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Alysse McLoughlin focuses her practice on state and local tax matters, with particular emphasis on working with financial services companies. Alysse handles state tax litigation and also advises with respect to planning opportunities. Read Alysse McLoughlin's full bio.

Earlier this month, Connecticut Governor Dan Malloy released his Governor’s Bill addressing the various state tax implications of the federal tax reform bill enacted by Congress in December 2017, commonly referred to as the “Tax Cuts and Jobs Act.” Among other things, the Governor’s Bill addresses Connecticut’s treatment of the foreign earning deemed repatriation tax provisions of amended section 965 of the Internal Revenue Code (IRC). While the Governor’s Bill does not explicitly provide that the addition to federal income under IRC section 965 is an actual dividend for purposes of Connecticut’s dividend received deduction, the bill does protect Connecticut’s ability to tax at least part of the income brought into the federal tax base under the federal deemed repatriation tax provisions by defining nondeductible “expenses related to dividends” as 10 percent of the amount of the dividend. Continue Reading Connecticut Responds to the Federal Repatriation Tax

In a recent decision, the New Jersey Tax Court provided some long-awaited guidance on the “unreasonable” exception to the state’s related-party intangible expense add-back provision. In BMC Software, Inc v. Div. of Taxation, No 000403-2012 (2017), the Tax Court held that payments made by a subsidiary to its parent for a software distribution license were intangible expenses that were subject to the add-back provision, but that the statutory exception for “unreasonable” adjustments applied so that the subsidiary was able to deduct the expenses in computing its Corporation Business Tax (CBT). The court first determined that the expense was an intangible expense and not the sale of tangible personal property between the entities because the contract specifically called the fee a royalty, the parent reported the income as royalty income and the parent retained full ownership of the intellectual property rights indicating that no sale had taken place. Thus, the court determined that the intangible expense add-back provision did apply. The most interesting aspect of this case, however, was the court’s application of the “unreasonable” exception to the intangible expense add-back provision because that had not yet been addressed by the courts in New Jersey.

The Tax Court established two critical points with respect to the add-back of related-party intangible expenses: first, that the “unreasonable” exception does not require a showing that the related-party recipient paid CBT on the income from the taxpayer; and secondly, that a showing that the related-party transaction was “substantively equivalent” to a transaction with an unrelated party is sufficient evidence that the add-back is “unreasonable.” Continue Reading Favorable Guidance from the New Jersey Tax Court on the ‘Unreasonable’ Exception to the Related-Party Intangible Expense Add-back

On January 16, Governor Cuomo introduced the 2018 New York State Executive Budget Legislation. The bill proposes a number of changes to the New York State sales tax law. Below is a summary of the highlights.

Sales and Use Tax

  • “Marketplace Providers”

The governor’s bill proposes to impose sales tax registration and collection requirements, traditionally imposed on vendors, on “marketplace providers.” This provision is essentially an effort to obtain sales tax on sales to New York customers that make purchases over the internet from companies that have no physical presence in New York and do not collect sales tax in New York when those companies make sales through online marketplaces. In the governor’s Memorandum of Support of this bill, he affirmatively states that “the bill does not expand the rules concerning sales tax nexus”. Although, as noted below, this claim may not be true.

The bill effectively shifts the sales tax collection burden from the traditional vendor to the marketplace provider. The bill defines marketplace provider as “a person who, pursuant to an agreement with a marketplace seller, facilitates sales of tangible personal property by such marketplace seller or sellers.”

A person “facilitates a sale of tangible personal property” if the person meets both of the following conditions:

(i) such person  provides the  forum  by which the sale takes place, including a shop, store, or booth, an  internet  website,  a catalog,  or  a similar  forum;  and

(ii) such person or an affiliate of such person collects the receipts paid by a customer  to  a marketplace  seller  for  a  sale  of  tangible  personal  property.

The bill caveats that “a person who facilitates sales exclusively by means of the internet is not a marketplace provider for a sales tax quarter when such person can show that it has facilitated less than one hundred million dollars of sales annually for every calendar year after [2015].”

Unlike the definition of the term “vendor” in the current Tax Law, the definition of “marketplace provider” does not contain a doing business or physical presence component. Accordingly, despite the governor’s assertion that the bill does not expand the rules concerning sales tax nexus, this provision may expand the sales tax nexus rules by potentially imposing a sales tax collection obligation on marketplace providers that do not have a physical presence in New York.

