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What’s New in New York Taxes for Closely Held and Flow-Through Entities

Timothy P. Noonan, JD
Published Date:
Aug 1, 2019

Last month I spoke at the State Society’s annual conference on tax issues for closely-held entities.  My topic, as you might guess, was all-things involving New York State taxes in this area of the law.  This article outlines what I talked about, and it covers recent updates and developments in the New York State and City tax areas and how some of these changes effect closely-held and flow-through entities.

The GILTI Exemption Finally Passes

New York has recently changed course regarding its treatment of Global Intangible Low-Taxed Income (GILTI). To recap, the Governor’s executive budget that was signed into law (2019 NY Senate-Assembly Bill S1509-C, A2009-C, Part C) established a statutory sourcing rule for GILTI that required net GILTI to be included in the denominator of the taxpayer’s apportionment factor, with zero reported in the numerator. This treatment mirrored the Tax Department’s recent technical guidance relating to such income and conformed to the instructions for Form CT-3-I. This apportionment rule provided some relief to taxpayers from having to pay federal and state tax on GILTI, but it was a far cry from the 95% exemption that was originally contained in the Governor’s executive budget, but subsequently removed just prior to passage.

(For additional information regarding New York’s treatment of GILTI, please visit,report-on-executive-budget-fy-2020 and,ny-tax-minutes-amazon-congestion-pricing-gilti )

Apparently, the government just needed some additional time to summon the political will to pass the 95% exemption because that’s exactly what a new law (2019 NY Senate-Assembly Bill S6615, A08433) enacts. This new law amends the definition of “Exempt CFC Income” in Section 208(b) of the Tax Law to include “ninety-five percent of the income required to be included in the taxpayer’s federal gross income pursuant to subsection (a) of section 951A . . . .” The new law also definitively indicates that this income “shall not constitute investment income” and requires an add back for any deduction taken pursuant to Section 250(A)(1)(B)(I) of the Internal Revenue Code. Finally, the new law amends the apportionment rules for C-corporations. Rather than letting C-corporations include the full amount of the GILTI in the apportionment denominator, the new law only permits the inclusion of 5% of the income. The apportionment rules for S-corporations are now codified by the new law and remain unchanged—GILTI is excluded from the numerator and included in the denominator.

The new law takes effect immediately and applies to taxable years beginning on or after January 1, 2019.

NYS 2019-2020 Budget: What Did Not Pass

Perhaps more interesting is what did not pass in the budget this year. As a prime example, the New York City Pied-à-Terre Tax did not pass. Not too long ago, there was a great deal of discussion about a man who purchased a home in New York City for $238 million, but he did not plan to become a resident, and, thus, he would not be paying any taxes to New York. This created a push for the Pied-à-Terre tax, which would have taxed a non-primary residence in New York City with a market value of $5 million or more. The proposed rates ranged from 0.5% on homes valued over $5 million to 4% on homes valued over $25 million.

TCJA State Response Update

Among the many changes in the 2017 Tax Cuts and Job Act (TCJA) was the 199A deduction for flow-through entities. Unlike some of the other changes, like GILTI, this change did not automatically flow to most of the states because it is a “below-the-line adjustment” to taxable income, not to adjusted gross income. Only six states start with federal taxable income, and for those states (Colorado, Idaho, Minnesota, North Dakota, Oregon, and South Carolina), this change did flow through; but for the majority of states that start with adjusted gross income, it did not.

The TCJA also lowered the corporate tax rate, and, because of this, many S-corporations are now considering becoming C-corporations, particularly if they are ineligible for the 199A deduction. Obviously, becoming a C-corporation results in double taxation, and this must be factored in when choosing the appropriate entity. However, New York State taxes should also be factored into this consideration as the tax rates differ for S-corporations and C-corporations. This choice of entity also becomes particularly important when you have nonresident shareholders because shareholders of C-corporation will not pay New York State tax on a dividend from the corporation.

To provide an example of the different New York tax rates, let’s say that you have an S-corporation that is selling advertising services in and out of New York City, it has nonresident owners, and it is considering becoming a C-corporation. Here’s a chart outlining the differing tax treatment at the State and City level:


As an S-corporation

As a C-corporation

State entity level

No tax

7.1%, market-based apportionment

State shareholder level

8.82%, market-based apportionment

No tax on dividends

City entity level

8.85%, COP-based sourcing

8.85%, market-based sourcing


The bottom line? If this advertising corporation is owned by nonresidents, C-corporation status might make sense. The state entity tax would likely be low, assuming the taxpayer had a lot of non-NYC customers. There would not be double taxation for state purposes, since dividends paid to nonresidents would not be taxed. And the City corporate tax would be a lot more favorable, again because C-corporations are required to use market-based sourcing, while S-corporations subject to the City corporate tax must base their allocation on where they are, which in this case would be 100% NYC.

