On Aug. 31, 2022, New York Gov. Kathy Hochul approved legislation making important changes to several New York City (City) tax provisions.1 Effective beginning with the 2022 tax year, the legislation adopts an economic nexus standard for City business corporation tax (BCT) purposes, aligning the City with the $1 million receipts threshold that currently applies for the New York State (NYS) franchise tax. Additionally, the legislation moves the effective date of the City’s pass-through entity (PTE) tax to the 2022 tax year.
BCT economic nexus standard adopted
The City BCT historically has applied to corporations doing business in the City through the employment of capital, owning or leasing property or by maintaining an office in the City.2 Effective for tax years beginning on or after Jan. 1, 2022, the BCT will also apply to corporations “deriving receipts from activity in the city.”3 A corporation is “deriving receipts from activity in the city” if it has $1 million or more in receipts from City sources during the applicable tax year.4 “Receipts” are defined as those subject to the City’s allocation rules, and “receipts within the city” are those included in the numerator of the City receipts factor.5
A corporation that does not meet the $1 million receipts threshold but has at least $10,000 in City receipts and is a member of a unitary group is also subject to BCT if that corporation and the other unitary group members with at least $10,000 in City receipts meet the $1 million threshold in the aggregate.6 The economic nexus provisions do not apply to the City unincorporated business tax (UBT) or to S corporations subject to the City general corporation tax (GCT).
Partnerships meeting the above receipts thresholds will establish economic nexus for any of its corporate partners.7 As such, corporations that do not independently meet the $1 million receipts threshold may still have nexus with the City based on the receipts of the partnership in which they are a partner.
The legislation also adjusts nexus thresholds for corporate credit card issuers that are part of unitary groups. Historically, corporate credit card issuers (whether or not part of a unitary group) have been subject to BCT if they issue credit cards to 1,000 or more customers with a City mailing address; have merchant customer contracts covering 1,000 or more City locations to which the corporation remits payments for credit card transactions during the tax year; or the sum of both customers and merchant contracts equals 1,000 or more.8 The legislation subjects a corporate credit card issuer that is part of a unitary group and does not meet any of the above historic economic thresholds to BCT if: (i) it has at least 10 customers, locations, or both customers and locations; and (ii) the corporation and the other unitary group members with at least 10 customers, locations or both meet any of the above thresholds.9
PTE tax effective date moved to 2022 tax year
In April 2022, New York enacted budget legislation establishing an elective PTE tax for City PTE purposes.10 The City PTE tax election initially applied to tax years beginning on or after Jan. 1, 2023, for eligible City partnerships and City-resident S corporations.11 In separate follow-up legislation enacted in May 2022, the NYS PTE tax election deadline was extended from March 15, 2022, to Sept. 15, 2022, for the 2022 tax year only.12
Senate Bill 9454 makes the City PTE tax applicable to tax years beginning on or after Jan. 1, 2022.13 The legislation also now requires that the annual City PTE tax election be made through the same process by which the NYS PTE tax election was made.14 Specific to the 2022 tax year, the legislation specifies that the City PTE tax election must be made by March 15, 2023, in a manner to be determined by the City Department of Finance.15 However, the NYS Department of Taxation and Finance released guidance clarifying that taxpayers considering making a City PTE tax election for the 2022 tax year must have made a NYS PTE tax election by the Sept. 15, 2022, deadline in order for the City PTE tax election to apply.16
The legislation further clarifies that electing City PTEs are not required to make estimated payments for the 2022 tax year.17 However, owners of an electing PTE must calculate their required City personal income tax estimated tax payments as if they were not entitled to the City PTE tax credit.18
Other changes
Other notable provisions contained in the legislation include the following:
- Amounts received through the COVID-19 pandemic small business recovery grant program or the small business resilience grant program are excluded from entire net income for purposes of the UBT, GCT, BCT and City banking corporation tax (Bank Tax), to the extent those amounts were included in federal taxable income, retroactive to tax years beginning on or after Jan. 1, 2021.19
- Elective NYS and City PTE taxes paid are included in entire net income for BCT purposes, effective for tax years beginning on or after Jan. 1, 2022.20
- Credits for overpayment of UBT or city business taxes (GCT, Bank Tax and BCT) are applied to any City tax liability of the person making the overpayment.21
Commentary
With this legislation, City becomes the latest jurisdiction to adopt an economic nexus standard for corporate income tax purposes, with a $1 million receipts threshold mirroring the NYS standard. The adoption of economic nexus for the BCT notably comes eight years after NYS adopted economic nexus for franchise tax purposes as part of the state’s significant tax reform legislation in 2014. Interestingly, City tax reform legislation that followed in 2015 did not initially include an economic nexus provision applicable to the BCT. Corporate taxpayers and corporate partners without a physical presence in the City will need to determine whether they now have a BCT filing obligation as a result of receipts from City sources beginning with the 2022 tax year and consider opportunities to mitigate potential tax exposure.