In an effort to minimize the number of entities with a collection requirement, the bill provides that if a marketplace seller obtains a certificate of collection from the marketplace provider, it is not required to collect sales tax as a vendor.  The bill caveats that if the marketplace provider and the marketplace seller are affiliated parties, and the marketplace provider fails to collect the tax, the marketplace seller will remain liable for the sales tax.  For such purposes, parties are affiliated if they have as little as five percent of common ownership.

The proposed legislation would not permit marketplace sellers that sell to customers in New York through a marketplace provider to collect the sales tax themselves. One suggestion is to include a provision that allows marketplace sellers to collect the tax based on an agreement with the marketplace provider.

The bill provides some protection for marketplace providers if their failure to collect the correct amount of tax is due to incorrect information given to the provider by the marketplace seller.  Again, affiliated parties would not get this protection.

The bill proposes that the act take effect on September 1, 2017 and apply prospectively.

  • Related Entity Sales Tax Issues

The governor’s bill proposes amendments to the resale exclusion in an effort to stop companies from purchasing high-dollar-value property for resale to their affiliates, then leasing the property using a long-term lease or for a small fraction of the property’s fair market value thereby avoiding much of the sales tax on the transaction.

The governor’s bill proposes to solve the problem by eliminating the resale exclusion for (1) sales to a single member LLC or subsidiary that is disregarded for federal tax purposes for resale to its owner or parent company; (2) sales to a partnership for resale to one or more of its partners; and (3) sales to a trustee of a trust for resale to one or more of the beneficiaries of the trust.

This provision is broader than necessary to accomplish its goal since the provision also eliminates the resale exclusion for arms-length, good-faith transactions between related entities, thus potentially subjecting certain transactions to double taxation–once when the property is sold to the single member LLC, for example, and again when it is resold by the LLC to its owner.

The bill proposes that this section take effect immediately.

  • Use Tax Exemption for Nonresidents

In response to the New York State Division of Taxation’s and the Attorney General’s recent focus on sales and use tax issues involving the sale of artwork, the governor’s bill proposes to provide an exception to the use tax exemption for the use of property or services in New York purchased by the user while the user was a nonresident. The governor’s goal is to prevent New York residents from creating foreign entities to purchase property (usually artwork) outside of New York and subsequently bringing the property into New York and avoiding the use tax.

The bill provides that the use tax exemption for nonresidents will not apply if the nonresident business has not been doing business outside the state for at least six months prior to the date that such nonresident brought the property or service into New York. This provision does not apply to individual nonresidents.

Again, this provision may be broader than necessary to “catch” those avoiding tax using the use tax exemption. This provision may impact businesses acting in good-faith without a tax avoidance scheme. A better idea may be to provide that a nonresident company will lose the use tax exemption if the company has no valid business purpose and was created solely to avoid tax.

The bill proposes that this section take effect immediately.

  • Transportation, Transmission or Distribution of Gas or Electric

The governor’s bill also proposes the making of a technical change to NY Tax Law § 1105-C to clarify that sales tax is imposed on charges for transporting, transmitting, or delivering gas or electricity when the company providing the transportation, transmission, or distribution is also the provider of the commodity. This amendment is intended only to clarify the existing law.

The bill proposes that this section take effect immediately.

On February 16, 2016, the Michigan Department of Treasury announced its new acquiescence policy with respect to certain court decisions affecting state tax policy. The Treasury’s acquiescence policy is similar to the Internal Revenue Service’s (IRS) policy of announcing whether it will follow the holdings in certain adverse, non-precedential cases.

In Michigan, while published decisions of the Michigan Court of Appeals and all decisions of the Michigan Supreme Court are binding on both the Treasury and taxpayers, unpublished decisions of the Court of Appeals and decisions of the Court of Claims and the Michigan Tax Tribunal are binding only on the parties to the case and only with respect to the years and issues in litigation. Nonetheless, the Treasury has determined that a particular decision, while not binding, may constitute “persuasive authority in similar cases.” The Treasury may therefore decide to follow a non-precedential decision that is adverse to the Treasury in other cases, a policy known as acquiescence. Beginning with its May 2016 quarterly newsletter, the Treasury will publish a list of final (i.e., unappealed), non-binding, adverse decisions, and announce its acquiescence or non-acquiescence with respect to each. The Treasury points out that an indication of acquiescence does not necessarily mean that the Treasury approves of the reasoning used by the court in its decision. Continue Reading Michigan Department of Treasury’s New Acquiescence Policy: A Model for Other States

States are competing aggressively to attract data centers with various tax incentives. Data center companies and their business customers are taking them up on their offers. But are these incentives really a good deal for the businesses? Tax incentives that seem attractive at first glance may not be beneficial when they are examined in the context of the entire tax picture, especially in the unique, uncertain, and developing world of state taxation of technology and computer services.

