On January 21, 2014, New York State Governor Andrew Cuomo released the 2014- 2015 Executive Budget. It contains an ambitious and potentially far‑reaching set of tax proposals, many of which are consistent with recommendations recently made by the Governor’s New York State Tax Reform & Fairness Commission and the New York State Tax Relief Commission. The deadline for enactment of the budget is April 1, 2014.

Corporate Tax Reform. The most sweeping set of proposals involves the repeal of the nearly 30‑year‑old New York State bank tax (and certain license taxes), subjecting banks to Article 9‑A, and making far-reaching changes to Article 9‑A itself. If enacted, the changes would be effective for tax years beginning after 2014. The proposals include a rate reduction from 7.1% to 6.5%, which would not go into effect until 2016. These proposed changes are the culmination of a Department-led initiative that began more than four years ago. Among the many changes being proposed are the following:

  • Unitary Filing. The proposals adopt full “Water’s Edge” unitary combined filing, while permitting corporate taxpayers to make a binding seven‑year election to include in their combined returns all non-unitary members where a 50% ownership test is satisfied. This change would eliminate the distortion requirement for combination, as well as the concept of substantial intercorporate transactions as a basis for finding distortion. It would also, for the first time, provide for the combination of alien corporations that have Federal effectively connected income.
  • Economic Nexus. The proposals adopt an “economic nexus” standard for taxation, based on corporations “deriving receipts from activity in” New York, with designated annual thresholds for receipts that would trigger nexus.
  • Repeal of Subsidiary Capital Treatment. The proposals eliminate the 100% exclusion of income, gains and losses from subsidiary capital, which has been in place since the inception of Article 9-A in its present form in 1944. However, dividends from unitary corporations not included in a combined Article 9-A return would be exempt from tax.
  • Change in Taxation of Investment Income. The proposals provide a scaled-back category of “investment income” – redefined to include only stock in non-unitary corporations held for more than six months or stock that is not a “qualified financial instrument” – which would be exempt from tax. The “investment allocation percentage” for apportioning investment income would be eliminated.
  • Market State Sourcing Rules. A new detailed regime would be implemented for apportioning business income, using a single sales factor based on market state/customer sourcing rules, with prescribed hierarchies for determining market/ customer location. This regime would include, for the first time, rules for sourcing receipts from digital products.
  • Limits on the Investment Tax Credit. The proposals scale back the investment tax credit for manufacturing, and completely repeal it for the financial services industry.
  • Expansion of Special Treatment for Manufacturers. The proposals carve out special treatment for qualified New York manufacturers that conduct no business in the downstate Metropolitan Transportation District region that would completely eliminate the tax on income (currently, qualified manufacturing corporations in the State are taxed at a reduced rate on income). The proposals would also allow a 20% real property tax credit to qualified manufacturers in the State.

​Of anecdotal interest − and reflecting the reality of socalled “temporary” taxes − the proposals also remove the word “Temporary” from the 17% “Temporary Metropolitan Transportation Business Tax” surcharge which was enacted in 1982.

Other Budget Bill Items. The proposals contain various other changes. One proposal would comprehensively reform the estate tax by, among other things, increasing the exclusion threshold from $1 million through a four‑year phase‑in to the Federal exemption amount (currently $5.25 million), as well as phasing in a reduction of the top estate tax rate from 16% to 10%. Another long-overdue proposal would repeal the stock transfer tax, which has been completely refundable since 1981 and has served no discernible purpose since 2008, when the New York City Municipal Assistance Corporation bonds it secured were retired.

Although the proposals adopt several of the Governor’s Tax Reform and Tax Relief Commissions’ suggestions, many recommendations did not make it into the bill, including the creation of 14-day “safe harbor” before a nonresident individual working in the State becomes subject to New York State personal income tax.