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 corporation is not a taxpayer (i.e., it does not have nexus with New York), then another member of the combined group that is a taxpayer may be appointed as the designated agent. The Department’s new guidance provides, consistent with the Department’s current regulations, that when a member of a combined group has a tax year that differs from that of its designated agent, that member’s tax year ending within the designated agent’s tax year is included in the combined report. Additionally, the new guidance states that any corporation with a fiscal tax year that begins in 2014 and ends in 2015 cannot be included in a designated agent’s 2015 calendar year combined report, suggesting that the fiscal year taxpayer would need to file a separate report (or, if there are multiple fiscal year filers, a separate combined group) for that transition year. While not addressed by the guidance, it would seem to follow that a corporation with a fiscal year that spans both 2014 and 2015 also cannot be included in a designated agent’s 2015 fiscal year combined report if the designated agent’s fiscal year begins after January 1, 2015. This could have an unexpected impact on affected groups’ 2015 tax liability.
Short Tax Years and Corporate Dissolutions
The guidance outlines special filing and extension requirements for taxpayers that dissolve or file short period returns for a tax period that begins after January 1, 2015. Notably, if a corporation dissolves before the close of a taxable year that, for federal income tax purposes, begins on or after January 1, 2015, and before December 31, 2015, and before the new 2015 tax forms are available, the corporation must make an estimated final tax payment, applying the Tax Law effective January 1, 2015, accompanied by an affidavit of an officer of the corporation that describes, in detail, the calculation of the final tax due and includes a statement affirming the corporation’s duty to file a final return no later than 30 days after the 2015 form has been made available on the Department’s website.
Filing Dates and Estimated Tax Payment Obligations
The Department’s guidance reminds taxpayers that the Tax Law provisions on filing dates, extension requests and estimated tax payments were not changed as a result of corporate reform. However, the guidance does address one important area of concern for taxpayers – estimated tax payments. Given that there are still many areas of uncertainty as a result of corporate tax reform and that the Department has promised guidance in many of those areas, taxpayers have had concerns about making estimated tax payments that would need to reflect new tax provisions that are far from certain. The Department’s guidance clearly provides that the mandatory first installment of estimated tax payments for a tax year beginning on or after January 1, 2015, is to be paid with the applicable 2014 tax return at the time it is filed or with the applicable extension form. The mandatory first installment must be based on the tax (or properly estimated tax) shown on the taxpayer’s 2014 filing and does not need to take into account law changes effective for tax years beginning on or after January 1, 2015. However, a taxpayer’s second, third and fourth installments must take the law changes into account and must be filed by the dates currently set forth in the regulations.
Qualified New York Manufacturers
The Department’s guidance on qualified New York manufacturers summarizes the benefits available to qualified New York manufacturers, namely:
- A zero percent tax rate for purposes of computing tax on the entire net income base (for 2014) or the business income base (for 2015 and later);
- A reduced tax rate for purposes of computing the tax on the minimum taxable income base for 2014 (this base is eliminated for tax years beginning on or after January 1, 2015);
- New reduced tax rates for purposes of computing tax on the capital base (with the capital base tax to be fully phased out for all taxpayers by 2021) and retention of the $350,000 cap on the capital base tax (while the cap was increased to $5 million for other taxpayers);
- Lower fixed dollar minimum tax rates; and
- A refundable real property tax credit equal to 20 percent of the eligible real property taxes paid during the taxable year (generally taxes paid on property owned (and in some cases leased) by the taxpayer and principally used in manufacturing).
The guidance also reiterates that a corporation or a combined group is a “qualified New York manufacturer” if (1) more than 50 percent of the taxpayer’s or combined group’s gross receipts are from the sale of goods produced by manufacturing activities (e.g., manufacturing, processing, assembling) and (2) it has property meeting the Investment Tax Credit (ITC) requirements located in New York State with an adjusted basis of at least $1 million. A taxpayer or combined group that fails to meet the receipts test may still be a qualified New York manufacturer if it has at least 2,500 New York manufacturing employees and at least $100 million of manufacturing property in New York.
In addition to reciting the benefits available to and qualifications for qualified New York manufacturers, the guidance contains some new advice for taxpayers.
First, the guidance surprisingly states that activities of a contract manufacturer cannot be considered by a taxpayer in determining its eligibility as a “manufacturer.” Notably, the Department has previously ruled, in the context of the investment tax credit, that the activities of a subcontractor can be attributed to a taxpayer for purposes of determining if a taxpayer principally uses eligible property in the production of goods by manufacturing where the taxpayer exercises control and supervision over the manufacturing activities and retains title and the benefits and burdens of ownership for the property used in the manufacturing process.
Second, consistent with the existing authorities, the Department states that a corporation that is a partner in a partnership or member of an LLC must include its distributive share of the partnership or LLC’s receipts and qualified manufacturing property with its own receipts and qualified manufacturing property to determine if it meets the requirements of a qualified manufacturer.
Lastly, the guidance specifically provides that the Department will not issue any advisory opinions on the issue of whether a specific taxpayer or combined group satisfies the requirements to be a qualified New York manufacturer. While, as a general matter, state revenue authorities do not issue rulings or other definitive advice to taxpayers on factual determinations, the Department’s stance seems somewhat flawed because there are still questions of law that are not answered by this guidance, including the relevant definition of “employee” for purposes of meeting the alternate test.