With the rise of global commerce, cloud computing, streaming video and a wide array of other internet-related businesses, data centers have become big businesses.  In 2014, the colocation data center industry reached $25 billion in annual revenue globally, with North American companies accounting for 43 percent of that revenue.[1]

To get in on the action, states have been trying to outdo one another by offering a slew of competing tax breaks to the industry. According to the Associated Press, states have provided about $1.5 billion in data center tax breaks over the past 10 years.[2]   Some states have gone even further, providing tax incentives to the entire data center industry through changes in the tax laws themselves. Such incentives can include reductions or exemptions from sales and use taxes on data center products or services, favorable income tax rates for data center companies and favorable property tax rules for data center assets. According to a recent analysis by the Associated Press, at least 23 states provide such statutory data center tax incentives.[3] Just a few of the most recent examples include a sales tax exemption for data center equipment in Michigan,[4] a broadening of the sales tax exemption for data center electricity and equipment in North Carolina[5] and a favorable apportionment formula for data centers in Virginia.[6]  Importantly, many of these incentives apply not only to the data centers themselves, but also to their customers.

Businesses considering whether to take advantage of these incentives would be well advised to consider not only the potential benefit from any particular tax incentive, but also whether the decision would affect their tax picture as a whole. Because of the current uncertain and changing landscape for state and local taxation of technology and computer services, the analysis of these incentives for data centers and their customers can be particularly complex.

One item that a taxpayer might overlook when considering whether to take advantage of an incentive program is what affect, if any, the choice of location might have on the taxpayer’s property factor for income tax apportionment purposes. Obviously, location of a company’s technology equipment in a data center under a colocation agreement will cause the company’s in-state property factor to increase due to its equipment being located in the state. However, data center customers also should be aware that local tax authorities might also argue that the colocation payments themselves constitute consideration for the use of real or tangible personal property and thus the customer’s in-state property factor should be further increased by the amount of those charges. Our Firm has seen the tax authority in one state argue this precise issue.

Therefore, although a data center customer might pay less in sales tax by choosing a data center in a state that provides certain incentives, the customer should also carefully evaluate any potential increase in tax due to colocation in a state, such as a potential increase of their income tax liability due to higher apportionment from the property factor.

Another consideration that data center customers should keep in mind is the sourcing of receipts. For tax purposes, most states source the sale of technology products based on the location of the user, which usually will be the location of the customer’s employees.[7] However, where a vendor provides a product by way of a server, at least one state tax authority has determined that such receipts should be sourced to the location of the server.[8] These contrasting source rules present the risk that a business will essentially be subject to “double tax” on its purchase of technology services. Where IT-sourcing rules are not codified or their interpretation is uncertain, businesses should be cognizant of the risk of other tax authorities adopting this position, especially in light of the growth in services provided by data centers.

These issues demonstrate that although data centers and their customers stand to reap significant benefits from the wide array of state tax incentives available, any decision should include an analysis of the overall tax picture. Even the most attractive tax break may be outweighed by potential increases in other taxes.

[1] Yevgeniy Sverdlik, Global Data Center Colocation Market Reaches $25B, Data Center Knowledge (December 23, 2014) (accessible at:

[2] Yevgeniy Sverdlik, North Carolina Makes Data Center Tax Breaks Easier to Get, Data Center Knowledge (October 1, 2015) (accessible at:

[3] Id.

[4] SB 616, 2015 Leg., 1st Reg. Sess. (MI., 2015).

[5] HB 117, 2015 Leg., 1st Reg. Sess. (N.C., 2015).

[6] SB 1142, 2015 Leg., 1st Reg. Sess. (VA., 2015).

[7] See, e.g., New York Dep’t. of Tax’n and Fin., TSB-A-11(17)S (Jun. 1, 2011).

[8] Tenn. Dep’t of Rev., Ltr. Rul. 11-58 (Oct. 10, 2011).

