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.
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 for the favorable rates adopted for certain taxpayers, such as qualified New York manufacturers), New York City will impose a higher tax rate (9 percent) on the business income base for certain large financial corporations than will be imposed on other corporations (8.85 percent). In addition, New York City will not impose a 0 percent tax rate on qualified New York manufacturers; instead, there will be a potential reduction in the tax rate, with the amount of such deduction dependent upon the amount of the manufacturer’s income, with the reduced rate reaching as low as 4.425 percent. Additionally, the New York City definition of “qualified New York manufacturer” is slightly different from the State’s definition.
- New York City will continue its phase-in of a single sales factor business allocation percentage, but the Budget Bill also provides for an election for certain taxpayers to have a modified three-factor formula apportionment even after the phase-in of a single sales factor is complete.
- New York City has traditionally taxed S corporations in a manner similar to the taxation of C corporations. The taxation of partnerships and S corporations will not change as a result of the Budget Bill (S corporations will continue to be subject to the former General Corporation Tax, and unincorporated entities will continue to be subject to the Unincorporated Business Tax, which has not been amended by the Budget Bill), so in addition to many other differences, those entities will remain subject to the costs of performance sourcing rules instead of the new customer-based sourcing rules. New York City has organized a working group to study and determine the proper treatment of such entities.