The recently enacted budget bill in New York (S. 6359) makes numerous tax law changes, but the most significant of those changes is, without a doubt, the adoption of a bright-line economic nexus standard for its corporate income tax (i.e., Corporate Franchise Tax). Coming in a very close second place finish in terms of significance is New York’s adoption of a “market-based” sourcing rule for service revenue. Both of these rules will take effect in 2015.
The simultaneous enactment of both of these provisions impacts corporations based in New York as well as those that have never even sneezed in the state. In-state corporations could benefit significantly, but many out-of-state corporations may soon be adding New York to their list of state income tax returns.
New York’s bright-line nexus standard will result in a corporation being subject to tax if it derives $1 million or more in New York receipts. The impact of the bright-line nexus rule is enhanced by the adoption of a market-based sourcing rule for service revenue. A market-based sourcing rule for purposes of apportioning service revenue essentially provides that the revenue is attributable to the state where the customer is located, rather than to the state where service is performed.
Thus, corporations that have never stepped foot in New York could have to pay income tax to the state if they derive at least $1 million from New York customers. For multi-state corporations based in New York, the market-based sourcing rule will likely reduce the portion of their income taxable in New York to the extent their income is derived from customers located in other states. New York is not the first state to adopt a bright-line nexus standard and a market-based sourcing rule. Other states that have these rules include California, Michigan, Ohio, and Washington.
New York’s new nexus and sourcing rules are limited to the section of the state’s tax law pertaining to corporations (including S Corporations). This creates a very different set of rule for corporations as compared to partnerships and other business tax filers. Other states that have enacted a bright-line nexus standard and a market-based sourcing rule have done so for both corporate and pass-through entities (e.g., California). Thus, choice of entity will become more important for potential New York taxpayers.
The New York legislation make other important changes to the state’s corporate income tax, including reducing the income tax rate from 7.1% to 6.5% for tax years beginning on or after January 1, 2016, merging the Bank Franchise Tax into the Corporate Franchise Tax, and providing “qualified manufacturers” a rate of 0% for tax years beginning on or after January 1, 2014.
If you have questions about changing state income tax rules please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
About the Author: Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.