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.