New York State Corporation Tax Reform: Prepare Now for Changes in 2015

Brian Gordon, CPA
Published Date:
Oct 1, 2014

There are sweeping changes coming to New York State corporation tax laws, effective for tax years beginning on or after Jan. 1, 2015, for reasons that include reducing complexity and removing uncertainty. Included in the reform are benefits to corporations located in New York, particularly for manufacturers who will have a zero percent tax on income, though some corporations outside New York that currently have no filing requirement (no nexus) will not be as happy with the new economic nexus standard. Keep reading to brush up on some of the more notable changes to the New York State Corporation Tax law.

Sourcing and Economic Nexus

Under current law, a corporation does not have nexus if its only connection to the state is the shipment of goods sold to New York customers, regardless of the amount. Nexus requires physical presence, employees, or assets in New York. But New York state has created a new economic nexus standard of $1 million of sales sourced to New York for tax years beginning Jan. 1, 2015. According to the new law, a company with no physical presence in New York is still doing business in New York if it has sales in excess of $1 million sourced to New York customers.

Under Public Law 86-272, if a company’s only connection to a state is that it has employees in that state solely for the purpose of soliciting sales of tangible personal property and those resulting sales are delivered from a point outside the state, tax cannot be imposed on the income resulting from those sales. Public Law 86-272 will still protect out-of-state companies, but only for tax on income resulting from sales of tangible personal property. New York has not made clear whether it will impose the tax on capital or the fixed-dollar minimum tax on these corporations. Other states with economic nexus standards have imposed tax on capital or minimum tax.

In addition, the nexus exemption for fulfillment services is eliminated. If inventory (an asset) is stored at a company in New York performing fulfillment services, there is currently an exemption from nexus. This exemption will no longer apply under the new law, and nexus will be created for having assets in the state even if they are at a fulfillment service.

Income from services. Public Law 86-272 does not offer protection from tax on income from sales of services or any sales other than sales of tangible personal property. Currently, this income is sourced to the location where the service was performed, but the sourcing rules for sales of services are changing. For example, New York is changing to market-based sourcing for services, which means that the income from services will be sourced to the location that receives the benefit of the service—generally the location of the customer. Sales of services to New York customers will be sourced to New York, and if they are in excess of $1 million, nexus will be created and will result in tax on this income.

Income from digital products. Digital products, such as digital books, videos, or audio products, are also not tangible personal property; thus, they are not protected under Public Law 86-272. This income will also be sourced to New York if that is where the customer is located. Nexus will be created if sales exceed $1 million.

Want to learn more about NYS corporate tax reform? NYS Tax Department officials will be on hand at the New York State Taxation Conference to talk about START-UP NY, on Oct. 20, at New York City Bar Association. Can’t attend in-person? Register for the live video webcast. Find out more here. 

Elimination of Article 32

Under the corporation tax reform, Article 32 of the Tax Law on banking corporations is being eliminated. Banks will now be taxable under Article 9-A as a general business corporation.

New Tax Bases

The current entire net Income base is revised; it will become the new tax on business Income.

The current alternative minimum tax base is repealed. The new bases are as follows: tax on capital, tax on business income, and fixed-dollar minimum.

Tax on capital. Major changes to capital computations will occur. Investment capital will be more narrowly defined, and subsidiary capital will no longer be separately classified; there will also be no tax on subsidiary capital. Business capital is all capital that is not defined as investment capital. The tax on capital base will be 0.15 percent, and gradually phased out, becoming zero percent in 2021.

The new definition of investment capital will be as follows: Investment capital only includes investments in stocks. Investment capital will no longer include bonds or other securities. The investments in stocks must be held by the taxpayer for more than six consecutive months, but not be held for sale to customers in the regular course of business.

Tax on business income. Income will be categorized as either business Income, Investment Income, or other exempt Income (a new category). Investment income will be exempt from tax, as well as will other exempt income. There will no longer be income from subsidiary capital.

Investment income refers to income, including capital gains in excess of capital losses, from investment capital, to the extent included in computing entire net income, less interest expense directly or indirectly attributable to investment capital or investment income, and/or less losses or expenses for hedging positions of investment capital. There will no longer be other expenses attributable to investment income (only interest expense). Investment income cannot be negative, and it cannot exceed entire net income.

Other exempt income means the sum of exempt controlled foreign corporation (CFC) income and exempt unitary corporation dividends.

Business income is newly defined as income other than investment income or other exempt income. The new business Income base will replace the entire net income base. Lower tax rates will go into effect. The tax on the business income base will be reduced 7.1 percent to 6.5 percent for tax years beginning on or after Jan. 1, 2016.

For qualified manufacturers, the rate will be 0% beginning for tax years on or after Jan.1, 2014.

New Allocation/Apportion Methodology

New York State is implementing a single receipts apportionment factor, using customer-based sourcing rules for all taxpayers.

Financial Industry Income

There are many new rules affecting financial industry income apportionment, including a fixed percentage election of 8 percent apportioned to New York for some types of income.

MTA Surcharge

The MTA surcharge is becoming permanent, and it will be subject to the new economic nexus rules that apply to corporate taxation in New York State. Corporations no longer need physical presence in the MTA districts to be subject to the surcharge. The traditional three-factor formula of property, payroll, and receipts will be used for the MTA surcharge. The numerator of these factors is the amounts attributable to the MCTD. The denominator is the amounts attributable to New York State.

Combined Reporting

New York State is adopting full unitary water’s-edge combined reporting, with an ownership requirement of more than 50 percent. Because banks will now be taxable under Article 9-A, they will be able to be combined with other general business corporations if they meet the new criteria.

Under the new legislation, the two important requirements for combination are unitary business, and more than 50 percent common ownership. Currently the important requirements for combination are substantial intercompany transactions and the correction of distortion. These requirements will be eliminated.

Economic nexus rules as they are applied to combined groups will be as follows: The threshold for economic nexus as mentioned above will be $1 million in receipts. The $1 million threshold is applied to the entire combined group, with one exception. Any combined corporation with less than 10,000 in sales will be excluded from the group for the purposes of determining the $1 million economic nexus threshold.

In addition to these requirements for combined reporting, taxpayers can elect to include in their combined report corporations that meet the 50% common ownership test, even if they do not meet the unitary business test. Once elected, they must stay combined for seven years. Credits will be determined separately, but applied against the combined tax. New York City does not have these new laws; therefore, different combined groups could result.

Net Operating Losses

The rules for net operating losses (NOL) are also being changed for tax years beginning Jan. 1, 2015. The new NOLs will be subject to the business allocation percentage (BAP) in the year of loss. A NOL is the amount of “business loss” incurred in a tax year, multiplied by the taxpayer’s apportionment percentage for that year. The allocated loss will be carried forward and applied against allocated income.

Currently the NOL is not allocated. The unallocated loss is carried forward and is applied as an NOL deduction (NOLD) against current year income, before allocation. Any remaining income will then be allocated by the BAP. Prior-years NOL (prior to Jan. 1, 2015) will be converted using a new calculation, and may be used in addition to NOLs under the new law. 

The New York NOLD will be calculated independently from the federal deduction. In addition, the respective losses do not have to originate in the same year.

The NOL should not be used to reduce allocated income all the way down to zero, only enough to reduce income to the point that the resulting tax would be the same as tax on capital or the fixed-dollar minimum. NOLs incurred under the new law may be carried forward for 20 years and carried back for 3 years, but not to any year prior to 2015.

Brian Gordon, CPABrian 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 He can be reached at 516-938-5219 or 212-370-3743, or by e-mail at

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