New York ALJ rules that a combined group was not a “qualified emerging technology company”

December 2022

Update: On January 25, 2024, the New York Tax Appeals Tribunal upheld the ruling of the administrative law judge described below. In a footnote, the Tribunal notes, “The Division has taken the same position since the enactment of Tax Law former § 210 (1) (a) (vi) (see TSB-M-08[1]C [January 31, 2008]). Additionally, the Division adopted new corporation franchise tax regulations during the pendency of this exception....Section 6-2.1 (e) of the newly adopted regulations is likewise consistent with the Division’s position herein: ‘For a combined group to be eligible for the preferential tax treatment available to [QETCs], every member of the combined group must be a [QETC].’” Please note, however, that the Tribunal did not rely on the newly adopted regulations in its analysis (i.e., the retroactive application of the regulations was not at issue). The taxpayer has the right to appeal this decision to the Appellate Division, Third Department.  

[In the Matter of the Petition of Charter Communications, Inc. and Combined Affiliates, N.Y. Tax Appeals Tribunal, DTA No. 829691, 1/25/24]

In brief

A New York administrative law judge (ALJ), recently ruled that a combined group did not qualify as a “qualified emerging technology company” (QETC) and, therefore, could not take advantage of the applicable reduced tax rate, because the statute did not allow for the aggregation of the group member’s attributes when determining the applicability of the lower QETC rate. 

The takeaway: The ALJ recognized that the law at issue should be construed “most strongly against the government and in favor of the taxpayer” since it did not provide for a tax exemption or exclusion. Despite this presumption in its favor, the ALJ ruled against the taxpayer. The applicable law allows aggregation of a combined group’s attributes when determining whether a taxpayer meets the definition of a qualified New York manufacturer. Although the QETC provision was part of that same statute, the ALJ found the statutory language clear and unambiguous and did not allow aggregation of a combined group’s attributes when determining whether taxpayers qualify as a QETC.

Action item: The taxpayer has 30 days to appeal the ALJ’s decision to the Tax Appeals Tribunal. Note that the Department of Taxation and Finance’s draft regulations (which are not yet binding) state that “[f]or a combined group to be eligible for the preferential tax treatment available to qualified emerging technology companies, every member of the combined group must be a qualified emerging technology company.”  Taxpayers should separately analyze each entity within a combined group for QETC qualification. Further, taxpayers that do meet the definition of a QETC for each member of the combined return should consider the ALJ’s decision when planning any acquisitions or reorganizations.

[In the Matter of the Petition of Charter Communications, Inc. and Combined Affiliates, Division of Tax Appeals, DTA No. 829691, 12/1/22]  

In detail


The taxpayer, Charter Communications, Inc. (Charter), is a combined group of affiliated companies engaged in providing video, high-speed data, and digital voice services throughout the United States. Charter employed its fiber-optic broadband technology and a variety of other technologies, for which it received several patents. Charter had thousands of in-state employees and billions of dollars of in-state property. 

For the tax years at issue, 2012-2014, Charter filed New York State (NYS) combined returns. On these returns, Charter calculated its NYS corporate franchise tax liability using the reduced rate (6.5% in 2012 and 2013, 5.9% in 2014) that was available to a QETC, as compared to the general rate of 7.1%. On audit, the Division of Taxation (Division) determined that Charter was not a QETC and recalculated its tax, applying the 7.1% rate. (The current general rate is 6.5%, and the current rate for QETCs is 4,875%.) Charter protested the resulting notice of deficiency. 

Qualified NY manufacturers

On appeal, the ALJ explained that the issue on appeal was whether Charter was a QETC under the Tax Law. The ALJ noted that, for pre-2015 years, there were two methods under New York Tax Law Sec. 210(1)(a)(vi) that governed whether a taxpayer can be a qualifying New York manufacturer. 

