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New York enacts law excluding 95% of GILTI

Legislation retroactively increases sales tax economic nexus threshold

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On June 24, 2019, New York enacted legislation that exempts 95% of federal global intangible low-taxed income (GILTI) for tax years beginning on or after Jan. 1, 2019.1 Prior to this legislation, net GILTI was subject to tax in New York for the 2018 tax year. Also, the legislation retroactively increases the $300,000 sales tax economic nexus threshold that applies to remote sellers and marketplace providers to $500,000.

GILTI exemption The Tax Cuts and Jobs Act (TCJA)2 added Internal Revenue Code (IRC) Sec. 951A to create a new class of income, GILTI, recognized by U.S. shareholders of controlled foreign corporations (CFCs) for tax years beginning after 2017.3 IRC Section 250(a)(1)(A) provides a deduction of 37.5 percent of foreign-derived intangible income (FDII).4 Also, IRC Sec. 250(a)(1)(B)(i) has a deduction of 50% of GILTI.

In April 2018, New York enacted budget legislation that provides an addition for the amount deducted under IRC Sec. 250(a)(1)(A) (FDII).5 In February 2019, the New York State Department of Taxation and Finance clarified that net GILTI, which is GILTI under IRC Sec. 951A less the allowable IRC Sec. 250(a)(1)(B)(i) (GILTI) deduction, is included in entire net income (ENI).6 New York enacted budget legislation in April 2019 that codified this treatment for tax years beginning on or after Jan. 1, 2018,7 and also generally required that net GILTI be included in the denominator of a corporate taxpayer’s apportionment fraction, and be excluded from the numerator.8

However, for tax years beginning on or after Jan. 1, 2019, the recent legislation completely changes the treatment of GILTI. Specifically, the definition of “exempt CFC income” is expanded to include 95% of the income required to be included in the taxpayer’s federal gross income under IRC Sec. 951A(a) (GILTI), without regard to the deduction under IRC Sec. 250,9 received from a corporation that is not included in a combined report with the taxpayer.10 This income does not constitute exempt unitary corporation dividends.11 Also, an addback is required for the amount of the GILTI deduction.12

Given that the vast majority of GILTI is no longer included in the New York tax base, the recent legislation accordingly adjusts the apportionment treatment of GILTI to reflect this change. For New York C corporations, GILTI is not included in the numerator of the apportionment fraction, and 5 percent of GILTI is included in the denominator.13 For New York S corporations, GILTI is not included in the numerator of the apportionment fraction, but is included in the denominator.14

Sales tax economic nexus threshold increase Under existing law, remote sellers without a physical presence in New York State but having more than $300,000 in sales of tangible personal property into the state and more than 100 transactions in the state during the four immediately preceding sales tax quarters are required to register as a vendor and collect and remit sales tax.15 This statute was enacted in 1989 but remained dormant until the U.S. Supreme Court eliminated the physical presence requirement in South Dakota v. Wayfair, Inc.16 The remote seller collection and remittance requirement arguably became effective when Wayfair was decided on June 21, 2018. The recent legislation increases the sales threshold for remote sellers to $500,000 effective June 21, 2018, and also retains the 100-transaction threshold.17

Effective June 1, 2019, New York has a sales tax collection and remittance requirement for marketplace providers that has the same economic nexus thresholds that apply to remote sellers.18 The recent legislation similarly increases the $300,000 threshold for marketplace providers to $500,000 effective June 1, 2019.

Commentary Under the recent legislation, the treatment of GILTI for New York corporate income tax purposes is completely changed for tax years beginning on or after Jan. 1, 2019. Thus, the treatment of GILTI for the 2018 tax year is markedly different from the treatment of GILTI for subsequent tax years. Net GILTI is included in ENI for the 2018 tax year. The “net GILTI” terminology is no longer used for tax years beginning after 2018. As discussed above, 95% of GILTI, without regard to the IRC Sec. 250 deduction, is now excluded from New York taxation as exempt CFC income. The exclusion of most of GILTI could be favorable to some New York corporations depending on their particular facts and circumstances.

Corresponding changes are made to the apportionment of the 5% of GILTI that remains taxable in New York for tax years beginning after 2018. For C corporations, only 5% of GILTI is included in the denominator. However, for S corporations, all of the GILTI is included in the denominator.19 Due to the statutory amendments, C corporations should consider the impact of the changes to GILTI in their tax base and apportionment for the remaining estimated tax payments for 2019.

At this point, New York City has not amended its treatment of GILTI for tax years beginning after 2018. New York City continues to follow the New York State GILTI treatment for the 2018 tax year. Thus, there will be inconsistent treatment of GILTI until corresponding legislation is enacted for New York City.

