New York's Tax Laws Change (Again)

In what has become an annual rite, on April 12, 2005, Governor George Pataki signed into law a variety of tax changes in connection with the passage of New York’s budget. Most of the tax law changes involve minor tweaks to existing law. One heralds a major change to the way business income is allocated to New York.
Another extends and expands the Empire Zone tax credit program in a way that could result in truly meaningful tax savings. As is the case with any tax law change, awareness of the change is a prerequisite to benefiting from it (or avoiding its downside). This article highlights some of the new law provisions. If you think you or your business may be affected, ask your accountant or tax professional how to best take advantage of — or mitigate — the new law.

Corporate Income
Single sales factor: The new law amends the formula corporations must use to allocate business income between New York and other states (for those doing business in other states) in calculating corporate franchise tax.
It provides for an allocation of entire net income based solely on the percentage of the taxpayer’s New York sales (or receipts) to its total sales/receipts. Under current law, for taxable years beginning before 2006, New York uses a three-factor formula (property, payroll and a double-weighted sales/receipts factor) to allocate business income. The new law’s use of a single sales/receipts factor is phased in over a three-year period. The sales/ receipts factor will constitute 60% of the business allocation percentage for taxable years beginning on or after January 1, 2006; 80% for taxable years beginning on or after January 1, 2007; and 100% for taxable years beginning on or after January 1, 2008.

The legislative thinking is that the single sales/receipts factor will encourage businesses to relocate to and stay in New York. Under the new formula, having additional property and equipment or additional employees in New York will not cause a greater portion of the corporation’s multistate income to be taxed in New York. Small business taxpayers: Applicable to taxable years beginning on or after January 1, 2005, the legislation increases the maximum amount of entire net income from $290,000 to $390,000 for purposes of qualifying as a small business taxpayer.

Small business taxpayers have a lower corporate franchise tax rate. This minor tweak will assist eligible corporations in saving a couple of percent in taxes. Taxpayers that might benefit should see whether they can manage their income so as to fall below the thresholds to benefit from the lower rate.

Personal Income
Temporary rate increase rolled back: The New York Assembly had sought to extend a temporary personal income tax rate increase enacted in 2003. Under the 2005–2006 budget package, however, the temporary rate increase is allowed to expire as originally scheduled. This benefits individual taxpayers having annual income above $500,000.

Sales and Use Tax
Sales tax rates: Effective June 1, 2005, the legislation increases the additional Metropolitan Commuter Transportation District sales tax rate from 0.25% to 0.375%. The combined sales and use tax rate for New York City is now reduced to 8 3/8% from 8 5/8% (this all is the result of the legislative gymnastics of New York State’s 4 1/4% rate and New York City’s 4 1/8% rate each going to 4% and the Metropolitan Commuter Transportation District rate going up 1/8%).

Credits
Empire Zones: The legislation authorizes 12 additional Empire Zones and extends the sunset date for the Empire Zone program from March 31, 2005, until June 30, 2011. This extension potentially is very big. A business that expands in, or relocates to, one of the New York Empire Zones may qualify to operate essentially free of many New York taxes. Benefits include a 10- year exemption from state sales tax for purchases of goods and services used predominantly in the zone, a refundable credit for real property taxes and income tax credits. Numerous other credits, benefits and savings are available to eligible businesses.

There are Empire Zones in all five boroughs as well as in nearby counties. You would be well advised to see if your business is in an Empire Zone and, if the business is moving, consider seriously the benefits of relocating to an Empire Zone. To locate Empire Zones, benefits and eligibility requirements, go to the New York State Empire Zone Development Agency website at http://www.empire.state.ny.us/. If this particular shoe fits, you will smile (and your bank account will grow).

Emerging technology: The legislation establishes a new credit program for qualified emerging technology company facilities, operations and training. Applicable to taxable years beginning on or after January 1, 2005, the plan stipulates that eligible taxpayers may qualify for a refundable credit with respect to certain research and development property, research expenses and high-technology training expenditures. The value of the credits may not exceed $250,000 per eligible taxpayer per year.