Leah Robinson (212) In a New York Minute: Tax Reform Developments

Transcription

1 Leah Robinson (212) In a New York Minute: Tax Reform Developments 1

2 Nexus Combination Tax Base Apportionment NOLs Credits and Incentives Other Leadership Changes What s on the Horizon 2

3 Nexus 2014 (and prior) law: Physical presence required for NYS and NYC (except for credit card issuers and acquirers) 2015 NYS law: A corporation is subject to tax under the new law if it is deriving at least $1MM of receipts from activity in NYS $1MM based on market-based apportionment sourcing rules (i.e., New York receipts) Combined groups: Aggregate the New York receipts of each member of a combined group having at least $10,000 in New York receipts NYC law: Retails physical presence (will reinstate economic nexus for credit card issuers and acquirers 3

4 Combined Reporting NYC and NYS Prior and Current Law 4 Through 2006, combined report in Article 9-A if: Corporations are engaged in a unitary business Meet the common ownership threshold (80%), and Distortion resulted from filing separately 2007 through 2014, combined report in Article 9-A if: Corporations are engaged in a unitary business (this requirement was not always explicitly stated, see TSB-08(2)C) Meet the common ownership threshold (80%), and Other requirement, determined by either of two standards: Hard Distortion: Substantial intercorporate transactions exist among the corporations (regardless of the transfer price for those intercorporate transactions) Soft Distortion: Separate filing distorts New York income or activities (economic substance, business purpose), although there was no affirmative grant of this discretion under the new statute All prior and current years: Aliens excluded, companies taxable under other articles not includible in Article 9-A group (but may be considered in measuring distortion for Article 9-A group)

5 Combination New York: Old Old Law Matter of the Petition of SunGard Capital Corp., DTA No (N.Y. Div. of Tax App. Apr. 3, 2014) ALJ determined that taxpayers did not operate a unitary business The ALJ found that the centralized operations and services provided by the parent corporation were stewardship-activities not resulting from the parent s operational expertise The decision rejects many of the traditional indicia of functional integration, centralization of management, and economies of scale In the Matter of IT USA, Inc., DTA Nos ; (N.Y. Tax App. Trib. Apr. 16, 2014). Intercompany transactions conducted at cost per se distortive In the Matter of the Petition of Astoria Financial Corporation & Affiliates, TAT(H) 10-35(BT) (Oct. 29, 2014, released Nov. 7, 2014). Need to prove transactions are not a sham? 5

6 Combination NY: New Old Law Matter of the Petitions of Knowledge Learning Corp. and Kindercare Learning Centers, Inc., Nos & (N.Y. Tax Appeals Tribunal September 18, 2014) First post-2007 law change decombination case The Administrative Law Judge (lower decision) found that taxpayers failed to establish substantial intercorporate transactions existed between affiliates to permit a combined filing and that distortion was not relevant On appeal ( on exception ), Tax Appeals Tribunal found sufficient evidence of SITs and determined that distortion was indeed relevant. 6

7 Combined Reporting NYS and NYC: New Law 7 Mandatory Combined Reporting: Eligible corporations are required to file a combined report if: Engaged in a unitary business with the taxpayer and; More than 50% direct or indirect common ownership test is met (measured by voting power of capital stock) Distortion (hard or soft) is irrelevant New Election to File Based on Common Ownership: No unitary business requirement Must meet the more than 50% common ownership test (same ownership as mandatory combined filing) Must be made on an original timely filed return Irrevocable for seven taxable years; automatically renews unless revoked; revocation bars election for three taxable years Any corporation entering the commonly owned group while the election is in effect is automatically included in the combined group (regardless of unitariness)

8 Combined Reporting NYS and NYC New Law Corporations that may be included on a combined report: General domestic corporations Corporations previously taxable under banking taxes Certain alien corporations (excluded under prior law) Combinable captive insurance companies (only overcapitalized captives includible under prior law) Captive real estate investment trusts (REITs), and Captive regulated investment companies (RICs) Certain corporations may not be included in a combined report (even if a commonly owned group election is made): Corporations taxable under another Article (NYS) or Chapter (NYC), namely certain utilities and insurance corporations An REIT or RIC that is not a captive REIT or a captive RIC A New York S corporation, and An alien corporation that is not treated as a domestic corporation under the Internal Revenue Code and that has no effectively connected income for the taxable year 8

