New York State corporate income tax reform Archives

Inside the New York Budget Bill: New York City Tax Reform

by McDermott Will & Emery | Apr 3, 2015 | Allocation/Apportionment, Income Tax, Local Tax, Nexus, Tax Base

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. This post is the eighth in a series analyzing the New York Budget Bill, and summarizes the amendments to reform New York City’s General Corporation Tax.

Background

In 2014, New York State enacted sweeping reforms with respect to its taxation of corporations, including eliminating the tax on banking corporations, enacting economic nexus provisions, amending the combined reporting provisions and implementing customer-based sourcing. New York City’s tax structure, however, was not changed at that time, resulting in concern among taxpayers about having to comply with two completely different sets of rules for New York State and New York City, and concern from representatives of the New York City Department of Finance, who would have lost the benefit of the joint audits that they currently conduct with New York State and the automatic conformity to any New York State audit changes resulting from separately conducted New York State audits.

Although it came down to the wire, the Budget Bill did make the necessary changes to largely conform the New York City corporate franchise tax provisions to those in place for New York State. These changes will be effective as of January 1, 2015, which is the same general effective date for the New York State corporate tax reform.

Differences Between New York State and City Tax Laws

Even after passage of the Budget Bill, there remain some differences in the tax structures of New York State and New York City. Some examples include the following:

New York State has economic nexus provisions, but New York City does not (except for credit card banks).
New York State will phase out its alternative tax on capital (with rate reductions implemented until the rate is 0 percent in 2021; different, lower rates apply for qualified New York manufacturers), and the maximum amount of such tax is capped at $5 million (for corporations that are not qualified New York manufacturers). Not only will New York City not phase out such alternative tax, it has increased the cap to $10 million, less a $10,000 deduction. Also, New York City will not have a lower cap for manufacturers.
Under New York State’s corporate tax reform, a single tax rate is imposed on the business income base for all taxpayers (except for favorable rates for certain taxpayers, such as qualified New York manufacturers), with the amount of such rate being decreased from 7.1 percent to 6.5 percent in 2016. Qualified New York manufacturers are subject to a 0 percent tax rate on the business income base. In the Budget Bill implementing New York City’s tax reform, there is no similar rate reduction. Furthermore, instead of using a single rate for all taxpayers (except [...]

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Inside the New York Budget Bill: Sales Tax Provisions

by McDermott Will & Emery | Apr 3, 2015 | Incentives, New York, Sales Tax

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.

This post is the seventh in a series analyzing the New York Budget Bill, and summarizes the sales tax provisions in the Budget Bill.

Dodd-Frank Act Relief Provisions

The Budget Bill includes provisions that provide relief from potential sales and use tax implications arising from compliance with certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank). Under Dodd-Frank, large financial services organizations must develop and implement resolution plans allowing for an orderly wind-down of their banking and broker/dealer operations in the event of an adverse financial event, such as another financial crisis. The affected financial services organizations and their regulators have agreed in principle to plans where front-office and back-office assets and operations would be segregated into separate legal entities. As a result, many affected financial services organizations are implementing plans whereby back-office functions are being placed into separate bankruptcy remote legal entities as a way to ensure that an orderly wind-down of the affected entities could occur, with the back-office functions remaining available to all potentially affected entities.

Without the relief provided by the Budget Bill, the Dodd-Frank-mandated reorganizations could have resulted in increased New York sales tax compliance burdens and increased New York sales tax liabilities, both upon the reorganization itself and on an ongoing basis. Many transactions that formerly occurred between different units within the same legal entity (and hence were not subject to sales tax) will have to occur between different legal entities after the restructurings and thus will be taxable. To prevent this increase in sales tax burdens and liabilities, an exemption was inserted into the Budget Bill that will apply to sales of property or services that are entered into or conducted as a result of the resolution planning required by Dodd-Frank, so that the affected companies are not subject to sales or use tax on transactions that occur solely as a result of their compliance with a federal law that has been put in place to make the global financial systems safer.

The exemption provided by the Budget Bill is tied to the status of the buyer and the seller as a “covered company” or “material company” as defined in section 243.2(l) of the Code of Federal Regulations, which is one of the sections implementing the Dodd-Frank Act. Under the exemption, sales of tangible personal property or services among related parties are exempt from the New York sales and use tax if the vendor and the purchaser are referenced as either a “covered company” or a “material entity” in a resolution plan (or the vendor and the purchaser are separate legal entities pursuant to a divestiture authorized by the Dodd-Frank [...]

