New York State and New York City Business Allocation: What Has Changed, and What Has Not

By:
Brian Gordon, CPA
Published Date:
Nov 1, 2015

In the past few years, there have been vast changes to the landscape of corporate allocation in the world of state and local taxes.  For example, we have seen New York follow some other states into the realm of economic nexus, where nexus (i.e. filing responsibilities) could be based solely on sales in a particular state rather than on the old test of physical presence.  This is effective for tax years beginning on or after January 1, 2015.

Market based sourcing is also a new trend in state allocation methodology.  Under this method, service income will also create nexus as long as the customer benefits from the service in New York State, even if the service is not performed there. It seems like every few months another state is beginning to utilize these methodologies. You must keep up to date with this changing environment; otherwise, you risk incurring a tax liability or a penalty for failing to file from a state in which, under the new rules, you are now conducting business.

Just to help you through the maze a little…

Corporations

You will have nexus with New York State if you have customers that benefit from your services there and the income from such services exceeds $1 million, even if you have no physical presence.  You will also have nexus in New York State if you have sales of intangibles where the intangibles are used in the state, or if you have sales of digital files to customers in New York State of over $1 million. 

According to the New York State’s Department of Taxation and Finance website, you will not have nexus in New York State if your only contact is the sale and delivery of tangible personal property.  That is because of the protection provided by Public Law 86-272, which technically only protects against tax on the net income from the sale of tangible personal property. For comparison, consider California: under this same scenario, California requires you to file a return and pay a minimum tax.

New York City recently followed New York State with most of its changes for 2015, including the adoption of market based sourcing for services; however, it did not adopt economic nexus. Therefore, you still need physical presence in New York City to be required to file.

Please remember that for corporations in both New York State and New York City, it is not required to have a place of business in another state in order to allocate income on your New York returns.  For New York State, the business allocation percentage is based only on your apportionment of receipts; for New York City, a three-factor formula of property, payroll and receipts is still being used, although property and payroll are being phased out.  There will be an option for most companies to extend the inclusion of a small amount of property and payroll.

Partnerships and Sole Proprietorships

After talking about the new world and changing landscapes, we must step back into the Jurassic Period in order to talk about partnership and sole proprietor allocation for New York State.  The rules discussed above do not appear here.  Economic nexus does not apply; physical presence is still required.  In addition, if your business is located in New York State, you can only allocate if you also have other business locations in other states. 

The primary method for allocation for partnerships and sole proprietors is what is sometimes referred to as “the books and records” method, or direct reporting.  The books of the business will determine how much income is derived from or connected with New York sources.   Each business location determines its own profit or loss from the business books.  If that is not possible due to the type of business, then a three-factor formula using property, payroll, and receipts is the backup method.  When using that method, however, the allocation of receipts is not based on the location of the customer, as is the case with corporations, but rather on the location of the home office of the employee responsible for the sale, or the location with which the service provider is associated.

In a recent ALJ hearing, In the Matter of the Petition of Patrick J. Carr, the state took the position that a lawyer’s license in New York alone determined the location of the business.  Mr. Carr was primarily retired.  While he maintained his New York law license, he no longer had an office in New York or any business in the state.  He also had a law license in New Jersey, but had no business there either.  His only income was from Florida, where he had an office and was admitted to practice pro hac vice, meaning that he was approved only to practice on one particular Florida case.  New York defended its position by citing a case where the attorney’s only “office” was in New York: because the only office was in New York, there was no allocation allowed.  That, however, was not the situation in Carr.  Mr. Carr’s New York license was not “a business”  located in New York, and Mr. Carr won his case.  Inexplicably, New York didn’t consider the New Jersey license. Although New York’s position was quite a stretch in this case, a summary of this case is included to emphasize the difference in partnership allocation rules.

To complicate things further, New York City partnership and sole proprietor Unincorporated Business Tax returns do not require or allow direct reporting, and they allow allocation without a place of business outside New York City.  As with corporations, they require a three-factor formula that is moving towards a single receipts factor, with sales allocated by destination or location of service.

If you have any questions on these issues, or about state audits, please contact the author.


Gordon1Brian Gordon, CPA, is director of state and local taxes at Sanders Thaler Viola & Katz LLP. His primary role is to represent taxpayers with NYS tax audits and other controversies. Previously, he was with NYS Department of Taxation and Finance for many years as the district audit manager in Manhattan and Brooklyn, where he worked on many audits of various tax types, including high-profile residency audits. Mr. Gordon is a member of the NYSSCPA New York, Multistate & Local Taxation Committee. He writes and speaks on various state and local tax issues and posts a monthly blog at http://www.st-cpas.com. He can be reached at 516-938-5219 or 212-370-3743, or by e-mail at bgordon@st-cpas.com.  

 
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