Another big change from the TCJA, of course, is the loss of the full state and local tax (SALT) deduction, as the deduction is now limited to $10,000. For high-income taxpayers in high-tax states, this can have a significant impact. New York is trying to combat this loss of the full SALT deduction through several different measures including: an Employer Compensation Expense Tax (ECET), a state-administered charitable trust fund which also authorizes local governments to create charitable gift reserve funds to support education, health care, and other charitable purposes, a new Unincorporated Business Tax (UBT), and a lawsuit against the federal government.

South Dakota v. Wayfair

The last topic we covered at the seminar was the fallout from the recent South Dakota v Wayfair decision that will dramatically change nationwide nexus rules.  Under the old nexus rules, states could require out-of-state vendors to collect and remit sales tax on sales to customers within a state only if the out-of-state vendor was physically present in the state. To put it another way, before a state could require a vendor to collect its sales tax, that vendor had to be physically present in the state (i.e., through people or property).

However, in Wayfair, the Supreme Court reviewed this physical presence test and basically concluded that it no longer made sense given the rise of the internet and our digital economy. South Dakota provided the Court with a possible new rule. The state passed a law that said even if an out-of-state vendor didn’t have physical presence in the state, it would still have to collect and remit South Dakota sales tax if it had enough of an economic presence. South Dakota defined the requisite economic presence to be: either $100,000 in sales to South Dakota customers; or more than 200 transactions in the state. Though the Supreme Court did not officially deem this specific standard to be constitutionally valid, it did remove the physical presence requirement when considering whether an out-of-state vendor is required to collect and remit a state’s sales tax. The case was then sent back to the South Dakota state courts to determine whether the law’s economic presence thresholds were constitutionally valid, but the parties eventually settled, so these thresholds remain the law in the state.

To date, of the 46 jurisdictions that impose a general sales and use tax (45 states and the District of Columbia), 43 states have either passed legislation, enacted an administrative rule, or have a pending proposal for economic nexus, each with its own respective thresholds and effective dates. Most of these states followed the South Dakota model, choosing $100,000 in sales or 200 transactions, though some variation has occurred.

Until January 15, 2019, New York was one of the five holdout states where no guidance was forthcoming (the other then-holdouts being Arizona, Florida, Kansas, and New Mexico—note that Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose a general sales and use tax). Then New York issued the Notice N-19-1 and officially joined the ranks of the states that impose economic nexus. According to the Notice, an out-of-state vendor with no physical presence will be required to collect and remit New York sales tax if, during the immediately preceding four sales tax quarters:

1. the business made more than $300,000 in sales of tangible personal property delivered in the state; AND

2. the business conducted more than 100 sales of tangible personal property delivered in the state.

As you can see, New York’s economic nexus law imposes different thresholds than those reviewed by the Supreme Court in Wayfair. The dollar amount is significantly higher, while the transaction count is significantly lower. And most importantly, New York’s rule imposes an “AND” test, rather than an “OR” test. According to the Notice, the Tax Department is taking the position that Wayfair caused certain seemingly dormant provisions in New York’s Tax Law to become “immediately effective.”

Most recently, New York passed a new law (2019 NY Senate-Assembly Bill S6615) increasing the state’s economic nexus threshold for sales and use tax purposes from $300,000 to $500,000. The law also applies this increase to the state’s marketplace legislation.

This change mirrors action recently taken by California, which also increased its economic nexus threshold to $500,000 (up from $100,000). So, it looks like the larger states are going to permit more economic activity within their borders without requiring out-of-state vendors to collect and remit sales tax (Texas, Ohio, and Massachusetts also impose a $500,000 threshold). But while California’s amended rule did away with that state’s transaction requirement (previously more than 200 transactions), New York kept its transaction requirement in place. This is significant because, while most states impose an “or” test (e.g., $100,000 OR 200 transactions), New York’s threshold contains an “AND” requirement. In other words, an out-of-state vendor has to satisfy both the $500,000 sales requirement AND the more than 100 transactions requirement in order to create nexus in the state (assuming the vendor has no physical presence in New York). Thus, infrequent sales of highly valuable property in the state (e.g., sales of expensive art) will not create economic nexus for the vendor.

Moreover, unlike many other states, New York’s economic nexus rule is limited exclusively to sales of tangible personal property. Remote sales of services (e.g., online access to information services) will not trigger the state’s economic nexus rule. The recently enacted law did not broaden the scope of the state’s economic nexus rule to apply it to services.

Timothy P. Noonan, JD, is the practice group leader of Hodgson Russ LLP’s New York Residency Practice, and he is one of the leading practitioners in this area of the law. He has handled some of the most high-profile residency cases in New York over the past decade, including the Gaied case discussed here, one of the first New York residency cases to ever reach New York’s highest court. He also co-authored the 2014 edition of the CCH Residency and Allocation Audit Handbook, and he is often quoted by media outlets, including the Wall Street Journal, New York Times, and Forbes, on residency and other state tax issues. As the “Noonan” in “Noonan’s Notes,” a monthly column in Tax Analysts’ State Tax Notes, Tim is also a nationally recognized author and speaker on state tax issues. He can be reached at 716-848-1265 or

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