As more and more states offer refundable tax credits to induce economic development, it is critical for businesses weighing incentive offers to take into consideration the federal income tax implications of an award. While a payment may be called a “credit” and claimed on a state tax return, that payment might nonetheless constitute taxable income for federal tax purposes. Imposition of federal income tax on incentive payments can materially reduce their value and should be considered when weighing the potential benefit of an award. A recent United States Tax Court decision, Maines v. Commissioner, demonstrates that risk.

Read the full article.

On May 28 2015, The California Court of Appeals issued a decision in Harley-Davidson, Inc. v. Franchise Tax Board, 187 Cal.Rptr.3d 672; and it was ultimately about much more than the validity of an election within California’s combined-reporting regime. It also tackled issues and, perhaps most importantly, blurred lines surrounding the Commerce Clause’s substantial nexus requirement. In Harley-Davidson, the court concluded that two corporations with no California physical presence had substantial nexus with California due to non-sales-related activities conducted by an in-state agent. The court applied an “integral and crucial” standard for purposes of determining whether the activities conducted by an in-state agent satisfy Commerce Clause nexus requirements.

The corporations at issue were established as bankruptcy-remote special purpose entities (SPEs) and were engaged in securing loans for their parent and affiliated corporations that conducted business in California. As a preliminary matter, the court found that an entity with a California presence was an agent of the SPEs. The court then concluded that the activities conducted by the in-state agent created California nexus for the SPEs that satisfied both Due Process and Commerce Clause requirements.

The Due Process Clause requires some “minimum connection” between the state and the person it seeks to tax, and is concerned with the fairness of the governmental activity. Accordingly, a Due Process Clause analysis focuses on “notice” and “fair warning,” and the Due Process nexus requirement will be satisfied if an out-of-state company has purposefully directed its activities at the taxing state. In Harley-Davidson, the SPEs purpose was to generate liquidity for the in-state entity in a cost-effective manner so that it could make loans to Harley-Davidson dealers, including dealers in California. Additionally, the SPEs’ loan pools contained more loans from California than from any other state, and the in-state entity oversaw collection activities, including repossessions and sales of motorcycles, at California locations on behalf of the SPEs. As a result, the court concluded that “traditional notions of fair play and substantial justice” were satisfied.

The Commerce Clause requires a “substantial nexus” between the person being taxed and the state. The Supreme Court of the United States has addressed this substantial nexus requirement, holding that a seller must have a physical presence in the taxing state to satisfy the substantial nexus requirement for sales-and-use tax purposes. In Tyler Pipe Industries v. Washington State Department of Revenue, 483 U.S. 232 (1987), the Supreme Court stated that, “the crucial factor governing [Commerce Clause] nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” While Harley-Davidson argued that the activities of the in-state agent could not create nexus for the SPEs, as such activities were not sales-related activities, the California court rejected this argument stating that “this argument fails from the outset, however, because the third-party’s in state conduct need not be sales-related; it need only be an integral and crucial aspect of the businesses” (internal citations omitted). The court observed that participating in actions to repossess motorcycles “maintain[ed] the value of the security interests underlying the securitization pools” and was “integral and crucial” to the SPE’s securitization business, thus, creating nexus for the SPEs.

Since Tyler Pipe, no case has expanded the “purposeful availment” or “substantial nexus” standards to encompass attribution of activities not relating to an out-of-state company’s ability to establish and maintain an in-state market. Although, some have argued that Tyler Pipe has left this door open. In contrast, other activities that do not directly generate income—such as purchases from in-state suppliers—have been found to be non-nexus creating.  The court’s decision in Harley-Davidson blurs the “market-enhancement” bright line by asserting that a broader range of activities conducted by in-state “agents” could satisfy Commerce Clause requirements if the activities are deemed “integral and crucial” to an out-of-state entity’s business. Interestingly, the court cites to a California Supreme Court decision, involving two foreign insurance companies and nexus under the Due Process Clause, to presumably support its Commerce Clause conclusion.

Since “integral and crucial” is a fairly amorphous standard, would an out-of-state business that retains a California law firm or a California management consulting firm to provide general advice (i.e., not specifically related to California) become subject to California taxation? After conversations with Franchise Tax Board (Board) employees, we understand the Board is encouraged that this decision reflects a broader view of the activities of an in-state person that can be attributed to an out-of-state business for nexus purposes. While this seems to be the superficial conclusion in Harley-Davidson, a closer review of the court’s rationale reveals that the court may have been confusing the “representative” and “alter ego” sub-categories of attributional nexus—or possibly, confusing unitary facts (which relate merely to apportionment concepts) with jurisdictional requirements. Perhaps the factors on which the court relied should have resulted in merely the conclusion that the two SPEs are properly includable in a combined California return, and not that such SPEs are taxpayers themselves.

