On January 21, 2014, New York State Governor Andrew M. Cuomo (D-N.Y.) released his 2014-2015 Executive Budget (Budget). Among other reforms, the Budget proposes sweeping changes to the Article 32 bank franchise tax and the Article 9-A general corporation franchise tax. In particular, the governor’s proposals would repeal the bank franchise tax in its entirety and merge it into a significantly modified Article 9-A general corporation franchise tax. Key components of the reform package include unitary filing, economic nexus, repeal of subsidiary capital treatment, changes to the definition and taxation of business and investment income, market-based sourcing, and preferential treatment for certain manufacturers. It is important to note that the vast majority of the proposed reforms would only impact filing obligations in New York State, and not in New York City. Accordingly, if conforming changes are not made to the New York City Administrative Code, taxpayers may be faced with navigating the waters of two distinctly different tax regimes.

The proposed reforms are the result of discussions that the New York State Department of Taxation and Finance has had with practitioners, industry groups and other interested parties over the past several years, and are largely consistent with the reform recommendations recently made by the governor’s New York State Tax Reform and Fairness Commission. If enacted by the legislature, the proposed reforms would be effective for tax years beginning on or after January 1, 2015. The corporate tax reforms proposed by the governor’s Budget are outlined below.

Corporate Tax Reform

Unification of Articles 9-A and 32

The bank franchise tax under Article 32 would be repealed in its entirety. Taxpayers historically taxed under Article 32 would be taxed under the Article 9 A general business corporation franchise tax.

Economic Nexus

In addition to the existing nexus standards in New York (e.g., doing business, employing capital, etc.), corporations would be subject to the state’s taxing jurisdiction based on economic presence in New York. Generally, “economic nexus” would be established if a corporation “deriv[es] receipts from activity in the state” totaling $1 million or more.1Nexus would also continue to be established for credit card corporations that issue a minimum number of credit, bank, travel or entertainment cards to customers with billing addresses in New York, or that have a minimum number of merchant customer contracts in the state.2 In addition, non-U.S. corporations that meet the economic nexus standard but do not have effectively connected income (“ECI”), computed pursuant to Internal Revenue Code § 882, would not be subject to tax and would be excluded from the combined group (see below for discussion of certain alien corporations that would be required to file as part of the combined group).3

Unitary Combined Reporting

Taxpayers engaged in a unitary business with other corporations, and owning directly or indirectly more than 50 percent of their stock, would be required to file combined reports.4 The concept of distortion as a basis for requiring combination (and thus the substantial intercorporate transactions test) would be eliminated.

Combined reporting would also be required for captive REITs and RICs (not combinable under Article 33),5“combinable” captive insurance companies,6 and certain alien corporations.7 Alien corporations that must be combined include those deemed to be “domestic corporations”8 or that have ECI for the tax year under the Internal Revenue Code.9 Corporations subject to tax under differing articles would continue to be prohibited from filing in the same combined group.10

Election as a Commonly Owned Group – An election to file as a commonly owned group would be permitted. Taxpayers making the election would be required to include all non-unitary corporations taxable under Article 9-A where a 50 percent ownership test is met.11 The election would be irrevocable and effective for the year made and six subsequent years; would renew automatically until affirmatively revoked; and could not be elected again for three years after the year of revocation.12 Under the proposed legislation, “any corporation entering the group subsequent to the year of the election shall be included in the combined group and is considered to have waived any objection to its inclusion.”13

Computation and Accountability of Tax – In general, the combined group would be treated as a single corporation.14Credits and NOLs of individual group members could be applied against the entire group.15 Each member of the combined group would be liable for the entire combined group’s tax exposure.16

Intercorporate Eliminations – As before, intercorporate dividends would be eliminated. Federal law would continue to control for all other intercorporate transactions.17

Modified Tax Bases

Rather than being subject to tax on one of four bases, corporations with nexus in New York would be required to calculate tax on three different bases, and pay the highest of the alternative amounts. The three alternative amounts would be: (1) net income base tax; (2) capital base tax; and (3) fixed-dollar minimum tax (attributed to each member of the combined group). The capital and fixed-dollar minimum bases would include a credit for taxes paid to other states on identical bases.18 Under the proposal, the Article 9-A alternative minimum tax base, the Article 32 alternative entire net income base, the Article 32 taxable asset base, and the Article 32 fixed-dollar minimum tax would be eliminated. In addition, the separate tax on subsidiary capital would be repealed.