9 Tax Base NYS old law/new law 9 New law: Article 9-A taxpayers (general corporations and banking corporations) pay: 1. Tax due on the highest of four three bases: Entire net (i.e., federal taxable) income (ENI now called business income base ) Capital (net) (cap increased to $5mm ; phases out in 2021) Minimum taxable income, and A fixed dollar minimum 2. Tax on subsidiary capital, and 3. Plus, in some cases, the temporary Metropolitan Transportation Business Surtax 2013 law, Article 32 taxpayers (banking corporations) pay: Tax due on the highest of two bases: ENI (the computation of which varies from the computation of ENI under Article 9-A), and Alternative minimum tax, which is paid on the highest of three bases: (1) taxable assets, (2) alternative ENI, and (3) a fixed dollar minimum)

10 Tax Base NYC new law New law: Chapter 3 taxpayers (general corporations and banking corporations) pay: 1. Tax due on the highest of three bases: Business Income Base; Capital (net) (cap increased to $10mm; DOES NOT PHASE OUT); or A fixed dollar minimum 10

11 Tax Base and Income Classification Comparison 2014 Entire Net Income Base Modified federal ENI - Income from subsidiary capital less attributed expenses Deducted from ENI and not included in ENI base. Apportioned subsidiary capital is subject to a separate tax - Income from investment capital Less attributed expenses Apportioned by Investment Allocation Percentage (IAP) Result + = Business income Apportioned by Business Allocation Percentage (BAP) Result = taxable income 2015 Business Income Base Modified federal ENI - Investment Income less attributed interest expense or 40% expenses - Other exempt income less attributed interest expense or 40% expenses = Business income Apportioned by Business Allocation Percentage (BAP) taxable income 11

12 Investment Income The Budget, and 2015 amendments, significantly restrict the investment capital definition: Includes only stock in non-unitary entities (does not include bonds, other securities, or cash) Must also be: Held for more than one-year; Capital asset under I.R.C. 1221; Stock acquired on or after January 1, 2015, must have never been held for sale in the regular course of business Identified in records on day acquired pursuant to 1236 Note October 1, 2015 deadline Investment income limited to 8% of total ENI Income or gain from debt obligations or other securities that cannot be apportioned to the state under the U.S. Constitution is classified as exempt investment income 12

13 Tax Base and Income Classification New Business Income Tax Base New category of other exempt income, which consists of: Certain income from controlled foreign corporations (CFCs) and Exempt CFC income is the income required to be included in the taxpayer s federal gross income pursuant to IRC 951, received from a corporation that is conducting a unitary business with the taxpayer but that is not included in a combined report with the taxpayer Dividends from unitary subsidiaries that are not included in the taxpayer s combined report (for example: certain alien corporations or corporations taxable under Article 9, or Article 33) 13

14 Apportionment New York Old Law (2014 and prior) General Corporations: NYS/NYC: A taxpayer s IAP is computed based on the weighted average of the IAP s of the taxpayer s investments (found in a Department publication) NYS: A taxpayer s BAP is the ratio of the taxpayer s New York receipts to its total receipts (single sales factor). Generally, New York receipts are from: Sales of tangible personal property shipped or delivered to the taxpayer s customers in New York Sales of services to the extent the services were performed in New York, and Other business receipts to the extent earned in New York NYC: Phasing in single sales factor through 2018 Banking Corporations: ENI is multiplied by a three-factor formula consisting of the: Double-weighted deposits factor Payroll factor, and Double-weighted receipts factor Taxpayers must source deposits to the extent that those deposits are maintained by the taxpayer at a branch location 14

15 Apportionment New York: Old Law In re Expedia, DTA Nos & (N.Y. Div. Tax. App. Feb. 5, 2015) New York Tax Law generally sources service receipts based on location of performance and other business receipts based on market. ALJ held that travel reservation facilitation receipts and online advertising receipts were service receipts and must be sourced to the location where the services were performed. Taxpayer demonstrated that the services were performed at its headquarters, data centers, and call centers rather than the location of its customers modems. ALJ rejected the Department s position that a service requires human involvement at the time the transaction is consummated. Department did not appeal Looking for a case with better facts Implications for sales tax? 15