On July 7, 2015, the New York Department of Taxation and Finance issued guidance (TSB-M-15(4)C, (5)I, Investment Capital Identification Requirements for Article 9-A Taxpayers) on the identification procedures for investment capital for purposes of the New York State Article 9-A tax and New York City Corporate Tax of 2015. Income from investment capital is generally not subject to tax in New York. For New York State and New York City corporate income tax purposes, investment capital is investments in stocks that meet the following five criteria:

  1. Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code (IRC) at all times the taxpayer owned the stock during the taxable year;
  2. Are held for investment for more than one year;
  3. The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the IRC;
  4. For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
  5. Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under IRC section 1236(a)(1) for the stock of a dealer in securities to be eligible for capital gain treatment (for stock acquired prior to October 1, 2015, that was not subject to IRC section 1236(a),such identification must occur before October 1, 2015).

Criterion five, regarding identification procedures, has been an area of concern for many New York taxpayers. While identification has been a concern of securities dealers for federal income tax purposes for many years, the New York identification requirement applies to all taxpayers that seek to have stock qualify as investment capital. Thus, all New York taxpayers, many in uncharted waters, must develop appropriate procedures to comply with this new identification requirement. Unfortunately, the Department’s guidance is somewhat sparse and does not address some important issues that could arise and that have been raised with the Department. The guidance also adopts a troubling position with respect to investments made by partnerships.

Securities Dealers

For taxpayers that are dealers subject to IRC section 1236, stock must be identified before the close of the day on which the stock was acquired (with the exception of floor specialists as defined in IRC section 1236(d) that have stock subject to the seven-day identification period in IRC section 1236(d)(1)(A)) as held for investment under IRC section 1236(a)(1) to satisfy the New York investment capital identification requirement. The presence or absence of a federal identification under IRC section 1236(a)(1) will be determinative, and a separate New York identification will not be allowed. A federal identification under IRC section 475 (relating to marked to market rules) is insufficient.

As a practical matter, many securities dealers that are taxed as corporations for federal income tax purposes do not comply with the identification procedures under IRC section 1236(a)(1) given the lack of a preferential federal income tax rate for capital gains. Those dealers will have to start complying with the federal identification rules for their stock to qualify as investment capital for New York State and City tax purposes. Additionally, the Department’s guidance does not provide a transitional rule for securities dealers, so a securities dealer that has not been complying with the IRC section 1236(a) identification requirements will not be afforded investment capital treatment for stock that it has already purchased.

Taxpayers Other Than Securities Dealers

For taxpayers that are not securities dealers subject to IRC section 1236 (non-dealers), stock must be recorded before the close of the day on which the stock was purchased in an account maintained for investment capital purposes only (e.g., the account cannot also be used for stock held for sale to customers). The investment capital account must disclose the name of the stock, CUSIP number of the stock (or CINS number for international securities), date of purchase, number of shares purchased and purchase price. If the stock is later sold, the account must also disclose the date of sale, number of shares sold and sales price.

The investment capital account may be an account maintained in the taxpayer’s books of account for recordkeeping purposes only, or it may be a separate depository account maintained by a clearing company as nominee for the company; in either case, the account must be set up in a manner that readily identifies the length of time the stock was owned by the taxpayer. Each corporation in a combined report must follow the identification procedures described above and maintain its own investment capital account.

While the Department’s guidance reiterates the transitional rule for stock acquired before October 1, 2015 (such stock must be clearly identified in accordance with these procedures by October 1, 2015), the guidance does not address other transitional issues that could arise in the normal course of business.

For example, what if a corporation is not taxable in New York State when it acquires a stock investment, and five years later it starts doing business in New York? When the corporation acquires the stock, it may not expect to be a New York taxpayer, so it may not know about the election, or if it does, it may not think that the election is needed. If the corporation later starts doing business in New York or becomes a New York taxpayer (for example, because of an acquisition), can it treat the investment as investment capital? As a matter of tax equity and practicality, corporations that first become New York taxpayers on or after October 1, 2015, should be permitted to identify any stock held as investment at the time they become a New York taxpayer.

