New York State Governor Kathy Hochul has signed into law a bill that mandates a “clear” economic nexus based on city revenue, applicable to tax years beginning on or after January 1, 2022, by under New York City corporation tax. Ch. 555, New York Statutes of 2022 (A. 10506, S.9454). The law enacted last week provides, among other things, that corporations “deriving in receipts” of $1 million or more from New York City sources in the tax year will be subject to the City corporations, whether otherwise carrying on business, employing capital, owning or leasing tangible property, or maintaining an office in the City.
Although the economic nexus has been in place since 2015 for New York State corporation tax purposes – with the threshold currently set at $1.138 million in revenue from in-state sources – until present, the legislature had not enacted broad-based economic nexus legislation for New York. For city corporation tax purposes. As a result, over the past seven years, there have been significantly different nexus standards for state and city corporate taxes.
Also similar to state tax, a corporation with less than $1 million in New York City revenue will still meet the economic nexus threshold for the tax year if it (i) has at least less than $10,000 in city revenue, (ii) is part of a unitary group that satisfies the ownership test for consolidation, and (iii) the aggregate municipal revenue of the unitary group is at least $1 million. dollars, unless the company cannot be included in a combined City return. The $1 million threshold is subject to annual adjustment by New York City if the Consumer Price Index has changed by at least 10% during the calendar year.
The legislation does not apply to the city’s general corporation tax (applicable only to S corporations) or the city’s unincorporated business tax (“UBT”).
Economic Nexus Corporate Partner
Another change relates to the existing nexus provisions for corporate partners which will ensure that a corporate partner in a partnership that “derives revenue” from City operations will be subject to City corporate tax “as described in the Finance Commissioner’s Regulations”. A literal reading of the change could be interpreted to mean that any amount of City revenue earned through the partnership will result in the corporate partner having a connection to the City. However, if the City were to issue a regulation such as the current proposed New York State Regulation for Business Partners, then a corporation general the partner would only meet the economic nexus threshold if its own municipal revenues, combined with municipal revenues from the partnership, totaled at least $1 million, and if a company limit the partner would also have to participate directly or indirectly in the business activities of the partnership to meet the threshold.
Accelerates NYC Transfer Entity Tax
The New York City Transfer Entity Optional Tax, enacted in April 2022 and previously not available until 2023, has been accelerated and is now available for tax years beginning on or after January 1, 2022. For 2022, the election must be made by March 15, 2023. However, the City Flow-Through Entity Tax Election cannot be made unless a timely New York State election has been made, which for 2022 has been extended until September 15, 2022. Therefore, if an entity wishes to make a municipal election for 2022, it must first make a state election before September 15, 2022.
Corporate and UBT tax credit against other municipal taxes
The amendments allow the Commissioner of Finance to apply overpayments of city or UBT corporation tax against any New York City tax liability, including excise taxes, before the overpayment may not be used to offset certain unpaid New York State taxes under New York Tax Law § 171-m for which a tax warrant has been issued.