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Inside the New York Budget Bill: Net Operating Losses and Investment Tax Credit

by McDermott Will & Emery | Apr 3, 2015 | Incentives, Income Tax, New York, Tax Base

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 sixth in a series analyzing the New York Budget Bill, and discusses changes to the net operating loss (NOL) and investment tax credit provisions.

Net Operating Losses – Prior NOL Conversion Subtraction

For tax years beginning on or after January 1, 2015, the calculation of the New York NOL deduction has changed dramatically. As a result, the Tax Law provides for a transition calculation, a prior NOL Conversion Subtraction, for purposes of computing the allowable deduction for NOLs incurred under the prior law.

To calculate the Conversion Subtraction, the taxpayer first must determine the amount of NOL carryforwards it would have had available for carryover on the last day of the “base year”—December 31, 2014, for calendar year filers, or the last day of the taxpayer’s last taxable year before it is subject to the new law—using the former (i.e., 2014) Tax Law, including all limitations applicable under the former law. This amount is referred to as the “unabsorbed NOL.” Second, the taxpayer must determine its apportionment percentage (i.e., its BAP) for that base year (base year BAP), again using the former (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer’s tax report for the base year. Third, the taxpayer must multiply the amount of its unabsorbed NOL by its base year BAP, then multiply that amount by the tax rate that would have applied to the taxpayer in the base year (base year tax rate). The resulting amount is divided by 6.5 percent (qualified New York manufacturers use 5.7 percent). The result of these computations is the prior NOL Conversion Subtraction pool.

A taxpayer’s Conversion Subtraction will equal a portion of its Conversion Subtraction pool computed as outlined above. The standard rule provides that one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted as the Conversion Subtraction. The Tax Law as originally drafted also provided that any unused Conversion Subtraction could be carried forward until tax years beginning on or after January 1, 2036 (tax year 2035 for calendar year filers). The technical corrections include slight changes to that carryforward provision. Now, any unused Conversion [...]

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Inside the New York Budget Bill: Combined Reporting

by McDermott Will & Emery | Apr 3, 2015 | Income Tax, New York

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 fifth in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s combined reporting provisions.

Investment Income

Last year’s corporate reform provisions provided that (1) the election to reduce investment income or other exempt income by 40 percent in lieu of attributing interest expenses to that income and (2) the election to apportion income and gains from qualifying financial instruments using the 8 percent rule apply to all members of a combined group. The Budget Bill provides that the following elections also apply to all members of the combined group: the election to waive the net operating loss carryback period and the election to deduct up to one-half of the prior year net operating loss conversion subtraction pool over a two-year period beginning with the tax year beginning on or after January 1, 2015.

The Budget Bill also provides that the new 8 percent cap on investment income (for more information about this cap see our prior post, Inside the New York Budget Bill: Tax Base and Income Classifications) applies by comparing the investment income of the combined group (before the deduction of attributable interest expenses) to the entire net income of the combined group.

Designated Agent

Under current law, each combined group must have one designated agent, and that designated agent must be a New York taxpayer (i.e., must have nexus with New York). The Budget Bill eliminates the requirement that the designated agent be the parent corporation of the combined group (taxpayers were permitted to choose another designated agent only if there was no parent corporation included in the combined group or the parent was not a taxpayer). This change gives combined groups greater flexibility in selecting the designated agent for the combined group.

The Budget Bill made a few additional clarifying amendments to the combined reporting provisions:

When computing the combined business income base, the apportioned business income of the group is reduced by any prior net operating loss conversion subtraction as well as any net operating loss deduction (the original reform provision referred to only the net operating loss deduction).
A combined net operating loss is composed of net [...]

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Inside the New York Budget Bill: Apportionment

by McDermott Will & Emery | Apr 2, 2015 | Allocation/Apportionment, Income Tax, New York

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 fourth in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s apportionment provisions.

Treatment of Excess Investment Income

As discussed in a previous blog post, the Budget Bill includes a “cap” whereby investment income cannot exceed 8 percent of a corporation’s (or a combined group’s) entire net income. A follow-up issue is the impact of this cap and the “excess” investment income that it creates on the apportionment factor that will be applied to a taxpayer’s business income, assuming that inclusion of the excess investment income is Constitutional.