Tax Rates and Caps

For most corporations, the tax rate for the net income base would be reduced to 6.5 percent for tax years beginning on or after January 1, 2016.19 The tax on the capital base would be capped at $350,000 for qualified New York manufacturers and $5 million for all other taxpayers.20 The fixed-dollar minimum tax on C-corporations would be capped at $200,000.21

Preferential Treatment for New York Manufacturers – Reduced rates and lower caps would continue to apply to qualified New York manufacturers. In addition, and more notably, the net income of qualified New York manufacturers operating outside of the New York City metropolitan area would be exempt from tax for tax years beginning on or after January 1, 2015.22

Modifications to Net Income Base

The net income base tax would be imposed on allocated business income.23 The starting point for the net income base tax would be federal taxable income, or for non-U.S. corporations, ECI.24 Non-U.S. corporations would also be required to add back treaty benefits to federal taxable income.25 The majority of income modifications currently found in the Tax Law would remain unchanged. However, a number of the modifications that are obsolete would be repealed. In addition, because of the proposed modifications below, modifications attributable to subsidiary capital and the 50 percent exclusion for dividends from non-subsidiaries would be eliminated.

Subsidiary Capital, Business Income, Investment Income, and Other Exempt Income

The proposal would eliminate the exclusion of income, gains and losses attributable to subsidiary capital. “Subsidiary capital,” as traditionally understood, would be reclassified as business income, investment income, or other exempt income. Investment income and other exempt income would not be subject to tax. Consequently, the “investment allocation percentage” for apportioning investment income would be eliminated.

Business Income – Business income would equal entire net income minus (i) net investment income and (ii) net other exempt income.26 Discrete components of business income are not defined, but business income would include: interest income and gains and losses from debt instruments or other obligations (unless the income could not be included in apportionable business income under the U.S. Constitution); gains and losses from stock of a unitary corporation; dividends and gains and losses from stock held in a non-unitary corporation for six months or less; and cash.

Investment Income – Investment income would be defined as income from investment capital, to the extent included in computing entire net income, minus – in the discretion of the commissioner – any interest deductions that are directly or indirectly attributable to investment capital or income.27 Investment income would be narrowly defined to include income from the stock of non-unitary corporations held by the taxpayer for more than six consecutive months, and not held for sale to customers in the regular course of business.28 For the purposes of the definition of investment capital and investment income, corporations not meeting a 20 percent ownership test would be presumed to be non-unitary. Additionally, a presumption that the stock is held for more than six consecutive months would be established if it was acquired during the second half of the tax year and owned on the last day of the taxable year.29 However, if the stock was treated as investment income in the taxable year in which it was purchased, but was not actually held for more than six months, the income generated from the stock in the year purchased would be required to be included in the subsequent tax year as business income.30 Investment income would also include income from a debt obligation or other security that cannot be included in apportionable business income as a result of U.S. constitutional limitations.31

Other Exempt Income – Other Exempt Income would include both exempt subpart F income and exempt unitary dividends.32 Exempt subpart F income means income, as defined under § 952 of the Internal Revenue Code, that is received from a controlled foreign corporation that is conducting a unitary business with the taxpayer but is not included in the combined report, minus – in the discretion of the commissioner – any interest deductions directly or indirectly attributable to such income.33 Exempt unitary dividends would include dividends from a unitary corporation not included in the combined report because it is: (i) taxable under another tax article; (ii) an alien corporation with no ECI; or (iii) less than 50 percent directly or indirectly owned, less – in the discretion of the commissioner – any interest deductions directly or indirectly attributable to those dividends.34

Interest Deduction – As previously stated, investment and other exempt income are computed net of interest expenses attributable to such income. If interest expenses exceed the income, deductions for the excess would be disallowed. Therefore, if the interest expenses allowed for federal income tax purposes and attributable to investment income exceeds investment income, the excess of the interest deductions over the income must be added back to entire net income.35 The methodology used to attribute interest expenses to particular classes of income would be based upon current rules. In addition, the allocation of interest expense for a combined group would be done on a combined basis.36

