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EisnerAmper Blog

An EisnerAmper State And Local Tax Blog

December Anti-Slumber: NYS Corporate Tax Changes and Resultant Action Items

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December 17, 2014

Allen_Jeffrey By Jeff Allen, CPA and Jennifer Banister

December has arrived, and that means two things: year-end parties and year-end tax planning.

As you are likely aware, New York State passed sweeping Corporate Income Tax Reforms .  As many of these changes are effective January 1, 2015, it is worth revisiting the major changes, and whether they require immediate action.

  1. Sourcing of New York Receipts from Services.  Starting in 2015 New York has adopted a market based “destination” sourcing method for receipts from services.  This is a significant change from the prior cost-of-performance method.  As a result, customer location will determine whether receipts from services are attributable to New York.  Previously, New York excluded gains from the sale of capital assets (i.e., property not held for sale in the regular course of business).  This is no longer the case.    
    • Action Item: For state apportionment purposes, corporations will need to start tracking their receipts from services based on a market sourcing approach, and evaluate the impact this change may have on its tax liabilities, as well as the related financial statement impact.
     
  2. Net Operating Losses (NOLs).  Previously, NOLs were limited to the federal NOL and computed on a pre-apportionment basis.  NOLs are now computed on a post-apportionment basis and are no longer limited to the federal NOL.  NOLs may now be carried forward for 20 years and carried back for 3 years.     Pre-2015 NOLs may still be carried forward but are calculated based upon transition rules providing for a “prior NOL conversion” (PNOLC) subtraction pool.  In effect, the PNOLC subtraction pool converts pre-apportioned NOLs incurred in years before 2015 to post-apportioned NOLs that are calculated at a 6.5% rate.  Any unused conversion subtraction may be carried forward through the 2035 tax year.  Alternatively, the law permits taxpayers to make a one-time election on a timely filed return for the tax year beginning on or after January 1, 2015, but before January 1, 2016 (the 2015 year for calendar year filers), to deduct 50% of the conversion subtraction pool over a two-year period.   However, if this election is made, any unused amounts are lost after the two-year period.
    • Action Item:  Assuming there are NOL carry forwards from prior years, these changes will require the corporation to determine the “prior NOL conversion” subtraction pool, which entities are included in the combined group for the “prior NOL conversion” subtraction pool, and the potential benefit of selecting the one-time election.
     
  3. Economic Nexus and Subjection to the New York Corporate Franchise Tax.    Previously, most taxpayers were only subject to the Corporate Franchise Tax if they had a physical presence in New York, with an exemption for companies whose only New York presence was a fulfilment center to store and ship inventory.  Starting in 2015, this exemption is eliminated and the Franchise Tax base will expand to include any corporation with more than $1 million in New York sourced gross receipts.  A corporate partner in a partnership operating in New York will also be subject to the Franchise Tax.
    • Action Item: This provision, coupled with the new sourcing rules for services outlined above, may subject many more services companies based outside of New York to New York taxation.  Thus, additional nexus analysis may be necessary if the service is performed in another state, and if the customer that benefits from the service is located in New York.  Further, non-service companies should also closely track their levels of New York sales if they are close to this threshold.
     
  4. Combined Reporting.  Under the new law, the rules for determining when related companies should file separate or combined tax returns have once again changed significantly.  Combined reporting is mandatory for unitary businesses where one taxpayer owns or controls more than 50% of the voting stock of one or more corporations.  This brings New York in line with the majority of other states and is designed to reduce controversy.  Additionally, taxpayers may choose to make an irrevocable, 7-year election to include all corporations meeting a more-than-50 % ownership test, including non-U.S. corporations with a permanent establishment in the U.S. or income that is effectively connected with the U.S.  This election should be carefully examined from a tax-planning perspective.
    • Action Item: In addition to reviewing their unitary relationships, corporations should carefully examine the advantages and disadvantages of the 7‐year election. Corporations should also address the inclusion of alien corporations. In many instances, the combined group will change.
     
  5. Other Changes.  For tax years beginning on or after January 1, 2016, the corporate net income tax rate will be reduced from 7.1 to 6.5% for most corporate taxpayers.  Small businesses can begin utilizing the 6.5% reduction in the 2014 tax year.  The new budget also, eliminates the Alternative Minimum Tax base, eliminates the deduction for income from subsidiary capital and creates new tax credits for certain industries.  Finally, “Qualified New York Manufacturers” are subject to a -0-% Business Income Tax rate.
    • Action Item: Companies should review their classification to ascertain whether they qualify as a New York Manufacturer, a Qualified Emerging Technology Company, or a Small Business.  They should also review the potential financial statement impact on items such as their deferred tax assets. 
     

