Press Room: Tax Release
New York State Tax Law Changes Overview
On March 31, 2014, Governor Cuomo signed into law what could be the most substantial tax reform package in New York since 1987. The primary area of change occurred in the corporate tax law, but there were also changes to the taxation of certain trusts and the estate tax. Apart from the trust and estate tax changes, the majority of the corporate tax provisions take effect in tax years beginning on and after January 1, 2015. The new tax law provisions are both significant and comprehensive and this release is merely designed to highlight the changes. We recommend that you contact your WTAS advisor for a more detailed explanation of the changes and the impact to you or your company.
Merger of Bank Tax with the General Business Tax
The merger of the Bank Tax (Article 32) with the General Business Corporation Tax (Article 9-A) ends a long history of the state’s separate taxing regimes. To account for the ongoing operational differences between banks and general business corporations, the new tax law has a number of income sourcing provisions that will have particular relevance and appeal to the banks and financial institutions. In particular, taxpayers will have the option to directly trace and source income from certain qualifying financial instruments or to simply elect to source 8% (New York’s approximate percentage of the U.S. population) of income from such instruments.
Reduction of the Corporate Franchise Tax
The corporate franchise tax rate on the entire net income for all taxpayers subject to the general business corporation tax is reduced from 7.1% to 6.5%, effective for tax years beginning on or after January 1, 2016. In addition, the tax rate on the entire net income will be effectively reduced to 0% for qualified New York manufacturers for tax years beginning on or after January 1, 2014.
A qualified New York manufacturer is a manufacturer having property in New York that is eligible for the investment tax credit and either 1) the fair market value of that property has an adjusted basis for federal income tax purposes of at least $1 million at the close of the taxable year, or 2) all of the manufacturer’s real and personal property is located in New York. A taxpayer or combined group that does not meet the definition of qualified New York manufacturer may still be eligible for the reduced tax rate if it employs at least 2,500 people in manufacturing within the state and it has property used in manufacturing in the state with an adjusted basis of at least $100 million.
The Metropolitan Transportation Authority surcharge will increase to 25.6% of the corporate franchise tax rate (7.1% for 2015, then 6.5% thereafter).
Expanded Nexus Standard
Currently in New York taxability is generally based on physical presence. Under the newly adopted economic nexus standard, a corporation is subject to tax if it derives receipts from activity in New York. A corporation is deemed to derive receipts from activity in New York if it has $1 million or more of receipts included in the numerator of its apportionment factor. Corporations with less than $1 million but at least $10,000 of receipts within New York would be considered to derive receipts from activity in New York if the corporation is a member of a combined group that has $1 million or more in receipts attributable to New York under the revised sourcing rules. Economic nexus will apply to certain credit card corporations if they have:
- Issued credit cards to 1,000 or more customers who have a New York mailing address as of the last day of the financial institution’s tax year
- Entered into merchant-customer contracts for which it has remitted payments for credit card transactions with merchants at 1,000 or more locations in New York, or
- Issued credit cards to customers with New York mailing addresses and entered into merchant contracts with merchants with locations in New York that total 1,000 or more on a combined basis
Alien corporations—those organized in a jurisdiction outside of the United States—will be subject to the New York State tax if they have effectively connected income as defined under the Internal Revenue Code (IRC).
New Corporate Income Tax Base
New rules simplify the system of computing the income tax base and eliminate what were considered significant loopholes in calculating the tax base. The starting point for business income is still federal taxable income. Business income is now defined as entire net income minus investment income and other exempt income. The definition of investment income is substantially narrowed to include only income from shares in non-unitary corporations held for more than six consecutive months. Other exempt income is defined as the sum of exempt controlled foreign corporation income and exempt unitary corporation dividends. Taxpayers will now have the option to either subtract expenses directly or indirectly attributable to investment and exempt income or, in the alternative, elect to take a 40% safe-harbor reduction. If electing the 40% safe harbor, it must be applied to both investment and exempt income.
Further, the capital base tax (capped at $350,000 for manufacturers and $5 million for all other taxpayers) will be phased out over a five year period.
Apportionment of Income for Businesses
Previously under Article 9-A, taxpayers apportioned business income and business capital by reference to a single-receipts factor. Under Article 32 taxpayers apportioned income by utilizing receipts, deposits, and payroll factors. The new provisions make the single sales factor standard for both and adopt a customer-based approach to sourcing receipts to New York. While the former rules with regard to sourcing sales of tangible personal property (destination) and leasing of real or personal property (situs of the property) remain in effect, other types of sales from licensing or services will now be sourced to the location where the benefit of the sale is provided (generally the customer location).