Under method one, a manufacturer is a “taxpayer which during the taxable year is principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing.” A combined group is a manufacturer only if the combined group during the taxable year is principally engaged in the qualified activity. To be “principally engaged,” the taxpayer or combined group must derive more than 50% of its gross receipts from the sale of goods produced by such qualified activities. A qualified New York manufacturer also must either have property in New York the adjusted basis of which is at least $1 million or have all of its property (real and personal) in New York.

Under method two, a qualified New York manufacturer is a taxpayer that is a “qualified emerging technology company” under the Public Authorities Law, regardless of the $10 million threshold set out in subparagraph (1) of such law below. The Public Authorities Law defines a QETC as a company located in NYS: (1) whose primary products or services are classified as emerging technologies and whose total annual product sales are $10 million or less; or (2) a company that has research and development activities in NYS and whose ratio of research and development funds to net sales equals or exceeds the average ratio for all surveyed companies classified as determined by the National Science Foundation in the most recent published results from its Survey of Industry Research and Development, or any comparable successor survey as determined by the department, and whose total annual product sales are $10 million or less.

Taxpayer, Division arguments

Although conceding that not all of its group members are located in NYS and, therefore, do not qualify separately as a QETC, Charter argued that a combined entity should be able to qualify as a QETC as long as the combined group’s attributes taken together meet the criteria to be a QETC under the Public Authorities Law. Charter noted that under method one, a combined group is considered a manufacturer if the group as a whole is principally engaged in certain requisite activities and that a combined group is “principally engaged” in the requisite activities if it meets that stated 50% receipts threshold. This aggregation approach under method one, Charter argued, should apply to method two to determine whether a combined group qualifies as a QETC. Additionally, Charter argued that the “concept of combined reporting treats a unitary business as a single taxable entity and that separately analyzing the components of a combined taxpayer is antithetical to [the] concept of combined reporting.”

The Division countered that the two methods are separate and distinct tests, noting that guidance issued in 2008 stated that in order for a combined group to qualify under method two, each individual corporation within the group must be located in New York.

ALJ analysis

The ALJ compared the two methods and stated that method one clearly and unambiguously articulates that a combined group can be a qualified New York manufacturer, noting that the test looks at the entire group’s gross income. Moreover, the method one definition also contains very specific property requirements and specifies when it was appropriate to use a combined group’s aggregate attributes to satisfy the requirements. 

The ALJ, contrasted method one with method two, the latter of which does not articulate that a combined group’s attributes should be used to satisfy the test. The failure to include this language “may be construed as an indication that its exclusion was intended . . . . If the legislature had intended that a combined group’s aggregate characteristics should be used for application of Method Two, it easily could have expressly provided for such,” stated the ALJ.

In addition, the ALJ noted that the Public Authorities Law specifically refers to a singular “company” in its QETC defining statute and does not provide that a combined group’s characteristics should be used. Accordingly, the ALJ did not accept Charter’s argument that the QETC definition should be applied based on a combined group’s overall attributes in the absence of an express provision by the legislature providing for such aggregation. 

Other ALJ determinations

The ALJ did not accept Charter’s other argument that principles of combined reporting would be violated by requiring each member of a group to be located in New York in order to qualify as a QETC. The state is not precluded from having certain requirements in order for a combined group to take advantage of a reduced tax rate. The statute at issue is not decombining a taxpayer; it is considering the components of the individual entities of a combined group for qualification of a reduced tax rate, the ALJ said. 

Lastly, the ALJ did not accept Charter’s argument that the Division should be required to apply the reduced rate to those members of the group that would separately qualify as a QETC. The ALJ said that it appeared that Charter was attempting to decombine for purposes of the QETC test and credit back the group the amount by which the individual members benefited from the reduced rate. According to the ALJ, combined reporting treats a unitary business as a single taxable entity and separately breaking out individual component companies of a combined taxpayer “would appear to create distortion.” The Tax Law has no provision that allows a taxpayer to decombine their return for favorable application of one portion of the law but otherwise file a combined return which incorporates the favorable portions of decombination, the ALJ said.

Contact us

Ed Geils

Ed Geils

Global and US Tax Knowledge Management Leader, PwC US

Follow us