New York Corporate Tax Increases And Massachusetts Legislative Update

Originally published April 11, 2008

The New York Legislature has enacted a budget bill that

reflects significant changes and poses potential new tax

liabilities for a wide range of corporate taxpayers. The

Sutherland SALT team describes below the most controversial new

provisions and the potential implications for corporate

taxpayers. Unless otherwise noted, all provisions are effective

immediately.

Article 9A Capital Tax Base: Cap Increase and Tax

Rate Decrease

New York corporate taxpayers (other than manufacturers)

subject to the Article 9A corporate franchise tax will now

temporarily have a higher cap on the maximum amount of tax

under the capital base. Under Article 9A, corporate franchise

taxpayers are subject to the highest tax based on several

alternative tax bases. The two primary bases are the entire net

income base and the capital base. Historically, the capital

base has been capped at a maximum tax liability and that cap

has been increased ten-fold from $1 million to $10 million for

tax years beginning on or after January 1, 2008. In return,

taxpayers receive a decrease in the tax rate from 0.178% to

0.15%. The cap is scheduled to return to the $1 million amount

for tax years beginning on or after January 1, 2011. Unlike the

temporary increase in the cap, the rate decrease is

permanent.

Sutherland Comment: Previously, the

maximum amount of tax liability under the capital base

was $1 million. The Governor's initial budget

proposed a complete removal of the cap with no sunset

date. The final negotiated increase in the capital base

cap means that taxpayers previously paying a tax under

the capital base that maxed out on the cap or that paid a

tax of less than $10 million under the entire net income

base could see a significant jump in their tax liability.

The sunset date was a significant element of the

legislature's agreement to increase the cap, but it

remains to be seen whether future legislatures will

extend the sunset date if budget pressures continue.

Manufacturers retain their preferential $350,000 cap for the

Article 9A capital tax base. However, to qualify for this

preferential cap, manufacturers must now meet the additional

requirements of having property in New

York principally used by the taxpayer in the

production of goods by manufacturing, processing, assembling,

refining, mining, extracting, farming, agriculture,

horticulture, floriculture, viticulture or commercial fishing,

AND either (i) the adjusted basis of that property is at least

$1 million or (ii) all of the

taxpayer's real and personal property is located in New

York. A qualified manufacturer also includes certain companies

that meet the definition of an "emerging technology

company" without limitation.

Sutherland Comment: The questionable

constitutionality of the new requirements for a

manufacturer to receive the preferential cap amount has

been noted by several people involved in the budget

process. The requirement that "qualified"

manufacturers invest in New York property recalls the

recent challenge to Ohio state and municipal tax

incentives in Cuno. DaimlerChrysler Corp. v.

Cuno, 547 U.S. 332 (2006). Although that case was

remanded by the U.S. Supreme Court on standing grounds,

the theories presented in that case are directly relevant

to this sort of "incentive," which some

manufacturers will instead view as a discriminatory tax

burden.

Substantial Changes for Credit Card Companies

Economic Nexus, Receipts Sourcing, Combined Reporting

Rules

Nexus: A corporation engaged in a

credit card business will now be subject to the New York

Article 32 bank tax (primarily a corporate income tax, with

some alternative bases), based solely on meeting certain

economic nexus thresholds. An out-of-state credit card company

with no physical presence in New York is subject to tax if its

business activity satisfy any of the following thresholds:

has issued credit cards to 1000 or more customers with a

mailing address in New York;

has merchant customers with 1000 or more total locations

...