Rather than determining the exact amount of interest expenses directly or indirectly attributable to corresponding income, a taxpayer may elect to reduce total investment and other exempt income by 40 percent.37 If a taxpayer chooses to make this election, it must do so for both investment income and other exempt income.38 If a taxpayer chooses to make the 40 percent election, it would apply to all members of the combined group.39

Miscellaneous Changes – The proposed legislation also makes the following changes:

  • The “tax treaty” exception to the royalty addback provision would be eliminated, as applicable to both New York State and New York City.40
  • The Commissioner would have the discretionary authority to make a “deemed distribution” of non-premium income from overcapitalized insurance corporations to the affiliated corporation taxed under the general franchise tax in order to prevent overcapitalization of non-life insurance corporations.41

Deductions and Credits

Net Operating Loss Deductions (NOLDs) for Tax Years Beginning on or After January 1, 2015. The proposed legislation decouples NOLDs from federal limitations (e.g., they would not be limited by the federal NOLD source or year amount).42 However, taxpayers would not be permitted to reduce tax liability below the greater of the tax on the capital base or the fixed-dollar minimum.43 In addition, NOLDs can be carried forward only from years in which the taxpayer was subject to franchise tax.44 The net operating losses themselves would be subject to a 20-year carryforward, but would not be permitted to be carried back.45 Corporations that file their federal return as part of a consolidated group, but file their New York franchise tax return on a separate basis, must compute New York NOLDs as if they filed their federal return on a separate basis.46

Prior Net Operating Losses (NOLs) Converted to Credits – The bill proposes to convert any unabsorbed NOL carryforwards in existence during the taxable year beginning on or after January 1, 2013, and before January 1, 2014, into a credit to be applied in years beginning on or after January 1, 2015.47 For most taxpayers, the credit amount would be based upon the taxpayer’s unabsorbed NOLs, business allocation percentage, and tax rate, all determined under the law still in effect through 2014.48 The credit could only be used in a year when the tax is measured by business income.49 In general, taxpayers would be allowed to take up to 10 percent of the credit per year, limited to the higher of the tax on the capital base or the fixed-dollar minimum.50 However, qualifying small businesses may take up to 100 percent of the credit in any year (rather than up to 10 percent).51 The credit would be subject to a 20-year carryover and any unused credit would expire after the tax year beginning on or before January 1, 2035.52

Investment Tax Credit – The proposed legislation restricts the investment tax credit (ITC) to qualified manufacturers, agribusinesses, and mining businesses.53 Under the proposal, ITCs can be earned only on investments in property used in the production of goods for sale, rather than the mere production of goods.54 The proposal would also eliminate ITC eligibility for investments by banks,55 and insurance companies,56 and would eliminate as well ITC eligibility for investments in film production facilities,57 and industrial waste treatment and pollution control facilities.58

Credit Survivability – The proposed legislation will have no effect on most credits generated in years before it takes effect.59 However, under the proposal, the alternative minimum tax credit would be repealed.60 Also, the proposed legislation would bar taxpayers from first claiming credits on amended returns.61


Business income would be apportioned using a single-receipts factor based on the customer’s location.62 Income from digital products (see below), services, and other business receipts would be sourced based on a variety of methods. Receipts from the following revenue streams would be sourced based on current sourcing provisions: interest, fees, penalties, service charges, merchant discounts, and fees from credit cards;63 broker/dealer activities; services provided to a Regulated Investment Company (RIC);64 sales of tangible personal property, rentals of real and tangible personal property; royalties from the use of patents, copyrights, and other intangibles; railroad and trucking activity; aviation; advertising; and transportation of gas through pipes.65

Digital Products – Receipts from sales of digital products would not be permitted to be divided into separate property and services components, and would be required to be sourced as one receipt based on the location of delivery. Delivery destination would be determined based on user access, as demonstrated by IP address, location of equipment receiving delivery or allowing access, or invoice address. Delivery to multiple states still would continue to be classified as delivery to New York to the extent the purchaser or authorized user accesses or uses the product within the state.66

Internet, New Media Advertising, and Financial Instruments – Receipts from Internet and new media advertising would be sourced based on the number of viewers or listeners within New York when such advertising “is furnished, provided or delivered to, or accessed by the viewer or listener.”67 Income from financial instruments would be apportioned using detailed new sourcing rules.68

MTA Surcharge

The MTA surcharge would become permanent.69 In addition, the MTA base and apportionment rules for the surcharge under Article 9-A would conform to the state rules.70