New York Moves to a Single-Factor Allocation Formula

By Mark H. Levin

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FEBRUARY 2006 - The 2005/2006 New York State Budget Act marks the end of the long-standing four-factor formula used in computing the business allocation factor for the corporation business franchise tax under Article 9-A of the New York Tax Law and the entire net income (ENI) allocation percentage for the bank franchise tax under Article 32.

The Budget Act replaces the four-factor formula used in the corporation business franchise tax and the bank franchise tax with a single-factor, receipts-based formula. This change was made to make New York State a more favorable location for a multistate corporation to do business and locate facilities. It is estimated that the switch to a single-factor formula will result in a reduction in tax revenue of $130 million when it is fully effective in 2008.

The Corporation Business Franchise Tax and the Bank Franchise Tax

Starting with taxable years beginning on or after January 1, 2006, the four-factor formula—consisting of a property factor, a double-weighted receipts factor, and a wage factor—will be phased out over a three-year period and will be replaced with a single-factor formula based on receipts. The single-factor formula for the corporation business franchise tax will be phased in over a three-year period as shown in Exhibit 1. The single-factor formula for the bank franchise tax will be phased in over a three-year period as shown in Exhibit 2.

When these single-factor receipts formulas are fully phased in in 2008, multistate corporations and multistate banks will no longer be penalized for having property or paying wages in New York State. They will be taxed only on that portion of their ENI that is apportioned to New York based solely on New York receipts.

Issuer Allocation Percentage

A side effect of the switch to a single-factor allocation percentage will, in many cases, be a reduction of the issuer’s allocation percentage (IAP) of multistate business corporations and banks doing business in New York. (This percentage is used in the computation of the IAP and the subsidiary capital–based tax.) Businesses that can allocate their investment income and capital might find that their investment income and capital may be lower due to lower IAPs, thus producing a lower tax. Likewise, businesses that can allocate their income from subsidiaries might find that their subsidiary income may be lower due to lower IAPs, thus producing a lower tax. Businesses subject to the additional tax based on subsidiary capital might also find that their subsidiary capital is lower due to lower IAPs, thus producing a lower additional tax on subsidiary capital.

While the switch from a four-factor formula to a single-factor formula will benefit multistate businesses subject to the corporation business franchise tax under Article 9-A or to the bank franchise tax under Article 32, it will have no effect on those businesses that are not able to allocate their ENI. This change will also simplify the preparation of these two taxes.

As of January 2006, there has been no comparable change to the New York City general corporation tax, the New York City bank tax, or the New York City unincorporated business tax.


Mark H. Levin, CPA, is manager, state and local taxes, at H.J. Behrman & Company, LLP, New York, N.Y.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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