New York State released a draft report on February 26, 2010 of major corporate tax reform that would overhaul the State’s current corporate tax structure. The intent of this bill is to be revenue neutral. Following are some of the “highlights” of the 300+ page bill.

Several of the changes relate to expanding the scope of the Article 9A Corporate Franchise Tax – which is the “general” corporate tax. First, Article 32, which imposes the state franchise tax on banks, would be eliminated and banking institutions would then be taxed under Article 9A. In addition, New York State would become a “full” mandatory unitary combined reporting state. New York historically has been a separate company state with combination applied by the state or taxpayer who could prove a unitary relationship and “distortion.” In recent years, the state expanded the instances in which combination applies by requiring it if a taxpayer had substantial intercorporate transactions (regardless of distortion). The proposal to adopt “full unitary combined reporting” (as imposed by California and other states) would complete New York’s shift away from separate company reporting. Further, the state would adopt economic nexus and assert taxing jurisdiction over corporations not physically present in New York. In addition, the New York combined group would be expanded to include alien (non-U.S.) corporations that have federal taxable income, eliminating the exist-ing prohibition against including alien companies in a New York combined return.

Some of the other notable changes affect the calculation of the Article 9A Corporate Franchise Tax by eliminating the exemption and by requiring subsidiaries to be included in the combined group. The apportionment of the tax base would be based upon a single sales factor, rather than on the existing threefactor formulas. The sourcing of sales for sales factor purposes would be determined using a market- based sourcing methodology. At the same time, a potential benefit to taxpayers is that the state net operating loss carry-forward would no longer be limited to the taxpayer’s actual federal NOL deduction. While many of the tax changes discussed above would likely produce a tax increase, the proposal would attempt to heal some of those wounds by reducing the tax rate from the existing 7.1% to 6.5%.

Finally, it is important to note that there are no proposed changes to the alternative tax provided for under Article 9A that is imposed on a taxpayer’s capital base. This tax imposes a 0.15% tax on the unitary group’s capital base subject to a $10 million maximum.

The proposal specifies an effective date of January 1, 2011 for the entire bill, including the changes described above.