New York: Budget legislation includes New York City conformity provisions

New York: Budget legislation, NYC conformity provisions

Two New York State bills, A.3009 and S.2009 (the “budget bills”), include the tax changes necessary to implement the FY 2015-2016 Executive Budget. These budget bills include provisions (PART QQ) to conform the New York City corporation and bank taxes to the reforms enacted for the New York State corporation and bank franchise taxes in 2014.

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The New York City changes, if enacted, would be effective retroactively to tax years beginning on or after January 1, 2015, which is also when the state changes generally became effective.*

*Provisions affecting qualified New York manufacturers (including the zero percent rate applied to entire net income) were effective for State purposes in 2014.

The New York State budget is due April 1. Thus, it is possible that the City conformity provisions could be enacted during the first calendar quarter of 2015.

The budget bills also include proposed state sales and use tax changes.

New York City conformity

One of the key features of the state tax reform was the merger of the Article 32, Bank Franchise Tax, into the Article 9-A, Corporate Franchise Tax.

The budget bills would, for New York City purposes, create a new Subchapter 3-A tax that applies to both corporations and banks in lieu of the current Subchapter 2 (City general corporate tax) and Subchapter 3 (City bank tax).

The new 3-A City corporate tax essentially mirrors the revised New York State 9-A corporate franchise tax and includes the following:

  • General economic nexus for New York City purposes - Similar to the New York State law, taxpayers would generally be subject to New York City taxes if they had $1 million or more in receipts attributed to the City based on the City’s revised sourcing rules.
  • Three alternative bases - Taxpayers would pay tax on the highest of three alternative bases: (1) entire net income allocated to New York, (2) capital, or (3) a fixed-dollar minimum tax. The separate tax on subsidiary capital would be repealed, as would the alternative tax base that was computed on entire net income plus compensation.
  • Revised net income tax base, including revised NOL provisions - As under the state reform, pre-reform net operating losses (NOLs) would be converted to a “prior NOL conversion subtraction” that could be deducted over time (or 50% in each tax year beginning on or after January 1, 2015, and before January 1, 2017) in computing entire net income.
  • New customer-based sourcing rules
  • More traditional combined reporting provisions - The budget bills would eliminate the “substantial intercorporate transactions” requirement as a prerequisite to filing a combined return. Under the revised law, general and banking corporations subject to the new City tax would be required to file a combined return with their greater-than-50%-owned unitary affiliates.

Nonconforming provisions

There are certain areas, however, where the City would not conform to New York State law. Most of the areas of non-conformity involve tax rates.

Entire net income tax rate reduction

For New York State purposes, for tax years beginning on or after January 1, 2016, the entire net income tax rate is reduced from 7.1% to 6.5%. Under the budget bills, the City corporate tax rate applied to entire net income would be 8.85% effective for tax year 2015 and forward.

This is the same as the current City rate for general corporations, but would represent a slight rate reduction for New York City bank franchise taxpayers that currently pay tax on entire net income at 9.0%.

The budget bills would provide some tax rate relief for smaller businesses whose business income (determined without applying the prior NOL conversion subtraction) is below certain thresholds.

Capital tax

Under New York State law, the tax on allocated capital is gradually being reduced and phased out over a number of years.

Under the budget bills, the City would continue to impose the 0.15% tax on allocated capital. In addition, the maximum amount of tax payable under the capital tax would be increased from $1 million to $10 million.

Fixed-dollar minimum tax

The budget bills would add new brackets to the City fixed-dollar minimum tax for taxpayers with over $25 million of New York City receipts. Under the new brackets, the highest fixed-dollar minimum tax would be $200,000 for a taxpayer with over $1 billion of New York City receipts.

Zero percent (0%) rate applied to qualified New York manufacturers

Effective for tax years beginning on or after January 1, 2014, “qualified New York manufacturers” will be taxed for New York State purposes at a rate of zero percent (0%) on entire net income.

Under State law, a “qualified New York manufacturer" is a manufacturer that has property in New York used in certain qualifying activities where: (1) the adjusted basis of such property for federal income tax purposes at the close of the tax year is at least $1 million dollars; or (2) all of its real and personal property is located in New York.

“Manufacturers” for New York State purposes are taxpayers that are “principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing.” A taxpayer that does not satisfy this “principally engaged” test may be a qualified New York manufacturer if, during the tax year, the taxpayer employs at least 2,500 employees in manufacturing in New York and has property used in manufacturing in New York with a federal adjusted basis of at least $100 million.

The budget bills do not conform the City tax to the zero percent (0%) state rate for qualified New York manufacturers. There are, however, reduced rates for certain qualified New York City manufacturers, with the rates graduating from 4.425% for qualifying manufacturers with business income computed without regard to the NOL conversion subtraction of less than $10 million to the full 8.85% rate for qualifying manufacturers with income of $40 million or more.

In addition, the definition of a “qualified New York City manufacturer” is somewhat different than the definition of a “qualified New York State manufacturer.” A “qualified New York City manufacturer” would be a manufacturing corporation that either: (1) has property in the City with an adjusted basis for federal income tax purposes at the close of the tax year of at least $1 million dollars, or (2) has more than 50% of the its real and personal property located in New York City.

For these purposes, property includes tangible personal property and other tangible property, such as buildings and structural components of buildings, that: (1) is depreciable under IRC section 167, (2) is acquired by purchase as defined in IRC section 179(D), (3) has a useful life of four years or more, (4) has its situ (is located) in the City, and (5) is principally used by the taxpayer in the production of goods by manufacturing.

