New York Supreme Court: Each Affiliated Member Must Qualify as a QETC for Group Tax Benefits

The New York Supreme Court, Appellate Division, found that a combined group did not qualify as a qualified emerging technology company (QETC), entitling the group to a reduced tax rate, because each group member did not separately qualify as a QETC. Charter Communications, Inc. v. New York State Tax Appeals Tribunal, CV-24-0971, December 24, 2025.

On its New York combined returns for three tax years (2012–2014), Charter Communications, an affiliated group, classified itself as a QETC and, therefore, calculated its state corporate franchise tax at the reduced rate available to QETCs at that time. On audit, the Department of Taxation rejected the group’s classification as a QETC on the grounds that certain members of the group did not qualify as a QETC in their separate capacity, resulting in a deficiency assessment. Both the Division of Tax Appeals and the Tax Appeals Tribunal upheld the assessment. The group appealed the matter to the Supreme Court, Appellate Division.

During the tax years at issue, qualified New York manufacturers paid tax at a reduced rate, and a QETC qualified as a New York manufacturer. A QETC is “a company located in New York whose primary products or services are classified as emerging technologies.” The court stated that the Legislature’s intent behind this provision was to “incentivize private investments in research and development and in emerging technology industries.” However, the Legislature did not specifically provide criteria for when to consider a combined group as a qualified New York manufacturer for purposes of the QETC provision.

The court opined that based upon the plain language of the statute, “a combined group may only be a qualified New York manufacturer under the definition of a qualified emerging technology company if each taxpayer qualifies because, pursuant to the statute, the ‘taxpayer’ is each corporation and not the combined group.” [Emphasis added.]

It is undisputed that certain members of the taxpayer/combined group were not located in New York during the relevant tax periods. The taxpayer’s argument is that all members of the group do not need to be located in New York. In fact, when analyzing the combination provision, the court (citing the 2008 Disney decision) noted that the state “employs combined reporting to avoid distortion of, and more realistically portray, the true income of closely related businesses[,] regardless of where they are geographically situated.” [Emphasis added.]

The court found that this taxpayer’s reading of the qualified manufacturer statute does not comply with the legislative intent of the QETC provision. It determined that each member must be located in the state and primarily have been involved in the production or servicing of emerging technologies. This conclusion seems to be at odds with the Disney decision, cited as New York’s adoption of the Finnigan rule, in which, as stated above, the taxation should be determined “regardless of where they are geographically situated.”

The court also rejected the taxpayer’s argument that the reduced rate is discriminatory in violation of the dormant Commerce Clause. Under the QETC provision, an out-of-state company can benefit from the reduced tax rate if it demonstrates “some real property connection to the state.” In so ruling, the court not only noted the “exceedingly strong presumption of constitutionality” afforded to legislative enactments but also (citing recent state precedent) said the taxpayer did not meet “substantial burden of demonstrating that in any degree and in every conceivable application, the law suffers wholesale constitutional impairment.” [Emphasis added.]¹

Ryan’s Take and Action Steps

This decision concerned tax years more than a decade ago, when a QETC could be deemed a qualified New York manufacturer, and as a qualified New York manufacturer, the taxpayer received a reduced tax rate. Today, the QETC provision, as related to qualified New York manufacturers, has been repealed. Nevertheless, QETCs are entitled to other tax benefits. In addition, qualified New York manufacturers now receive a 0% tax rate. This decision remains relevant in determining how a combined group can qualify for New York tax benefits and should prompt combined filers to review the profiles of all their members.

It’s notable that New York is a “Finnigan” state, which for combination and apportionment purposes means that the term “taxpayer” means the entire combined group for purposes of determining taxable income of the combined group. In California, the state of origin for the “Finnigan” rule, then deconstructs the taxable income of the combined group to each group member over which the state has nexus for income tax purposes. Query whether an issue left unaddressed by this case is whether the QETC statute would then properly be applied only to the income associated with the QETC-qualifying member of the group. It will be interesting to see if this issue surfaces on any appeal.

This decision is also notable for detailing a heavy burden taxpayers must bear in asserting a constitutional violation—that a taxpayer must demonstrate that a law suffers wholesale constitutional impairment in any degree and in “every conceivable application.”

For strategic guidance on the New York court decision regarding group eligibility for tax benefits, contact the Ryan experts listed below.

¹ In the Matter of Robert C. Ciardullo et al., v. Jean A. McDonnell, as Secretary to the Tax Appeals Tribunal, et al., 241 AD3d 45 237 NYS3d 766 2025 NY Slip Op 03365 (June 5, 2025).

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