Going forward, sales of digital products will be sourced according to a hierarchy of rules that will include geographic location of the users, internet protocols, or location of receipt. Digital products include property, services or the combination of property and services delivered to a purchaser through the use of wire, cable, fiber-optic, laser, microwave, radio wave, satellite or similar successor media, or in any combination of the foregoing.
Under the current New York corporation franchise tax, a related group of corporations must file a combined report if certain conditions are met. The conditions are the satisfaction of an ownership standard (80% or greater) and the existence of substantial inter-corporate transactions (greater than 50%) among the related entities. The new law repeals this combined reporting rule in its entirety and requires combination if a taxpayer is engaged in a unitary business with one or more corporations and:
- More than 50% of the capital stock is owned or controlled directly or indirectly by the other corporation(s)
- More than 50% of the taxpayer’s stock is owned or controlled either directly or indirectly by the other corporation(s), and
- More than 50% of the capital stock of the other corporation(s) is owned and controlled directly or indirectly by the same interest
Banks and general business corporations are then taxed under the new Article 9-A and are combinable with each other, unlike under the present rules that effectively preclude so-called cross article combination. Non-U.S. unitary corporate affiliates would be combinable with their U.S. affiliates to the extent they either are considered to be U.S domestic entities under IRC Sec. 7701 or have effectively connected income under IRC Sec. 882.
A New York combined group can now include the following entities to the extent the 50% ownership test is met: 1) domestic corporations, 2) alien corporations deemed to be domestic under the IRC, 3) certain alien corporations that have effectively connected income, 4) certain captive Real Estate Investment Trusts (REITs) and Regulated Investment Companys (RICs) and 5) certain captive insurance companies.
Corporations that are subject to tax under a different article (non-Article 9-A) are still prevented from inclusion under the new combined filing rules as are S corporations. Finally, taxpayers will have the option to elect to include non-unitary members in the combined filing; however, an election once made, remains in effect for seven years.
Net Operating Loss (NOL)
Taxpayers are no longer allowed to carry NOLs back to offset income in prior years. Instead, they may only carry NOLs forward 20 years. In addition, NOLs must be calculated on a post-apportioned basis. A credit will be available for NOLs incurred before 2015, calculated by using the taxpayer’s unabsorbed NOLs, business-allocation percentage and tax rate, all determined under the law in effect through 2014. The credit can be used in a year when the tax is measured by business income. The taxpayer would be able to use up to 10% of the total amount of credit against current-year tax, limited to the higher of the tax on the capital base or the fixed-dollar minimum tax.
The new law closes the so-called resident-trust loophole, by taxing exempt resident-trust distributions of its accumulated trust income to New York beneficiaries. Previously, such distributions were not subject to taxation to the extent the trusts that were not domiciled in New York at the time the trust was created or became irrevocable and the trusts did not have any 1) New York trustees, 2) New York assets, or 3) New York-source income.
In addition, former exempt trusts qualifying as Delaware/Nevada incomplete non-grantor (DING/NING) trusts will, by law, be deemed to be grantor trusts and thus any income will be included in the settlor’s/grantor’s taxable income.
The new provisions are effective for income earned after January 1, 2014.
Overall the changes to New York’s estate tax are favorable and will eliminate many estates from taxation by matching the state exclusion amount to the federal estate exemption. The exclusion match will be phased in as follows:
- April 1, 2014 through March 31, 2015 - 2,062,500
- April 1, 2015 through March 31, 2016 - 3,125,000
- April 1, 2016 through March 31, 2017 - 4,187,500
- April 1, 2017 through March 31, 2018 - 5,250,0001
Although in the preliminary bills the estate tax rate was scheduled to be reduced from 16% to 10%, that provision did not pass and thus the highest rate remains 16%. The generation-skipping transfer tax, however, is repealed under the new law.
The negative side of the new law is the requirement that gifts made within three years prior to a decedent’s death are added back to the estate tax base and subject to taxation. This, however, will only apply to gifts made from May 1, 2014 through December 31, 2018.
1Effective January 1, 2019 the exclusion amount will be indexed for inflation