New York releases final draft regulations on sourcing of receipts from “passive investment customers,” other rules

July 2022

In brief

The New York State Department of Taxation and Finance (Department) on July 1 released amended draft regulations that provide guidance regarding the customer-based sourcing provisions of the state’s corporate franchise tax, effective for tax years beginning on or after January 1, 2015. Prior versions of the draft regulations were published, most recently in 2019. 

Draft regulations address how asset management corporations should source their management or advisory fees. The current version makes noteworthy changes, including changes to the definition of “passive investment customer” and the sourcing of management fees for passive investment customers.

Takeaway: The Department is accepting comments on the draft regulations until August 26. The Department intends to begin the State Administrative Procedure Act process to formally propose and adopt the draft regulations this year. The newly issued draft regulations are not binding until formally promulgated. 

In detail 


Prior to 2015, fees for management or advisory services earned by corporate taxpayers were sourced based on where a taxpayer performed its services (customer sourcing rules applied, however, for qualifying receipts earned by registered broker-dealers and RIC service providers). A taxpayer’s tax liability therefore would be higher to the extent it performed its activities in New York. Starting in 2015, however, New York adopted a ‘customer-based sourcing’ regime for fees from services. Under this law change, taxpayers must source their management or advisory fees based on where their customers are located (which generally is based on where the benefit of the services was received). 

Since 2015, the Department periodically has issued draft regulations for comment on its website. The current final draft regulations, published on July 1, have made changes to the sourcing of a corporation’s receipts from the provision of management services to “passive investment customers,” among other changes.

Sourcing receipts from services: New York tax law

New York Tax Law Section 210-A generally requires service receipts to be sourced based on the location of the customer. The customer’s location is determined according to a hierarchy of factors, the first of which is the location where the customer receives the benefit of the service.

The law details specific sourcing rules for management services provided to a regulated investment company (RIC) and for management services provided by a registered broker-dealer. The statute does not provide a specific sourcing rule for asset management fees received by a non-broker-dealer or asset management services provided to an entity other than a RIC; such fees are sourced according to the general rule, based on where the customer receives the benefit of the asset management services.

New definition of “passive investment customer” 

The 2019 version of the draft regulation provided specific sourcing rules for management services provided to a “passive investment customer.” Under current draft regulation Section 4-4.1(b)(3), the definition of a passive investment customer was amended and now is defined as “a customer that is an unincorporated entity, such as a limited partnership, general partnership, limited liability company, limited liability partnership, or trust, that pools capital from passive investors for the purpose of trading or making investments in stocks, bonds, securities, commodities, loans, or other financial assets, but that does not otherwise conduct a trade or business.” 

Sourcing of services to passive investment customers

2019 Draft regulations

The prior draft regulation’s general sourcing rule provided that the benefit of the management service is received by the passive investment customer (i.e., the fund) at the location where the passive investment customer makes the decision to utilize the investment or management decisions. However, if the passive investment customer has granted, pursuant to a contract, broad discretionary authority to the taxpayer or another party to execute the investment advisory or investment management decisions on behalf of the passive investment customer, then the location where the benefit is received is presumed to be the location where the entity granted such authority executes these decisions, regardless of the location of the passive investment customer.

Observation: The 2019 rule would be deemed to raise a question of consistency with the New York statute and legislative intent that requires sourcing service receipts based on customer location (and which no longer requires sourcing based on where the taxpayer performs its services). Such a rule would negatively impact New York-based investment advisors. 

2022 Draft regulations

The revised draft regulations remove the sourcing language that would have required the fees to be sourced to where the investment advisor executes its discretionary authority with respect to investment advisory or investment management decisions on behalf of the passive investment customer. 

The revised draft regulations now require the sourcing of such fees based on the location where the contract is managed by the passive investment customer. Specifically, the revised language provides that “[i]n the case of a passive investment customer, the benefit of the service or other business activity is presumed to be received at the location where the contract is managed by the passive investment customer.” Additionally, the revised draft regulations provide that the location where a contract is managed by the customer means the primary location where an employee or other representative of a customer serves as the person with responsibility for monitoring or managing the day-to-day execution of the contract of sale with the corporation.

Observation: The revised draft appears to suggest that the Department will not be adopting a look-through approach with respect to passive investment customers (i.e., management fees received from unincorporated funds that are not in a trade or business are likely not sourced based on the location of the investors in those funds). Additionally, in an introduction to the revised draft regulations, the Department states that this position is based on rules adopted by the other states and the Multistate Tax Commission. 

Additional changes from the prior regulations

 The final draft regulations also make the following changes to the prior version:

  • Clarifying the items included in the business apportionment factor (BAF).
  • Addressing the apportionment of lump-sum payments. 
  • Inclusion of rules for net gains from the sale of tangible personal property and real property.
  • Providing new examples for sourcing sales of tangible personal property, royalties, advertising receipts, and receipts from digital products/services.
  • Updating the rules for federal funds and other financial instruments.
  • Clarifying that cryptocurrency falls under the definition of digital product.
  • Inclusion of a billing address safe harbor for receipts from digital products/services and services and other business receipts.

Contact us

Caragh DeLuca

Partner, State and Local Tax Financial Services Leader, PwC US

Brian Rebhun

Principal, PwC US

Mike Zargari

Principal, PwC US

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