Michigan Refund Opportunity

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July 18, 2014

Michigan Supreme Court holds in favor of Taxpayer’s use of the MTC’s equally weighted, three-factor apportionment formula

By Gary Bingel, Bill Gentilesco, and Matt Wilk

On July 14, 2014, the Michigan Supreme Court issued its decision in International Business Machines Corp. (“Taxpayer” or “IBM”) v. Department of Treasury, and decided in favor of the Taxpayer’s election to use the Multistate Tax Compact (“MTC”) equally weighted, three-factor apportionment method for the Michigan Business Tax including both the income tax and the modified gross receipts tax. The Court is not anticipated to accept the request for reconsideration, should there be one. 

This decision in Michigan follows the most recent decision in California’s The Gillette Company, et al. v. California Franchise Tax Board Case.  In California, the Court of Appeals also held in favor of the taxpayer’s use of the equally weighted, three-factor apportionment formula.  The decision in Gillette was appealed to the California Supreme Court and a decision is expected before the end of the calendar year.

 The Issue:

Today there are seventeen Member States of the Multistate Tax Compact.  The MTC default apportionment method is an equally weighted, three-factor apportionment formula of property, payroll and sales.  Over time, most of the MTC Member States have enacted apportionment formulas that are more heavily weighted to the sales factor, if not a 100% sales factor.  Both taxpayers in IBM and Gillette argued that the taxpayer was entitled to elect to use the MTC equally weighted, three-factor apportionment formula instead of the state’s default apportionment formula.  Since the taxpayers in these cases had lower percentages of property and payroll as compared to its sales in the state, the MTC apportionment formula resulted in a lower state tax liability. 

The Opportunity: 

Clients that have significant Michigan liabilities for the years the MBT was in effect (2008-2011) should analyze whether the use of the MTC’s equally weighted, three-factor apportionment formula would be beneficial and, if so, pursue claims for refunds.  The Michigan Supreme Court did not address whether the MTC is applicable to the new Michigan Corporate Income Tax, and thus there may be an opportunity to claim refunds for more recent tax years. 

In addition to California and Michigan, refund opportunities may also exist in other states.  Although the California and Michigan cases are not precedential in other states, they are persuasive evidence of the legal issues.  Therefore, there are opportunities in many of the MTC Member States to take the position that the MTC’s equally weighted apportionment formula is available for use. 

New Jersey Budget Brings About Important Tax Changes

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The newly enacted 2015 New Jersey State Budget delivers some good news, as well as some potentially bad news, for New Jersey taxpayers. Amid all the debate, Governor Christie vetoed two tax increases that were passed by the legislature and approved several new laws around tax provisions that could have lasting effects on taxpayers.

EisnerAmper state and local tax experts Gary Bingel, William Gentilesco and Matt Wilk weigh in on the four key changes set to take effect for tax years ending on or July 1, 2014, and explain how each one will impact New Jersey taxpayers and business owners in Several Key Changes to Existing New Jersey Tax Provisions.

 

NY Court of Appeals Holds Against Department of Taxation and Finance Position on Statutory Residence

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February 28, 2014

By Stephen Bercovitch


Bercovitch_SteveThe New York Court of Appeals has decided that a taxpayer’s subjective use of the premises is a key inquiry in determining “permanent place of abode” to be considered together with the degree that the taxpayer maintains living arrangements in particular premises.  This decision, in which the Court referred to the “statutory residence” provision of the tax law, is a reversal of the Department of Taxation and Finance’s position that property rights, suitability and unfettered access equate to “permanent place of abode.”   Find out more with our article titled “Major Decision on NY Statutory Residence Issued by Court of Appeals.”

U.S. Supreme Court Declines to Review New York Amazon Click-Through Nexus Case

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 Bingel, GaryDecember 17, 2013

By Gary Bingel, CPA

In our April 1, 2013 State and Local Tax blog, we described the impact of New York’s highest court upholding New York’s Internet affiliate nexus requiring the collection of sales tax even when a retailer has no physical nexus itself in New York.  The taxpayers subsequently appealed to the U.S. Supreme Court. 

On December 3, the U.S. Supreme Court denied a request to review the Amazon.com and the Overstock.com challenges to New York’s statutory provisions requiring out-of-state Internet retailers with no physical nexus to collect sales tax.

This decision has now exhausted the appellate options for the New York law.   Thus, “click-through” nexus is now the law of the land, at least in New York.  While other states have adopted laws similar to New York’s, not every state’s affiliate nexus law has been upheld.  Specifically, the Illinois Supreme Court decided in October 2013  that the Illinois affiliate nexus statute was invalid and unenforceable because it was preempted by the Federal Internet Tax Freedom Act.

START-UP NY

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Bercovitch_SteveDecember 3, 2013

By Stephen Bercovitch  

The NYS Department of Taxation and Finance has taken the initial step to implement the the ‘SUNY Tax-Free Areas to Revitalize and Transform Upstate New York’ (START-UP NY program) by issuing a technical memorandum summarizing the tax benefits for approved businesses located within a tax-free NY area, and for the employees of these businesses.  The full text of the State’s October 22, 2013 Memorandum can be found here.    