As a preliminary matter, the excess investment income will not be eligible for the 8 percent fixed sourcing election since such income cannot be considered income from qualified financial instruments (QFIs); a financial instrument that qualifies as investment capital cannot also qualify as a QFI. Even though through operation of the cap excess investment income will be treated as business income and not investment income, there is no corresponding provision in the statute specifying that the character of investment capital that gave rise to such excess investment income will switch to business capital. Thus, a taxpayer’s election to use the 8 percent fixed sourcing election will not apply to any excess investment income. Instead, the excess investment income will need to be sourced under the general customer sourcing rules for financial instruments. Under those general rules, dividends and net gains from sales of stock are not included in either the numerator or denominator of the apportionment formula, unless the Commissioner determines that inclusion is necessary to properly reflect the business income or capital of the taxpayer. The Commissioner’s determination is governed by the Tax Law’s general provision on alternative apportionment, meaning that taxpayers can request factor representation to the extent necessary to properly reflect their business income or capital. Interestingly, in those cases where the excess investment income is properly included in business income, inclusion in the apportionment formula should be required on Constitutional grounds (factors used in an apportionment formula must reasonably reflect how income is earned).

Description of QFI

The rule concerning what will qualify as a QFI for purposes of the 8 percent [...]

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Inside the New York Budget Bill: Tax Rates and Qualified New York Manufacturers

by McDermott Will & Emery | Apr 2, 2015 | Incentives, Income Tax, New York

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 third in a series analyzing the New York Budget Bill, and discusses changes to the tax rates and to the qualified New York manufacturer provisions.

Qualified New York Manufacturers

Effective for tax years beginning on or after January 1, 2014, qualified New York manufacturers are subject to a 0 percent business income tax rate and to beneficial rates for purposes of the tax on business capital and the fixed dollar minimum tax.

Under the original corporate tax reform provisions enacted in 2014, a “qualified New York manufacturer” is a manufacturer (either a single taxpayer or a combined group) that meets two qualifications. First, it has property in New York that is described in section 210-B.1 of the Tax Law (i.e., property that is eligible for the investment tax credit), and either (1) the adjusted basis of such property for federal income tax purposes at the close of the taxable year is at least $1 million, or (2) all of its real and personal property is located in New York. Second, it is principally engaged in qualifying activities (e.g., manufacturing, processing or assembling) (the “principally engaged” test).

A taxpayer—or, in the case of a combined report, a combined group—that does not satisfy the principally engaged test may still be a qualified New York manufacturer if the taxpayer or the combined group employs during the taxable year at least 2,500 employees in manufacturing in New York, and has property in the state used in manufacturing, the adjusted basis of which for federal income tax purposes at the close of the taxable year is at least $100 million.

The technical corrections in the 2015 Budget Bill restrict the types of property eligible for consideration in the principally engaged test to property mentioned in Tax Law section 210-B.1(b)(i)(A) (property that is principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing), rather than property described in the entirety of section 210-B.1. This correction mirrors the definition of eligible property before the 2014 law changes.

The technical corrections also contain an important clarification with respect to the application of the qualified New [...]

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Inside the New York Budget Bill: Tax Base and Income Classifications

by McDermott Will & Emery | Apr 2, 2015 | Allocation/Apportionment, Income Tax, New York, Tax Base

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 second in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s tax base and income classifications.

Although the modifications are described as “corrections” to last year’s corporate tax reform provisions, the Budget Bill makes a number of substantive changes with respect to the income classification rules.

Investment Capital

Last year’s corporate tax reform narrowed the definition of investment capital to mean investments in stocks held by a taxpayer for more than six consecutive months but not held for sale to customers in the regular course of business, and excluding stock that is a “qualified financial instrument” for which the taxpayer has elected to use the 8 percent apportionment sourcing rule, stock in a unitary business, stock in a business that is included in a combined report with the taxpayer, and stock issued by the taxpayer.

This year’s Budget Bill further narrows the definition of investment capital by extending the holding period from six months to one year, by tying the definition of investment capital to certain Internal Revenue Code provisions, and by requiring taxpayers to separately identify stock held as investment capital in their books and records. Investment capital now means investments in stocks that meet the following criteria:

Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code at all times the taxpayer owned the stock during the taxable year;
Are held for investment for more than one year;
The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the Internal Revenue Code;
For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under section 1236(a)(1) of the Internal Revenue Code for the stock of a dealer in securities to be eligible for capital gain treatment (for [...]

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Inside the New York Budget Bill: Economic Nexus

by McDermott Will & Emery | Apr 2, 2015 | Income Tax, New York, 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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