Written by: W. Matt McCord

The New York Division of Tax Appeals recently decided the petition for Redetermination of Deficiencies or for refunds of New York State Corporation Franchise Tax of Raytheon Company. 

The contested matter in this petition is the use of the preferential tax rates by a qualified New York manufacturer and/or an eligible qualified New York manufacturer. Initially, the tax rate on the entire net income was reduced from 7.1% to 6.5% for a qualified New York manufacturer. Beginning in 2014, the tax rate on the entire net income for a qualified New York manufacturer was reduced to 0%. 

Over the history of the provision for preferential tax rates for a qualified New York manufacturer, the definition of “qualified New York manufacturer” has been substantially the same. For a corporation or a combined group of corporations to be a qualified New York manufacturer, the corporation or combined group of corporations must: 

  • Be principally engaged in a qualifying activity (i.e. manufacturing, processing, or assembling) 
  • Have a property in New York that is described in §210-B(1)(b)(i)(A) (i.e. property eligible for the investment credit that is used in a qualifying activity; and the adjusted basis (depending on year, adjusted basis could be federal or state)) of that property at the close of the taxable year is at least $1 million or all of corporation’s or combined group’s real and personal property is located in New York.  

There is no dispute that the Raytheon combined group was principally engaged in a qualifying activity. However, the Raytheon combined group did not satisfy the definition of a qualified New York manufacturer because it did not satisfy the property requirement since there is no manufacturing by the group within the state. Raytheon, in their petition, argued that denying them the use of preferential rates violates the Commerce Clause of the US Constitution. The Division of Tax Appeals, after reviewing Raytheon’s arguments, determined that the matter was a facial challenge, and the Division of Tax Appeals lacks jurisdiction to consider facial validity challenges of statutes. 

Based on the Division of Appeals’ inability to rule on the facial challenge and significant value to the taxpayer, it is likely that this case makes its way to court. 

Taxpayers engaged in qualifying activities but unable to take advantage of the preferential rates because they cannot satisfy the in-state property requirement should monitor the progress of this case. Taxpayers with material opportunities should consider amending prior years to ensure they do not lose potential refunds to the statute of limitations if the constitutional challenge is ultimately successful. 

Work with our state income and franchise tax professionals to ensure that you are able to obtain preferential tax rates or to amend prior year returns to ensure they do not lose potential refunds to the statue of limitations. 


Lean on DMA’s state income tax professionals to ensure you get preferential tax rates and the help you need on your amended returns. 

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