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Inside the New York Budget Bill: Economic Nexus

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the “Budget Bill”) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions. The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the first in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s economic nexus provisions.

The New York Tax Law provides that a corporation is subject to corporate income tax if it is “deriving receipts from activity in [New York].” A corporation is deemed to be “deriving receipts from activity in [New York]” if it has $1 million or more of receipts included in the numerator of its apportionment factor, as determined under the Tax Law’s apportionment sourcing rules (New York receipts). Furthermore, a credit card company is deemed to be doing business in New York if it has issued credit cards to 1,000 or more New York customers; has contracts covering at least 1,000 merchant locations; or has at least 1,000 New York customers and New York merchant locations. The Tax Law also has special rules (aggregation rules) for corporations included in combined reporting groups. This year’s Budget Bill slightly modified those aggregation rules.

Under the Tax Law as originally amended by last year’s corporate income tax reform, if a corporation did not meet the $1 million threshold itself, but had at least $10,000 of New York receipts, the $1 million test was to be applied to that corporation by aggregating the New York receipts of all members of the corporation’s combined reporting group having at least $10,000 of New York receipts. Similarly, a credit card corporation that did not meet the 1,000 customer and/or merchant location threshold by itself, but had at least 10 New York customers, at least 10 New York merchant locations or at least 10 New York customers plus merchant locations, would have been subject to tax in New York if all members of its combined reporting group with 10 such customers and/or locations, on an aggregated basis, had at least 1,000 New York customers, 1,000 New York merchant locations or 1,000 New York customers plus merchant locations.

As a result of the technical corrections, the $1 million New York receipts and 1,000 New York customers/merchant locations aggregation tests now apply to a corporation that is part of a unitary group meeting the ownership test of Tax Law section 210-C (more [...]

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Inside the New York Budget Bill: Guidance Released Regarding Transitional Compliance and Qualified New York Manufacturers

On March 31, 2014, Governor Andrew Cuomo signed into law a budget bill containing major corporate tax reform. That new law resulted in significant changes for many corporate taxpayers, including a complete repeal of Article 32 and changes to the Article 9-A traditional nexus standards, combined reporting provisions, composition of tax bases and computation of tax, apportionment provisions, net operating loss calculation and certain tax credits. Most of the provisions took effect on January 1, 2015.

Due to the sweeping nature of this corporate tax reform, taxpayers have been awaiting official guidance from the New York State Department of Taxation and Finance on many areas of the reform. On January 26, 2015, the Department started releasing Technical Memoranda on certain aspects of the corporate tax reform.

The first Technical Memoranda, TSB-M-15(2)C, provides guidance on many transitional compliance issues, including, but not limited to, (1) clarifying the filing requirements for Article 32 and Article 9-A taxpayers with fiscal years that span both 2014 and 2015, (2) addressing the inclusion in a combined report of a member with a tax year end that is different from the designated agent, (3) addressing compliance issues involving short periods and corporate dissolutions, (4) clarifying the filing dates and estimated tax payment obligations for 2015 Article 9-A taxpayers.

The second Technical Memoranda, TSB-M-15(3)C, (3)I, addresses the benefits available to qualified New York manufacturers.

Transitional Compliance Issues

Taxpayers and tax return preparers should be particularly careful when preparing 2015 Article 9-A tax returns, as the Department’s guidance on transitional compliance issues indicates that returns submitted on incorrect forms or on prior year forms will not be processed by the Department and will not be considered timely filed, which could result in the imposition of penalties.

Fiscal Years Spanning 2014 and 2015

The Department’s guidance makes it clear that for any 12-month tax year that began before January 1, 2015, taxpayers must complete the relevant 2014 return (e.g., an Article 32 taxpayer must file a 2014 Article 32 franchise tax return and, if applicable, a MTA surcharge return) according to the Tax Law that was in effect before January 1, 2015. Fiscal year taxpayers, both Article 32 and Article 9-A, with a 12-month tax year that began in 2014, but will end in 2015, will not be permitted to file short period returns solely as a result of corporate reform.

Combined Reports that Include Taxpayers with Different Year Ends

For tax years beginning on or after January 1, 2015, a taxpayer is required to file a combined report with other corporations engaged in a unitary business with the taxpayer if a more-than-50-percent common ownership (direct or indirect) test is met, with ownership being measured by voting power of capital stock. Under the Tax Law, a combined report must be filed by the designated agent of the combined group. The “designated agent” must have nexus with New York and is generally the parent corporation of the combined group. If there is no such parent corporation or if the parent [...]

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