The increases in the sales tax nexus thresholds for remote sellers and marketplace providers from $300,000 to $500,000 are particularly interesting because they are effective retroactively to when the respective sales tax collection and remittance requirements began.20 Conceivably, a remote seller or marketplace provider that met the prior threshold (for example, had sales of $400,000 and more than 100 transactions) may not meet the new higher $500,000 threshold. Thus, certain remote sellers and marketplace providers may no longer have a collection and remittance obligation.21 Many states have enacted the $100,000 in sales or 100-transaction thresholds from the South Dakota statute approved in Wayfair. New York joins only a handful of large-market states adopting a $500,000 sales threshold, such as California, Massachusetts, Ohio and Texas.
 

1 Ch. 39 (S.B. 6615), Laws 2019.
2 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
3 IRC § 951A. GILTI is the excess of the aggregated “tested income” over a routine return on certain tangible assets.
4 FDII is broadly defined to include income received from the sale of property for foreign use or services rendered to persons outside the U.S.
5 Ch, 59 (A.B. 9509-C/S.B. 7509-C), Laws 2018, enacting N.Y. TAX LAW § 208.9(b)(24). This addition also applies to New York City. N.Y.C. ADMIN. CODE §§ 11-602.8(b)(20); 11-652.8(b)(21). Note that a similar provision requires an addback of the deduction for New York State insurance franchise tax purposes. N.Y. TAX LAW § 1503(b)(2)(W). Because New York State and New York City decouple from FDII, this income is not included in the tax base. For a discussion of this legislation, see GT SALT Alert: New York State Enacts FY18-19 Budget Legislation Providing Extensive Tax Reform.
6 TSB-M-19(1)C, New York State Tax Treatment of Repatriation, Foreign-Derived Intangible Income Deduction, and Global Intangible Low-Taxed Income for Businesses, New York State Department of Taxation and Finance, Feb. 8, 2019.
7 Ch. 59 (A.B. 2009-C/S.B. 1509-C), Laws 2019. For a discussion of this legislation, see GT SALT Alert: New York State Enacts FY19-20 Budget Legislation Including Marketplace Provider Rules and GILTI Apportionment.
8 N.Y. TAX LAW § 210-A.5-a. A statute defines net GILTI as the amount required to be included in the taxpayer’s federal gross income pursuant to IRC Sec. 951A(a) less the amount of the deduction allowed under IRC Sec. 250(a)(1)(B)(i). Similar provisions apply to New York City’s business taxes. N.Y.C. ADMIN. CODE §§ 11-604.3(a)(2)(E); 11-654.2.5-a.
9 Presumably, this includes both the FDII and the GILTI deductions.
10 N.Y. TAX LAW § 208.6-a(b).
11 Id.
12 N.Y. TAX LAW § 208.9(b)(25). Note that similar changes were made to the New York State insurance franchise tax. N.Y. TAX LAW § 1503(b)(1)(U), (V), (2)(Y).
13 N.Y. TAX LAW § 210-A.5-a(b).
14 N.Y. TAX LAW § 210-A.5-a(c).
15 N.Y. TAX LAW § 1101(b)(8)(iv); Important Notice N-19-1, Notice Regarding Sales Tax Registration Requirement for Businesses with No Physical Presence in New York State, New York State Department of Taxation and Finance, Jan.15, 2019. For further discussion, see GT SALT Alert: New York Department of Taxation and Finance Releases Notice Announcing Remote Seller Economic Nexus Standard.
16 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
17 N.Y. TAX LAW § 1101(b)(8)(iv). An uncodified section provides that a remote seller that is registered to collect state and local sales and use taxes, and in good faith collected and remitted sales tax at the incorrect local rate, is liable for the additional sales tax due at the local rate but is not liable for interest or penalties on the uncollected sales tax. This relief only applies to sales made in the immediately succeeding four quarterly periods ending in February, May, August and November after the date the person becomes a “person required to collect tax.” This provision is effective June 21, 2018. S.B. 6615, Part J, § 3.
18 N.Y. TAX LAW § 1101(e)(1).
19 For S corporations, GILTI is included in the base. As explained by the Department, GILTI needs factor representation in the business apportionment factor to properly reflect the S corporation’s business income and capital in the state. See TSB-M-19(1)C, New York State Tax Treatment of Repatriation, Foreign-Derived Intangible Income Deduction, and Global Intangible Low-Taxed Income for Businesses, New York State Department of Taxation and Finance, Feb. 8, 2019.
20 The legislation provides that the remote seller economic nexus standard is retroactively effective June 21, 2018 (the date that Wayfair was decided). This is consistent with the guidance that the Department released on January 15, 2019 announcing retroactive application of the sales tax nexus standard for remote sellers. In Wayfair, the U.S. Supreme Court stated that South Dakota’s economic nexus law provided small merchants with a reasonable level of protection in part because the law did not apply retroactively. If the remote seller nexus standard is enforced retroactively to June 2018, such enforcement is potentially subject to legal challenge based on a Wayfair analysis.
21 At this point, it is not clear whether these remote sellers or marketplace providers could cancel their registration.



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