On March 31, 2014, New York State Governor Andrew M. Cuomo signed into law comprehensive New York State corporate tax reform legislation. Chapter 59, N.Y. Laws of 2014. With a few exceptions, the new law will apply for tax years beginning on or after January 1, 2015. The legislation substantially overhauls the State corporate tax, and contains the most significant revisions to the tax since its enactment in 1944. Among the changes to the corporate tax (Article 9-A) are the following:

  • Economic nexus. Adopts a "bright line" economic nexus standard for taxation for corporations deriving at least $1 million of receipts annually from activities in New York State.
  • Corporate partner nexus. Expands nexus for corporate partners to include any corporation that is a partner in a partnership that is doing business in, or deriving receipts from activity in, New York State, regardless of the nature or size of the ownership interest.
  • Zero tax rate for qualified New York manufacturers. Introduces a zero tax rate on business income for qualified New York manufacturers, effective for tax years beginning on or after January 1, 2014. It also expands the definition of a qualified New York manufacturer to include a corporation (or a combined group) with at least 2,500 employees engaged in manufacturing in New York State and having in-State property used in manufacturing with an adjusted basis for federal tax purposes of at least $100 million at year-end.
  • Subsidiary capital treatment eliminated. Eliminates the subsidiary capital classification, including the exclusion for 100% of income from subsidiary capital, in place since the tax was enacted in 1944.
  • Investment income no longer taxable. The definition of investment capital will be limited to investments in the stock of non-unitary corporations held for more than six months, the income from which will no longer be taxable.
  • Expense attribution. Nontaxable investment income and other exempt income must be reduced by interest expenses (but not other expenses) directly or indirectly attributable to those items. Taxpayers will be permitted to make an election to reduce those nontaxable items of income by 40% in lieu of computing an interest expense attribution.
  • Market-based sourcing. Adopts market-based sourcing for purposes of the apportionment factor, including for sourcing receipts from the performance of services.
  • Adopts full water's-edge unitary combined filing. Under the new combined reporting regime, taxpayers will be required to file combined returns with unitary corporations in which there is a more than 50% stock ownership interest. The law includes several exceptions to unitary combined filing, including one for alien corporations that have no federal effectively connected income. Taxpayers will be allowed to make a binding seven year election to file on a combined basis with all corporations that meet the more than 50% stock ownership test.
  • Repeals New York State bank tax (Article 32). Banks currently subject to the bank tax will become subject to the substantially revised corporate tax.

The above is only a partial listing of the various changes, and the provisions in the new law are detailed and may contain exceptions to the general rules. Also, certain of the changes may be susceptible to legal challenge. At present, the changes apply only to the New York State corporate and bank taxes, and not to the New York City general corporation and bank taxes.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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