New York's tax reform and its impact on small business.

AuthorMcGahan, Sarah

The New York executive budget legislation for fiscal year 2014-2015 was signed by Gov. Andrew Cuomo on March 31,2014. Much has been said and written about the corporate tax reform measures and their potential impact on various taxpayers. It appears one of the goals of this legislation was to improve the state business climate through broadening the tax base, lowering tax rates, and reducing some of the inherent complexities of New York's corporate tax framework. In fact, according to the Tax Foundation, these measures have likely raised New York's corporate tax system ranking from 25th to fourth, falling behind only three states that do not impose a corporate income tax. The state's overall tax structure ranking, however, improved by only two positions to 48th, from dead last.(1)

Most significantly affected by New York's corporate tax reform are banking institutions, as they will no longer be subject to a separate method of taxation but will be rolled into the significantly revised corporate tax regime. The law adopts unitary combined reporting and elective combined reporting for certain groups of corporations. The changes eliminate the separate treatment of subsidiary capital and income, along with the alternative tax on minimum taxable income. But what impact does New York's tax reform have on smaller, non-banking businesses? And further, what is the impact on smaller businesses primarily located outside New York state? That is the focus of this column.

Nexus

One of the most significant changes under New York's corporate tax reform is the implementation of a bright-line economic nexus standard. Corporations deriving receipts from New York sources of $1 million or more will be deemed to have nexus with the state beginning in 2015. New York has joined others, most notably California, in adopting a "factor presence" standard (which generally provides that nexus is established if any one of three thresholds for property, payroll, or receipts is exceeded) for purposes of imposing its franchise tax. However, the only factor that is relevant for New York taxes is the receipts factor since both property and payroll factors had already been eliminated from the corporate allocation formula.

To determine whether the New York receipts threshold of $1 million has been met, the sourcing rules for determining the state's allocation percentage are used. If receipts are required to be included in the numerator of the receipts factor, they will be considered

New York receipts for purposes of meeting the threshold.(2)

It is important to note that, because the new economic nexus provisions are contained in New York's statutes under Article 9-A, Franchise Tax on Business Corporations, the new provisions apply exclusively to corporations. Small businesses are most often formed as S corporations, partnerships, limited liability companies (LLCs), or sole proprietorships to avoid double taxation at both the federal and state level. Two standards now apply for determining nexus in New York, depending on whether the business is conducted in corporate or noncorporate form, and therefore apply differently to small businesses organized as S corporations compared to other, noncorporate, forms.

S corporation taxation is determined under the corporate tax provisions in Article 9-A.(3) S corporations, however, are only subject to the fixed-dollar minimum tax at the corporate level, and cannot be included in a combined return.(4) For S corporations, the fixed-dollar minimum tax remains unchanged under corporate tax reform, and it maxes out at $4,500 for corporations with more than $25 million in New York receipts.(5) Unfortunately, the new economic nexus provisions contained in Article 9-A apply to all corporations, including S corporations.(6) Therefore, beginning in 2015, any S corporation with $1 million or more of New York-source receipts will automatically be deemed to have nexus and be subject to tax. This includes both the fixed-dollar minimum fee at the corporate level and the personal income tax at the shareholder level.

If the corporation's receipts from New York taxpayers are derived entirely from sales of tangible personal property, and contacts with the state are limited to the solicitation of sales as further defined under the Wrigley (7) decision, federal Public Law 86-272 should apply.(8) Pl. 86-272 prevents any state from imposing an income tax in these situations. However, P.L. 86-272 does not offer any protection from the imposition of the fixed-dollar minimum tax or any other non--income-based tax.

Nexus determinations for nonresident individuals conducting business as sole proprietors or partnerships are contained in New York's statutes under Article 22. LLCs treated as partnerships for federal tax purposes are also treated as partnerships for New York...

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