The Department’s guidance also does not address certain merger and acquisition situations. For example, what if a corporation makes the identification and its stock is later bought in an IRC section 338(h)(10) transaction, where the corporation is treated as a new taxpayer for most income tax purposes but is the same legal entity? Must the “new” taxpayer make a new identification? What if a corporation makes an identification and then merges into another unrelated corporation? Must the surviving corporation in the merger make a new identification? As matter of practicality, identifications should carry over in acquisition situations. These issues have been brought to the Department’s attention and they are being considered.

Stock Acquired Pursuant to Options

If stock is purchased pursuant to an option, the stock may be identified as investment capital only if the taxpayer, before the close of the day on which the option was acquired (or by October 1, 2015, for options acquired before that date), had clearly identified the option in its records as held for investment.

Corporate Partners

Perhaps the most troubling aspect of the Department’s guidance is the identification procedures for investments owned by partnerships. The guidance provides that if a corporation is a partner in a partnership and the corporation uses the aggregate method to compute its tax—whereby the partner aggregates its share of the partnership’s income (or loss) and apportionment factors with its own income (or loss) and apportionment factors—the partnership must follow the required identification procedures at the partnership level. The guidance further provides that if a corporation becomes a partner in a non-dealer partnership and the partnership has not identified any stock as investment capital using the procedures described in this memorandum before the corporation became a partner, only stock acquired by the partnership on or after the date the corporation became a partner may potentially qualify as investment capital.

To highlight the potential issues with a partnership-level identification requirement, consider a corporation that invests in a partnership that is organized and operates entirely in another state or country. The partnership would have no way of knowing the New York rules and would have no legal obligation to comply with them. A partnership often does not know whether any of its partners are, or will become, New York taxpayers. Additionally corporate partners (particularly minority partners) often do not have the ability to require their partnerships to comply with these types of procedures and may not have the ability to monitor the partnership’s compliance.

A more workable rule would be to allow the identification to be made at the partner level. This rule would be consistent with the language of Tax Law section 208(a), which provides that stock be identified in “the taxpayer’s records,” and would facilitate compliance by taxpayers that invest in foreign or alien partnerships.

The McDermott Difference

We have been working with a number of taxpayers on these and other similar issues and encourage taxpayers to raise their concerns with the Department (either directly or through an advisor) so the Department can refine these identification procedures as it drafts the proposed regulations (which, unlike the recently issued TSB, will be subject to a notice and comment period).

On April 13, 2015, Governor Andrew Cuomo signed into law two bills related to the 2015-2016 budget (S2009-B/A3009-B and S4610-A/A6721-A) (Budget Bill), containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s (the City’s) General Corporation tax.  For additional information regarding these changes see our Special Report.

One of the less-publicized changes to the New York City Administrative Code involves an amendment to the provision that prohibits changes to the City allocation percentage during the additional period of limitation that is initiated by the reporting of federal or New York State corporate income tax or certain sales and use tax changes to the City where a taxpayer is not conceding the reported changes for New York City purposes.  N.Y. Admin. Code § 11-674(3)(g).  Under the former rule, if the general three-year statute of limitations had expired (i.e., the three-year period from the date the City return was filed), neither the taxpayer nor the City could make changes to the taxpayer’s allocation percentage due to the reporting of federal or New York State changes.  (This same prohibition on changes to the allocation percentage applied (a) when the taxpayer had not notified the City as to a federal or New York State change, but in such situation there would be no limitation on the time period during which the City can issue an assessment and (b) when a deficiency was attributable to the application of a net operating loss or capital loss carry back.)

In the past, the Commissioner has argued that the language in section 11-674(3)(g) was only intended to bar the City from making its own audit adjustments to a taxpayer’s allocation percentage and did not bar the City from making changes to a taxpayer’s allocation percentage that track or reflect State changes to such percentage.  A 1991 Department of Finance Hearing Decision agreed with this interpretation.  See Matter of C.I.C. International Corporation, FHD(390)-GC-9/91(0-0-0) (Sept. 13, 1991).  However, in 1999, the New York City Tax Appeals Tribunal held that the limitation imposed by section 11-674(3)(g) barred the City from making any changes to a taxpayer’s allocation percentage during the additional two-year period of limitation following a report of a State change, even if those changes were merely employed to mirror State changes.  Matter of Ethyl Corporation, New York City Tax Appeals Tribunal, TAT(E)93-97(GC) (June 28, 1999).