For city purposes, the term “manufacturing” includes the process of working raw materials into wares suitable for use, or giving new shapes, qualities, or combinations to matter which has already gone through some artificial processes.

Single-receipts factor apportionment

Under the “new” New York State Article 9-A corporate franchise tax, all taxpayers (general corporations and banking corporations) apportion their receipts to New York State using single-receipts factor apportionment.

For City tax purposes, as under current law, property and payroll would continue to be used (in declining proportions) in apportioning a taxpayer’s receipts to New York City until single-receipts factor apportionment is fully phased-in for tax years beginning after 2017.

Sales and use tax proposals

Requiring marketplace providers to collect sales tax

One of the provisions in the budget bills affects businesses having New York nexus that facilitate online sales.

Under the budget bills, effective March 1, 2016, a person meeting the definition of a “marketplace provider” would be required to collect and remit sales and use tax on sales to New York customers that the marketplace provider “facilitates.”

A “marketplace provider” is an entity that—per an agreement—facilitates a sale, occupancy, or admission by a marketplace seller. A person facilitates a “sale, occupancy, or admission” when: (1) such person, or the person’s affiliate collects the receipts, rent, or amusement charge paid to the marketplace seller by a customer, occupant, or patron, and (2) such person performs either of the following activities: (a) provides the forum in which, or by means of which, the sale takes place or the offer of occupancy or admission is accepted, including a shop, store, or booth, or Internet website, catalog, or a similar forum; or (b) arranges for the exchange of information or messages between the customer, occupant, patron, and the marketplace seller.

For purposes of this requirement, two persons are affiliated if they have a 5% or more direct or indirect ownership interest in each other, or another person (or persons) holds, directly or indirectly, an ownership interest of more than 5% in each person. In other words, under the proposal, operators of online marketplaces with nexus in New York would be required to collect tax for all sellers on the marketplace if the marketplace provider provides the platform for the sale and processes the payment for the sale.

A “marketplace seller” would be any person, whether or not such person is required to register to collect New York sales and use tax who has engaged a marketplace provider to facilitate sales, occupancies or admissions, and is engaged in certain types of businesses (e.g., selling tangible personal property, operating a restaurant or hotel, etc.). If a marketplace provider is merely facilitating a transaction involving a sale, occupancy, or admission, the marketplace seller would not be a person required to collect tax with regard to the transaction.

The budget bills include language requiring all marketplace providers to comply with New York’s sales tax laws and providing that a marketplace provider would be relieved of liability if it fails to collect tax due to incorrect information given to the marketplace provider by a non-affiliated marketplace seller.

Eliminating certain tax avoidance strategies

  • Revising the nonresident use tax exemption for businesses - Under current law, a use tax exemption applies to property or services used in New York that was purchased while the user (an individual or a business) was a nonresident of New York. The exemption applies only if the nonresident did not use the property in a trade or business carried on by the purchaser in New York. The budget bills would require that a nonresident business, not an individual, have an established place of business outside New York for at least six months prior to bringing products or taxable services into New York to qualify for the use tax exemption.
  • Treating single-member limited liability companies (SMLLCs) as disregarded entities - Under current law, SMLLCs are regarded (i.e., they are considered a separate entity from their sole member) for sales and use tax purposes. Under the budget bills, a SMLLC and its member would be deemed to be one person, and neither party could make a purchase for resale to the other.
  • Taxing all related entity leases at the inception of the lease or when property is brought into New York - Currently, receipts from certain leases of vehicles, vessels, and noncommercial aircraft are subject to sales tax on the date the first payment is made under the lease, option to renew, or similar provision, or on the date the property is registered in New York, whichever is earlier. The tax due is based on the entire stream of lease payments to be made. The budget bills provide that any lease of tangible personal property between related entities would be subject to this requirement. As such, a lease between related parties, regardless of duration or the location the lease was entered into, would be subject to New York sales and use tax at the inception of the lease or when the leased property is brought into New York State. If the Tax Commissioner determines that the sum of all payments due under such lease do not reflect the true value or cost of the leased property, the Commissioner could estimate the true value or cost from information that may be available, including by means of external indices.
  • Transfers of property under corporate reorganizations - Under current tax law section 1101(b)(4)(iv), certain transfers and distributions of property as a result of a merger, acquisition or liquidation are excluded from the definition of a retail sale and are, therefore, not subject to sales and use tax. However, the exclusions from the definition of “retail sale” do not apply to transfers, distributions, or contributions of aircraft or vessels except when the two corporations to be merged or consolidated are not affiliated persons with respect to one another. A corporation is an affiliated person with respect to another corporation if one of the corporations has a 5% or more direct or indirect ownership interest in the other, or another affiliated person or group of persons holds, directly or indirectly, an ownership interest of more than 5% in each of the corporations. 

Under the budget bills, transfers, distributions or contributions of all tangible personal property between affiliated persons would be considered retail sales (i.e., not eligible for the exclusion from the definition of retail sale) subject to sales and use tax. Only transfers pursuant to a merger or consolidation between unaffiliated parties (applying the 5% ownership test) would be nontaxable.

 

For more information, contact a tax professional with KPMG’s State and Local Tax practice:

Russ Levitt | +1 (212) 872-6717 | rdlevitt@kpmg.com

Dale Kim | +1 (212) 954-3920 | dykim@kpmg.com

Dennis Prestia | +1 (212) 872-6891 | dprestia@kpmg.com

Judy Cheng |+ 1(212) 873-3530 | jycheng@kpmg.com

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