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State & Local Taxation

New York State Implements Sweeping Tax Reform

Wayne Berkowitz, CPA, J.D., LL.M. 04.09.2014 | Client Alert

For the fourth consecutive year, New York State has enacted an on-time budget and, this time; it features a major overhaul of its tax system.  This overhaul is also unusual in that many elements have delayed implementation — running into 2015 and 2016 as noted.  We have highlighted some of the most significant changes impacting businesses that we believe are important to our clients and friends. An analysis of the changes impacting trusts and estates will follow.

Special Incentives for NY Manufacturers

The bill provides meaningful incentive tax breaks for “qualified New York” manufacturers (1) including “qualified emerging technology companies”.  Notably, the bill extends beyond earlier proposals that would have applied only to “upstate” manufacturers.  The following apply for tax years commencing on January 1, 2014 to qualified manufacturers state-wide. 

  • Refundable real property tax credit: A refundable credit against both the corporate franchise tax and the personal income tax of 20% of real property taxes paid.
  • Zero rate of corporate level tax:  Under the franchise tax.

Corporate Tax Overhaul

Important: The following apply for tax years beginning on or after January 1, 2016.

Rate Reduction

The tax rate on a corporation’s business income tax base will be reduced from the current 7.1% to 6.5%.

Phaseout of Capital Base Tax

The current 0.15% capital base tax will be gradually eliminated, reaching complete elimination for tax years beginning on or after January 1, 2021.

Important: The following apply for tax years beginning on or after January 1, 2015.

Economic Nexus Triggers Tax

Following the lead of many other states, you no longer have to set foot in New York to be subject to the taxing authorities.  Now, if a corporation is “deriving receipts” from New York, it will be subject to tax.  A threshold amount of at least $1 million in sales of products or services — including interest income — to New York customers will subject one to the tax.  Detailed rules for determining the sourcing of income have been implemented as part of the legislation.

New York has historically required some type of physical presence to submit to its taxing jurisdiction.  Whether or not economic nexus is a permissible basis to be subject to a state’s taxing authority is still unsettled and is likely to be the subject of litigation in the very near future.

Market Based Apportionment Rules Refined

For purposes of allocating business income in and out of the state, the current single sales-factor apportionment scheme is retained, but with a major refinement.  Receipts will now generally be sourced to the location of a taxpayer’s customers.  While this has always been the general rule for sales of tangible personal property, the new rules have a huge impact on the sales of digital goods, the provision of services, interest income and other intangibles.  The statute establishes a detailed hierarchy for determining where the customer is located. 

Combined Reporting Required

The “intercorporate transaction” requirement has been eliminated and New York will now require combination based on the existence of a unitary business.  In practical terms this means that corporations with common ownership of 50% or more and possessing degrees of vertical or horizontal integration will be required to file as one taxpayer.

Net Operating Losses Scrapped

The existing net operating losses (NOL) scheme, which generally follows federal principles, is going to be abandoned.  Detailed transitional rules are provided regarding the use of preexisting NOLs.  Newly generated NOLs will be carried forward on a “post-apportionment” basis, which links the NOL available to the corporation’s business activity in the State for the period in question.  The carryforward period will be 20 years and carrybacks will be three years.

Bank Franchise Tax Eliminated

The separate bank franchise tax (Article 32) will be eliminated. Banks will now be subject to the corporate tax regime under Article 9-A.

“Temporary” MTA Surcharge Becomes Permanent

The MTA surcharge rate, currently 17%, will increase to 25.6%.  However, beginning in 2016, the Commissioner has the authority to adjust the rate annually based upon certain state budget factors.  The tax will now be computed before the application of credits, instead of after their application, as is currently the law.

Questions? Contact your Berdon advisor or Kayte Steinert-Threlkeld at 212.699.6708| ksteinert@berdonllp.com.

(1) The term “manufacturer” is defined to include entities that produce goods by manufacturing, processing, assembling, refining, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing—as long as the entity has a minimum amount of property (by reference to tax basis) in New York State and derives more than 50% of gross receipts from the sale of goods attributable to the relevant activity.  A qualified New York manufacturer is a manufacturer that has certain manufacturing property in New York with a federal adjusted basis at the end of the year of at least one million dollars or has all of its real and tangible personal property located within New York.

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