In brief, the START-UP NY program is intended to draw businesses and jobs to New York State, that would not have otherwise located in-state and especially upstate.  New York loses many start-up companies to various states shortly after their formation.  This program is designed to help attract and expand job opportunities that will benefit all residents.  The benefits afforded under the program will apply to tax years beginning on or after January 1, 2014 and to sales tax quarters beginning on or after March 1, 2014.  Businesses must apply for the program by December 31, 2020.

The START-UP NY program is designed to create tax-free communities on currently vacant land or space on the campuses of SUNY schools and community colleges, CUNY campuses, and other eligible New York private college and university campuses.  The initiative is geared toward leveraging higher education institutions with advanced research and development resources for the benefit of new businesses for a synergy of industry experts and research laboratories, to create new jobs and expand opportunities for students and academic researchers in targeted start-up industries.  The intention is to foster business-academic alliances that result in commercially viable technological innovation and the resulting new jobs.  There are a number of requirements to be met:

  • The eligible start-up business must be new to New York – start-ups cannot have been engaged in a line of business that is currently or was previously conducted by the business or a related person in the last five years in New York State, and employees cannot be transferred from employment with another business located in-state through reorganization; 
  • The mission and activities of the business must align with or further the academic mission of the campus, college or university sponsoring the tax-free NY area;
  • The new job must be a full-time job (or two or more part-time jobs that together constitute the equivalent of a full-time job), filled for more than six months during each year for which tax benefits are being granted, and not filled by an individual employed within New York State within the preceding 60 months by a related person.
  • In New York City, Long Island, and Westchester County, new technologies are targeted.  For these downstate areas – in addition to the other requirements -- a business must be in the “formative stage” (not yet in the commercial marketplace); or
    • Engaged in the design, development and introduction of
      • new biotechnology,
      • information technology,
      • remanufacturing,
      • advanced materials processing,
      • engineering or electronic technology products; and/or
      • innovative manufacturing processes.
       
     

Qualified businesses and their employees will enjoy numerous tax benefits such as:

  • Business income tax exemption for ten years, based on presence in the designated campus related area;
  • Employees in participating qualifying companies will pay no state personal income taxes for the first five years on income of $200,000 for a single individual or $300,000 if filing a joint return; 
  • Exemption from sales and use taxes on property and services; and/or 
  • Exemption from real property taxes on property owned by a college or university. 

Much remains to be implemented.  Campuses must submit a plan to be designated as a tax-free community.   A three-member Start-Up Approval Board will designate up to twenty such sites.  Existing academic programs cannot be cancelled and current buildings, such as dorms or classrooms, cannot be razed to make land available for companies seeking tax benefits.   The Governor is also seeking additional ideas to incentivize business.  On October 2, 2013 he established the New York State Tax Relief Commission comprised of former Governor Pataki and Comptroller Carl McCall as well as other highly qualified citizens and business leaders.  This group is to examine new ways to reduce the burdensome tax load on start-up businesses and fuel economic growth.  For more information, please contact your tax professional.

New Massachusetts Computer and Software Tax Repealed

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 Bingel, GaryOctober 17, 2013

By Gary Bingel, CPA

On September 27, 2013, Massachusetts Governor Deval Patrick signed legislation that repealed the imposition of the 6.25% sales and use tax on computer and software services that was originally effective July 31, 2013.  This is an amazing turnaround from just a few months ago when the Governor vetoed the bill to implement the tax on computer services.  Both the Massachusetts Senate and House of Representatives voted on July 25, 2013 to override the Governor’s veto, enacting the law effective July 31, 2013.  The new tax was to be imposed on computer system design services and the modification, integration, or configuration of standard software.  Computer system design services means the planning, consulting, or designing of computer systems that integrate computer hardware, software, or communication technologies and are provided by a vendor or a third party.  The new tax did not apply to data access, data processing, or information management services.

After the veto override, the business community realized the impact of the new tax law and raised a loud outcry which created an immediate reaction in the legislature.  In anticipation of repeal, the Department of Revenue (DOR) initially extended the September 20 filing/payment date for taxes collected July 31 through August 31 to the October 20 filing date.

Now with the repeal, the DOR has issued Technical Information Release 13-17 explaining what vendors need to do to return the tax to their customers if they had already collected and remitted the tax to the state or if they collected the tax but did not yet remit.

Finally, the DOR stated that “longstanding statutory and regulatory rules regarding sales and use tax on standardized or prewritten software and on computer hardware remain in effect.”  Also, the DOR stated that it will issue additional guidance to clarify when a transaction is a taxable sale of standardized or prewritten software and a non-taxable service.

 

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