Economic nexus adopted for NYC business corporation tax: PwC

In brief

On August 31, New York Governor Kathy Hochul (D) signed legislation (S9454/A10506) adopting an economic nexus threshold of $1 million of New York City (NYC) receipts for purposes of the NYC business corporation tax, for tax years starting on or after January 1, 2022. As a result, the NYC nexus provisions mirror those of New York State. The legislation also made the recently enacted elective NYC pass-through entity tax (PTET) effective retroactively to tax years beginning on or after January 1, 2022.

Observation: This bill was atypical in that most significant tax changes adopted in New York are included in the Governor’s annual budget. The legislation comes eight years after New York State (NYS) adopted economic nexus for the state’s corporate income tax as part of the state tax reform package, and seven years after the NYC tax structure was reformed. However, the 2015 NYC reform legislation did not include economic nexus provisions.

Action item: Corporations that have been paying NYS, but not NYC, income taxes now need to consider the impact of this provision. Corporate partners will need to examine the activity of their partnerships to determine whether such activities may create nexus for them.

In detail

Specifically, the new legislation provides that taxable corporations include corporations that derive receipts within NYC meeting a $1 million economic nexus threshold. Receipts within NYC are those receipts included in the receipts factor numerator. A corporation that is part of a combined group and that has less than $1 million, but more than $10,000, of NYC receipts is deemed to satisfy the receipts threshold if the in-state receipts of all members of the group that separately exceed $10,000 meet the $1 million threshold in the aggregate.

Partnerships that meet these economic nexus thresholds will establish nexus for any corporate partners of the partnership. Accordingly, corporations that do not meet the receipts threshold nevertheless may have nexus with NYC based on the receipts of partnerships in which they have a partnership interest.

Note: The economic nexus provisions do not apply for purposes of the NYC unincorporated business tax or for S corporations subject to the NYC general corporation tax.

The legislation also amends the existing economic nexus provisions for credit card issuers (a holdover from NYC’s now-repealed separate tax on financial institutions), which are based on the number of NYC customers. These changes apply to tax years starting on or after January 1, 2022. Specifically, the legislation provides that a corporation that does not meet the customer thresholds, but (1) has at least 10 customers, locations, or locations and customers in NYC, and (2) is part of a unitary group, is deemed to be doing business in NYC if the number of NYC customers, locations, or customers and locations of the members of the group in the aggregate meet this 10 customer/location threshold.

Additionally, the legislation provides that receipts from processing credit card transactions for merchants include merchant discount fees received by the corporation.

Pass-through entity tax: The New York FY 23 budget legislation created a NYC elective pass-through entity tax effective for tax years beginning on or after January 1, 2023. See our Insight for more details on the pass-through entity tax. S9454/A10506 accelerates the effective date to tax years beginning on or after January 1, 2022.

Caution: In order to make the NYC PTET election for 2022, taxpayers first must have opted into the NYS PTET by the September 15, 2022 NYS PTET election deadline.