| New
York Moves to a Single-Factor Allocation Formula
By
Mark H. Levin
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. |