On February 6, 2008, the Business Council of New York State held a meeting with the newly confirmed Commissioner of the New York State Department of Taxation and Finance, Robert Megna. Sutherland attorneys Diann L. Smith and Marc A. Simonetti attended this meeting, along with many representatives from industry, trade associations and consulting firms. At the meeting, the Commissioner and some of his senior staff fielded questions from Business Council members regarding the Governor’s proposed Budget Bill S6810/A9810. The Business Council will be testifying on the Budget Bill before the New York legislature on February 11, 2008.
No-Cap Capital Base?
One of the major issues of concern among the group was the proposal to eliminate the cap on the Article 9-A capital base of the franchise tax (the cap will remain for manufacturing companies). Currently, the cap is $1 million. While the cap is to be eliminated, the tax rate on the capital base will also be lowered from 0.178% to 0.15%. The Commissioner explained that this proposal was a “fairness issue” and would provide rate relief to smaller corporations while increasing the tax on corporations that previously benefited from an artificial cap. Financial service companies are particularly concerned with the removal of the cap, because these companies are experiencing a drastic downturn in profits and could be significantly hurt by the removal of the cap. Another industry that will be injured is the real estate industry (which was apparently the source behind the cap in the beginning). This change is forecasted to increase revenue by $100 million, but the Business Council considers this estimate to be quite low.
New York Nexus Standard Shift?
A second issue of concern for taxpayers is the Governor’s proposal to drastically change the nexus threshold standard both for the Article 32 bank tax and for sales/use tax purposes.
Economic Nexus Under Article 32 for Credit Card Companies
The Governor’s Budget proposes to impose an economic presence nexus standard on credit card companies and subject such companies to the Article 32 bank tax. The Commissioner noted that states are reconsidering what constitutes “nexus.” He commented that the proposal is appropriate because credit card companies are marketing in the state and deriving significant revenue from customers in New York. A banking corporation will be deemed to be doing business in New York if it: (1) has issued credit cards to 1,000 or more customers with mailing addresses in New York; (2) has 1,000 or more merchant customers located in New York State; (3) has receipts of $1 million or more from customers who have mailing addresses in the State; (4) has receipts of $1 million or more from merchant customers located in the state; or (5) has either 1,000 or more customers who are cardholders or merchants in New York, or receipts of $1 million or more from customers who are cardholders or merchants in New York arising from credit card transactions. The New York financial institutions represented at the meeting noted that the language in the budget yielded a perverse result – namely, that out-of-state credit card issuers would actually become more competitive than New York banks. If the Budget Bill is enacted, it is effective for taxable years beginning on or after January 1, 2008. This proposal is estimated to generate an additional $95 million in FY 2008.
Attributional Nexus for Sales and Use Tax
The Governor’s Budget also includes an attributional nexus provision for sales and use tax purposes. The Commissioner commented that the Department has seen a national trend toward extending a state's ability to tax out-of state sellers based on activities performed for these sellers by other businesses operating in the state.
The legislative proposal creates a rebuttable presumption that a seller is soliciting sales through an independent contractor or other representative when the seller has an agreement with a “resident” to directly or indirectly refer customers, for a commission or other consideration, to the seller and the agreement generates sales of over $10,000 in the prior four quarterly reporting periods. The provision specifies that the term “refer” includes “[through] a link on an internet website or otherwise.” It is clear from the language of the provision that the legislation is drafted to capture a very broad range of companies that sell remotely in New York. A taxpayer can rebut the presumption by demonstrating that the resident did not engage in any solicitation in New York on behalf of the seller “that would satisfy the nexus requirement of the United States Constitution” during the previous four quarterly periods.
The new provision would have an effective date of June 1, 2008.
Nonconformity in a Nutshell
Another Budget item raising concerns from business members is the proposed decoupling from IRC § 199 Qualified Production Activity Income Deduction. The Commissioner noted that decoupling made sense because much of the tax benefit was received by taxpayers for activity that had no connection to New York at all. When asked whether the provision could be targeted to New York activity, the Commissioner’s staff noted that based on prior New York cases, any provision targeted solely to New York activity would likely be unconstitutional. This proposal is forecasted to yield $56 million in extra revenue in FY 2009 and 2010.
One odd thing in the Governor’s Budget that the Commissioner commented on was the provision for $230 million additional revenue in FY 2009 from “improved audit and compliance efforts.” No one, including the Commissioner, seemed to know exactly how this money would be generated.
Many other provisions in the Governor’s Budget were not specifically addressed at the meeting. The Governor’s Budget would generate additional state revenue of $1.4 billion (over the anticipated additional revenue, absent these proposals, of $2.6 billion).
Sutherland Observations: The Commissioner and his senior staff present at the meeting appear to be very approachable and eager to work with taxpayers and their representatives – a continuation of the philosophy and approach of several recent Department administrations.
There are, however, some clear changes in the focus of the Governor’s Budget Bill that pose concerns to the business community. The adoption of an economic nexus standard for credit card companies is a major shift in policy. Historically, New York has imposed a physical presence nexus standard and has never given any indication that the state took any other position. When asked at the meeting whether anything should be read into this proposal regarding New York’s potential shift in nexus policy, the Commissioner assured the group that the credit card nexus provision was a stand-alone item and that last year’s combined reporting revisions addressed any potential nexus issues for general corporations.