New York recently enacted major corporate franchise tax reform legislation generally taking effect on January 1, 2015, with some exceptions. Highlights of this legislation are summarized below:
Tax Rate Reduction
The corporate franchise tax rate is reduced to 6.5 percent from its current 7.1 percent for tax years starting after 2015. Effective January 1, 2015, qualified New York manufacturers are subject to a 0% tax rate.
Adoption of Economic Nexus
Taxable nexus is no longer limited to corporations with a physical presence, such as an office or employees, in New York. A corporation has taxable nexus requiring it to file a New York tax return if it has New York receipts of $1 million or more in a taxable year. Corporate taxpayers that are members of a combined group of corporations are required to combine their receipts for purposes of determining whether the group exceeds the $1 million threshold.
Unitary (Combined) Reporting
Previous New York law required demonstration of substantial intercompany transactions or other proof of distortion (if a combined return was not filed) in order for unitary corporations to be permitted/required to file on a combined basis. Under the new legislation, corporations are required to file on a combined basis if they simply share common (>50%) ownership and a unitary business relationship.
New York since 2007 has adopted a single factor gross receipts apportionment formula to attribute income of multistate corporations to New York. Previous New York law sourced receipts from the performance of services to New York if the income producing activity generating the receipts occurred in New York. Under the new legislation, receipts from sales of services are sourced to New York if the benefit of the services is received by the purchaser in New York.
When selecting the type of entity within which to do business in New York, it should be noted that that the “reforms” described above are limited to corporations. Partnerships continue to use the UDITPA based payroll, property and sales three-factor apportionment formula and source service receipts based on location of income producing activity.