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 than 50 percent common ownership measured by voting power of capital stock), rather than a combined reporting group, thus eliminating the application of these rules to corporations or credit card corporations that are members of a combined reporting group solely as a result of a commonly owned group election. In determining whether the unitary aggregation test must be applied with respect to a corporation, the test will be applied if a corporation has at least $10,000 of New York receipts and is part of a unitary group that meets the more-than-50-percent common ownership threshold of Tax Law section 210-C.
However, once it is determined that the aggregation test must be performed, it is unclear if the unitary group is broadened for purposes of applying the test. One interpretation of the new law is that the corporation’s receipts are aggregated only with corporations that are unitary with the potential taxpayer and that meet the more-than-50-percent common ownership threshold of Tax Law section 210-C. Another interpretation is that the corporation’s receipts are aggregated with all corporations that are unitary with the potential taxpayer, not just those that are part of the unitary group and meet the more-than-50-percent ownership threshold. While the first interpretation likely is the intended and more logical result, this provision may require taxpayers to look outside the group of corporations that would be required to be included in a combined report under Tax Law section 210-C to those corporations that are unitary but don’t meet the more-than-50-percent ownership threshold. Similar changes were made to the aggregation rules applicable to credit card corporations.
In revising the aggregation rules, the Budget Bill also added a provision eliminating corporations that are excluded by statute from the filing of a combined article 9-A return from being included in either of the aggregation tests. Therefore, corporations taxable (or that would be taxable if subject to tax) under Article 9 (certain utilities) or Article 33 (insurance corporations), REITs or RICs that are not captive REITs or captive RICs, New York S corporations, and alien corporations that are not treated as domestic corporations under the Internal Revenue Code and that have no effectively connected income for the taxable year will not be considered for purposes of determining whether the aggregation test applies or when applying the aggregation test.
Additional clarifications or technical corrections made to the economic nexus provisions include the following:
- Similar changes to the aggregation tests applicable to the metropolitan commuter transportation district surcharge; and
- A correction to the exclusion from nexus language for certain alien (non-U.S.) corporations related to Internal Revenue Code section 864(b) that makes it clear that the exclusion for section 864(b) activities will also apply to the economic nexus standard.