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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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