In this year’s Budget Bill, the limitation provision was amended with respect to taxable years beginning on or after January 1, 2015 (the provision was not changed for taxable periods beginning before January 1, 2015).  For taxable years beginning on or after January 1, 2015, the City may adjust the allocation percentage within the additional period of limitation when the New York City assessment is based on the reporting of a New York State change.  (The prohibition on changes to the allocation percentage still remains with respect to the reporting of federal changes.)  Similarly, when contesting an assessment based on a New York State change or when seeking a refund of such an assessment, taxpayers can include a challenge to the allocation percentage.

In addition, the refund provisions in Administrative Code section 11-678 have been revised to remove the limitation prohibiting taxpayers from asserting an allocation change when a refund claim is filed with respect to the reporting of a New York State change. (The prohibition on changes to the allocation percentage still remains with respect to the reporting of federal changes.)

Interestingly, in reviewing the changes that have been made to the statutory language, there does not seem to be any limitation providing that the allocation changes being asserted by the City or by the taxpayer need to be related to the underlying New York State changes.

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.  This post is the eighth in a series analyzing the New York Budget Bill, and summarizes the amendments to reform New York City’s General Corporation Tax.


In 2014, New York State enacted sweeping reforms with respect to its taxation of corporations, including eliminating the tax on banking corporations, enacting economic nexus provisions, amending the combined reporting provisions and implementing customer-based sourcing.  New York City’s tax structure, however, was not changed at that time, resulting in concern among taxpayers about having to comply with two completely different sets of rules for New York State and New York City, and concern from representatives of the New York City Department of Finance, who would have lost the benefit of the joint audits that they currently conduct with New York State and the automatic conformity to any New York State audit changes resulting from separately conducted New York State audits.

Although it came down to the wire, the Budget Bill did make the necessary changes to largely conform the New York City corporate franchise tax provisions to those in place for New York State.  These changes will be effective as of January 1, 2015, which is the same general effective date for the New York State corporate tax reform.

Differences Between New York State and City Tax Laws

Even after passage of the Budget Bill, there remain some differences in the tax structures of New York State and New York City.  Some examples include the following:

  • New York State has economic nexus provisions, but New York City does not (except for credit card banks).
  • New York State will phase out its alternative tax on capital (with rate reductions implemented until the rate is 0 percent in 2021; different, lower rates apply for qualified New York manufacturers), and the maximum amount of such tax is capped at $5 million (for corporations that are not qualified New York manufacturers). Not only will New York City not phase out such alternative tax, it has increased the cap to $10 million, less a $10,000 deduction.  Also, New York City will not have a lower cap for manufacturers.
  • Under New York State’s corporate tax reform, a single tax rate is imposed on the business income base for all taxpayers (except for favorable rates for certain taxpayers, such as qualified New York manufacturers), with the amount of such rate being decreased from 7.1 percent to 6.5 percent in 2016. Qualified New York manufacturers are subject to a 0 percent tax rate on the business income base.  In the Budget Bill implementing New York City’s tax reform, there is no similar rate reduction.  Furthermore, instead of using a single rate for all taxpayers (except for the favorable rates adopted for certain taxpayers, such as qualified New York manufacturers), New York City will impose a higher tax rate (9 percent) on the business income base for certain large financial corporations than will be imposed on other corporations (8.85 percent).  In addition, New York City will not impose a 0 percent tax rate on qualified New York manufacturers; instead, there will be a potential reduction in the tax rate, with the amount of such deduction dependent upon the amount of the manufacturer’s income, with the reduced rate reaching as low as 4.425 percent.  Additionally, the New York City definition of “qualified New York manufacturer” is slightly different from the State’s definition.
  • New York City will continue its phase-in of a single sales factor business allocation percentage, but the Budget Bill also provides for an election for certain taxpayers to have a modified three-factor formula apportionment even after the phase-in of a single sales factor is complete.
  • New York City has traditionally taxed S corporations in a manner similar to the taxation of C corporations. The taxation of partnerships and S corporations will not change as a result of the Budget Bill (S corporations will continue to be subject to the former General Corporation Tax, and unincorporated entities will continue to be subject to the Unincorporated Business Tax, which has not been amended by the Budget Bill), so in addition to many other differences, those entities will remain subject to the costs of performance sourcing rules instead of the new customer-based sourcing rules.  New York City has organized a working group to study and determine the proper treatment of such entities.