16 Apportionment NYS and NYC New law: Retains the receipts-only apportionment scheme for NYS; continues phase in for NYC with election to retain 2017 treatment Moves from cost of performance sourcing to market-based sourcing Expands the categories of receipts for which sourcing is specifically addressed and provides guidance on how to apply the sourcing rules Hierarchies determine where to assign particular receipts A taxpayer is required to exercise due diligence under each method before rejecting it and moving to the next method in the hierarchy Example: Sourcing digital products (e.g., electronically available games, computer software, audio work, and books) Taxpayer must first source to the location of primary use and then to the location where the digital product is received by the customer How does a taxpayer determine the location of primary use? What if the taxpayer s customer orders a software program that will be used by its employees at several office locations? With respect to location of receipt, it is unclear if this would be determined by the customer s mailing address or some other method There may be several instances where the location of receipt will not be the location at which the customer actually uses the digital products

17 Apportionment Other Service and Business Receipts The Budget applies a similar 4-step hierarchy for sourcing Other Service and Business Receipts: 1 - Where the benefit is received 2 - Delivery destination 3 - Using the apportionment fraction for such receipts from the prior taxable year 4 - Using the current taxable year apportionment fraction for such receipts that can be sourced using methods 1 and 2 Can California s rules be used to determine where the benefit is received? (Would allow use of contracts/books and records; where order was placed; billing address) 17

18 Net Operating Losses NY Old Law In the Matter of TD Holdings II, Inc., DTA No (N.Y. Div. of Tax App. Jan. 22, 2015) (appeal pending) Must taxpayer use up a portion of NOL when tax computed on another base exceeds ENI? No. Refund implications Recomputation implications (related to PYNOL Conversion Subtraction Pool computations discussed on later slide) 18

19 Net Operating Losses NYS & NYC New Current Year NOL Deduction 2014 law: NOL deduction was generally the same as the federal NOL deduction computed pursuant to IRC 172, with some modifications NOLs were computed and carried forward on a pre-apportionment basis, and the NOL deduction is applied on a pre-apportionment basis 2015 law: NOL deduction computation is decoupled from the federal computation; the NOL is the amount of business loss incurred in a tax year multiplied by the taxpayer s apportionment percentage for that year. Business loss is not defined in the new law but it most likely means the entire net income less investment income and other exempt income as each term is defined in the bill NOLs are computed and carried forward on a post-apportionment basis, and the NOL deduction is applied on a post-apportionment basis New law provides a 20-year carryforward period for NOLs, with NOLs to be deducted on a first in, first out basis New law also allows a taxpayer to carryback the NOL for up to three tax years, but not to any years starting before January 1,

20 Net Operating Losses NYS & NYC Conversion Subtraction Conversion Subtraction allows taxpayers to use NOLs generated (and calculated on a pre-apportionment basis) in years beginning before the new law applies to the taxpayer (i.e., January 1, 2015, for calendar year filers) However, such prior year NOLs are not simply carried forward; they are recomputed: First, the taxpayer determines the amount of NOL carryforward it would have had on the last day of the base year using the current (i.e., 2014) Tax Law, including all limitations applicable under the current law (the unabsorbed NOL ) Next, the taxpayer determines its apportionment percentage (i.e., its BAP) for that base year, again using the current (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer s Franchise Tax report for the base year Third, the taxpayer multiplies the amount of its unabsorbed NOL by its base year BAP and then multiplies that amount by the tax rate that would have applied to the taxpayer in the base year The resulting amount is divided by 6.5%( qualified New York manufacturers use 5.7%; the percentages are the current year business income tax rates) Result of these computations will be called the Conversion Subtraction pool 20

21 Net Operating Losses Conversion Subtraction Amount of a taxpayer s Conversion Subtraction will be a portion of its Conversion Subtraction pool computed above Applying the Conversion Subtraction and carrying forward any balance: Standard rule is one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted Any unused Conversion Subtraction may be carried forward until tax years beginning on or after January 1, 2036 (unless the two-year election was made) New law provides a one-time revocable election, which must be made on a timely filed return for the tax year beginning on or after January 1, 2015, but before January 1, 2016, to deduct up to half of the Conversion Subtraction pool in each of the first two tax years beginning on or after January 1, 2015 If a taxpayer makes this election, that taxpayer cannot carryforward any unused amount of the Conversion Subtraction beyond that two-year period Conversion Subtraction must be applied before any post-2014 NOL deduction is taken (i.e., the deduction for NOLs generated in taxable years beginning on or after January 1, 2015, as discussed below) 21

