City will interpret its rules. Taxpayers should keep an eye on the City’s rulemaking process and be ready to adjust as additional guidance becomes available. Taxpayers should also keep in mind that the lack of guidance at the City level may present opportunities to resolve matters favourably during audit when disputes arise over issues for which the City has no official position.

P.L. 86-272: The Erosion of a Safe Harbour

Before apportionment and entity-level differences, businesses must first consider threshold nexus questions, that is, whether they are subject to New York tax in the first place. For decades, many out-of-state businesses have relied on a federal law known as P.L. 86-272 to limit their state income tax exposure. That protection is now under significant threat both nationally and in New York in particular.

Background on P.L. 86-272

P.L. 86-272 is a federal law enacted in 1959 that protects a seller of tangible personal property from a state’s net income tax. This protection applies if the seller’s in-state activities are limited to solicitation of orders as long as the orders are sent outside the state for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the state. When these conditions are met, the business is protected from state income tax even though it has employees soliciting customers within the state. See 15 U.S.C. § 381.

For more than 60 years, P.L. 86-272 has been a reliable safe harbour for companies with limited physical presence in a state. A manufacturer or distributor could send sales representatives into a state to meet with customers, take orders, and develop relationships without triggering income tax nexus, so long as the company’s activities did not exceed the statutory protection.

New York’s regulations on internet activities

In the latest round of efforts to narrow P.L. 86-272, New York State’s December 2023 regulations attempt to limit the federal protection for New York State purposes back to 1 January 2015 (the date of New York’s statutory corporation tax reform) when companies use modern technology to interact with customers. The New York State Department of Taxation and Finance has adopted regulations that identify certain online activities as exceeding the P.L. 86-272 safe harbour. See 20 NYCRR 1-2.10.

Under New York’s approach, the following activities may cause a business to lose P.L. 86-272 protection:

• offering customer support through “chat” features on a corporation’s website;
• accepting credit card applications online;
• allowing New York residents to apply for non-sales jobs via its website;
• using internet “cookies” to collect customer information via its website;
• remotely fixing or upgrading products previously sold to customers located in the state;
• selling extended warranties online;
• working with an online marketplace; and
• selling tangible personal property online while also contracting with customers to stream videos or music to electronic devices for a fee.

These regulations largely follow guidance from the Multistate Tax Commission, which some other states have also adopted in various forms.

Concerns about regulatory overreach

There are serious questions about whether the current positions of New York and some other states are consistent with the federal law. P.L. 86-272 protects “solicitation of orders,” and courts have interpreted this protection to include activities that are ancillary to solicitation, as well as de minimis (very small) activities. New York and other states are now taking the position that basic internet-based activities, such as providing a mobile app or using “cookies” to track customer information, go beyond what is protected.

From a taxpayer’s perspective, these rules seem overly aggressive. Having a mobile app that allows customers to browse products or check order status should not suddenly expose a company to state income tax. Similarly, using cookies for basic analytics or to improve the user experience on a company’s website is standard business practice and not the kind of in-state physical activity that Congress intended would negate P.L. 86-272 protection.

The state taxing authorities are arguably using technological advances as an excuse to effectively negate P.L. 86-272 through aggressive interpretation. Congress enacted the statute to provide certainty and to prevent states from imposing undue burdens on interstate commerce, and only Congress can change the governing rules. If states can nullify the protection by characterising routine Internet activities as unprotected, the statute’s purpose is frustrated. To the extent New York seeks to apply its regulations in a manner that unlawfully denies taxpayers their federal protections, taxpayers should be ready to fight.

The ACMA litigation and broader implications

The American Catalog Mailers Association (ACMA) has challenged New York’s regulations concerning P.L. 86-272 in state court, arguing that New York has exceeded its authority under the federal statute. Specifically, the ACMA sought a declaration that the 2023 regulations are preempted by federal law and that New York was improperly applying them retroactively to 2015. The New York State Supreme Court (a trial court) found that P.L. 86-272 does not prohibit the State from identifying and regulating which internet activities are construed by New York to constitute more than protected activity and ruled that there is no conflict between the regulations and P.L. 86-272. However, the court struck down the retroactive application of the regulations. See American Catalog Mailers Association v Department of Taxation & Finance, Index No. 903320-24 (N.Y. Sup. Ct. Apr. 28, 2025).

The ACMA has appealed the portion of the decision finding that New York’s regulations are not preempted, and the case is working its way through New York’s appeals courts. The parties submitted briefing to a New York intermediate appellate court in the summer of 2025, and oral argument took place in February 2026. This case has the potential to provide important clarity on the scope of P.L. 86-272 protection in the digital age, and the outcome could have significant implications for businesses across the country. A decision favourable to taxpayers could rein in state efforts to narrow P.L. 86-272 and reaffirm the statute’s role as a meaningful safe harbour. A decision favourable to the states could accelerate the erosion of P.L. 86-272 protection and expose businesses to income tax obligations in states where they have no physical presence based solely on their interactions with in-state persons via the internet.

Practical considerations for businesses

Given uncertainty in this area, businesses should carefully examine their digital activities to understand potential nexus exposure. This includes reviewing website functionality, mobile applications, use of cookies and tracking technologies, and post-sale customer interactions. Companies that have historically relied on P.L. 86-272 protection should assess whether their current activities might be viewed as exceeding that protection under New York’s regulations or similar guidance in other states.

However, businesses that believe they are entitled to P.L. 86-272 protection should not simply accept a state’s contrary position. The regulations represent the state’s view of federal law, but that view is subject to challenge. Taxpayers with principled positions should be prepared to defend them and assert their federal protections.

Looking Ahead

New York corporate taxation is complicated and constantly changing. Companies need to stay on top of developments.

A few things to watch in the coming months and years: New York City’s Mayor has discussed his desire to raise taxes on New York City’s most profitable corporations (though that would require state action). At the State level, the latest budget proposal did not include a corporate tax increase, though it would extend the State’s temporary top corporate tax rate of 7.25% through 2029. And changes at the federal level can affect State and City tax bases in unexpected ways.

For businesses with operations, employees, or customers in New York, proactive review of their corporate tax positions is essential. Taxpayers should work with experienced advisers to identify opportunities, mitigate risks, and ensure compliance with an evolving set of rules. When the State or City overreaches – whether through aggressive audit positions, overbroad regulations, or interpretations that strain statutory text – taxpayers should be prepared to push back and, when necessary, to litigate.