Changes to the City PTE tax applicable date were enacted presumably to allow eligible City PTEs the option to make a PTE tax election that would first apply to the 2022 tax year in line with an NYS PTE tax election, given that the NYS PTE tax election deadline for the 2022 tax year was extended to Sept. 15. With the fast-approaching Sept. 15 deadline, taxpayers still considering whether to make a 2022 NYS PTE tax election will need to determine whether such election should be made by Sept. 15, and also consider whether a City PTE tax election would be appropriate.
1 Ch. 555 (A. 10506 / S. 9454), Laws 2022.
2 N.Y.C. ADMIN. CODE § 11-653.1.(a).
3 Ch. 555, § 7, amending N.Y.C. ADMIN. CODE § 11-653.1.(a).
4 Ch. 555, § 7, amending N.Y.C. ADMIN. CODE § 11-653.1.(b).
5 The legislation specifies that receipts from processing credit card transactions for merchants include merchant discount fees received by the corporation. Id.
6 Ch. 555, § 7, amending N.Y.C. ADMIN. CODE § 11-653.1.(d)(1).
7 Ch. 555, § 7, amending N.Y.C. ADMIN. CODE § 11-653.1.(f).
8 Ch. 555, § 7, amending N.Y.C. ADMIN. CODE § 11-653.1.(c).
9 Ch. 555, § 7, amending N.Y.C. ADMIN. CODE § 11-653.1.(d)(2).
10 Ch. 59 (A. 9009 / S. 9009), Laws 2022. For further discussion, see GT SALT Alert: New York enacts city-level pass-through entity tax.
11 Eligible City partnerships include partnerships and limited liability companies filing an NYS partnership return and having at least one City resident individual partner. N.Y. TAX LAW § 867(i). City resident S corporations are NYS S corporations having all City resident individual shareholders. N.Y. TAX LAW § 867(j).
12 Ch. 188 (A. 10080 / S. 8948), Laws 2022.
13 Ch. 555, § 14, amending Ch. 59, Part MM, Subpart B, § 12.
14 Ch. 555, § 10, amending N.Y. TAX LAW § 868(b).
15 Ch. 555, § 15(a).
16 Extended election period for 2022 PTET, N.Y. Department of Taxation & Finance, updated Sept. 2, 2022, https://www.tax.ny.gov/bus/ptet/.
17 Ch. 555, § 15(b).
18 Ch. 555, § 15(c).
19 Ch. 555, § 1, adding N.Y.C. ADMIN. CODE § 11-506(c)(12); § 3, adding N.Y.C. ADMIN. CODE § 11-602.8.(a)(16); § 4, adding N.Y.C. ADMIN. CODE § 11-641(t); § 5, adding N.Y.C. ADMIN. CODE § 11-652.8.(a)(17).
20 Ch. 555, § 6, amending N.Y.C. ADMIN. CODE § 11-652.8.(b)(3). In addition to the BCT, City PTE tax (along with NYS PTE tax) is required to be added back in computing entire net income for GCT and Bank Tax purposes. To that end, the NYS Department of Taxation and Finance released updated instructions to reflect new requirements for the addback of NYS and City PTE taxes on 2021 NYS partnership and S corporation tax returns and related schedules. See Corporation tax forms corrections and changes for 2021 (Articles 9, 9-A, 13, and 33); Personal income tax forms corrections and changes for 2021 (Articles 22 and 30), N.Y. Department of Taxation & Finance, Sept. 12, 2022.
21 Ch. 555, § 2, amending N.Y.C. ADMIN. CODE § 11-526(a); § 8, amending N.Y.C. ADMIN. CODE § 11-677.1.
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