22 Credits and Incentives New York Qualified New York Manufacturers enjoy several benefits, including lower tax rates NYS Benefit: 0% business income tax and $350K capital base cap (plus MTA surcharge) NYC Benefit: lower business income tax rates (graduated scale) but no benefit to large corporations (over $40MM in unallocated receipts) Definition of a Qualified New York Manufacturer has been greatly expanded NYS: A corporation (or combined group) qualifies as a Qualified New York Manufacturer by satisfying either of two tests: (I) a two-part receipts and property test, or (II) a two-part employment and property test. Each is discussed on the following slides For purposes of these tests, keep in mind that employees and property located anywhere in New York State are considered (an early version of the new law limited the scope to Upstate New York only) NYC: uses the receipts and property test only 22

23 Qualified New York Manufacturer (I) Receipts and Property Test for Qualification; (A) and (B) must both be satisfied (A) Receipts portion of the test requires that the corporation be principally engaged in manufacturing Principally engaged in means that during the taxable year, more than 50% of the gross receipts of the taxpayer are derived from the sale of goods produced by the activities listed in the next paragraph. For purposes of determining whether a combined group of corporations qualifies as a manufacturer, the same list of activities is used and the same 50% test is applied, but in computing the group s gross receipts, intercompany transactions are eliminated Qualifying activities are the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming agriculture, horticulture, floriculture, viticulture, or commercial fishing. Generation and distribution of gas, steam, and electricity are excluded from the definition. Thus, a corporation (or combined group) must receive 50% or more of its gross receipts from sales of goods produced by those qualifying activities. NYC s list differs. (B) Property portion of the test is satisfied if: (1) Corporation has property eligible for the investment tax credit, Property eligible for the investment tax credit includes tangible personal property, buildings and structural components of buildings that are: depreciable; have a useful life of at least four years; are acquired by purchase; are located in New York; and are principally used in the production of goods by manufacturing and (2) Corporation meets either of two additional requirements (a) Adjusted bases of the corporation s New York property (for federal income tax purposes) is at least $1MM measured on the last day of the tax year, or (b) All of the corporation s real and personal property is located in New York (II) Employment and Property Test for Qualification (NYS only) If a corporation (or combined group) fails the 50% test for being principally engaged in manufacturing (above), it can still be a Qualified New York Manufacturer if the corporation (or its combined group) employs at least 2,500 employees in manufacturing and the corporation (or its combined group) have manufacturing property in New York worth at least $100MM 23

24 Qualified New York Manufacturer Under new law, qualified New York manufacturers are eligible to claim a refundable tax credit under the Franchise Tax (or the personal income tax) equal to 20% of such manufacturer s real property tax paid on property owned, or under certain circumstances leased, by such taxpayer and used for manufacturing in New York (as of January 1, 2014) A credit is not allowed for property taxes deducted in the computation of business income or in the computation of another credit claimed by the taxpayer New law provides a refundable credit for telecommunications excise taxes paid by START-UP New York businesses, beginning on or after January 1, 2014 START-UP New York Program already exempts businesses involved in the program from almost every type of New York tax Current public messaging surrounding the program touts 100% tax-free operations for qualified businesses. However, those businesses are not technically exempt from all New York taxes Example: New York s telecommunications excise tax is imposed on all taxpayers and is customarily passed through to the taxpayer s customers, which could include START-UP New York businesses This new credit eliminates the remaining tax that is borne by START-UP New York businesses 24

25 Other New York City Requirement to Report Federal and State Changes Modified Formerly did not require reporting of apportionment changes Formerly unclear with respect to reporting of changes to combined group Now, apportionment changes clear Unclear as to changes when different elections were made 25

26 New York Department Changes New York State Commissioner Mattox leaving, Commissioner Adams entering, Commissioner Jerry Boone incoming Tax Appeals Tribunal President Roberta Mosely New York City Harry Leonard promoted to Deputy Comm. Audit & Enforcement John Morhart retiring New Director of Taxpayer Services (Zal Kumar) New Taxpayer Advocate Position (Looking to fill) Tax Appeals Tribunal President Glenn Newman retiring 26

27 New York Tax Reform New York City Pass-through Taxation Working Group New York State and New York City Regulations Project 27

28 Questions? Leah Robinson Sutherland Asbill & Brennan LLP

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