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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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NYS Offers a GILTI Exemption and Increases its Economic Nexus Threshold

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On June 20, 2019, both the NYS Assembly and Senate passed bills that made significant changes to the state’s treatment of two hot tax issues: the taxation of global intangible low-taxed income (“GILTI”), and the state’s threshold for establishing economic nexus for sales tax purposes. According to the Senate and Assembly websites, the legislation was signed into law by Governor Cuomo on June 24th.

GILTI Treatment

New York is changing course regarding its treatment of GILTI. We previously discussed New York’s treatment of GILTI here and here. To recap, the Governor’s executive budget that was signed into law established a statutory sourcing rule for GILTI that requires net GILTI to be included in the denominator of the taxpayer’s apportionment factor, with zero reported in the numerator. This treatment mirrored the Tax Department’s recent technical guidance relating to such income and conformed to the instructions for Form CT-3-I. This apportionment rule provided some relief to taxpayers having to pay federal and state tax on GILTI, but it was a far cry from the 95% exemption that was originally contained in the Governor’s executive budget but subsequently removed just prior to passage.

Apparently the government just needed some additional time to summon the political will to pass the 95% exemption because that’s exactly what the new law enacts. The new law amends the definition of “Exempt CFC Income” in Section 208(b) of the Tax Law to include “ninety-five percent of the income required to be included in the taxpayer’s federal gross income pursuant to subsection (a) of section 951A….” The new law also definitively indicates that this income “shall not constitute investment income” and also requires an add back for any deduction taken pursuant to Section 250(A)(1)(B)(I) of the Internal Revenue Code. Finally, the new law amends the apportionment rules for C corporations. Rather than letting C corporations include the full amount of the GILTI in the apportionment denominator, the new law only permits the inclusion of 5% of the income. The apportionment rules for S corporations are now codified by the new law and remain unchanged (GILTI is excluded from the numerator and included in the denominator).

The new law takes effect immediately and applies to taxable years beginning on or after January 1, 2019.

Economic Nexus Threshold

We previously discussed New York’s economic nexus provisions here and here. To recap, following the Supreme Court case South Dakota v. Wayfair, states can now require out-of-state sellers to collect the state’s sales tax on sales to customers within the state if the seller has enough economic presence in the state. Prior to the Wayfair case, an out-of-state vendor had to be physically present in a state before the state could impose a collection and remittance obligation. So what qualifies as sufficient economic presence to create nexus? Well, the Supreme Court didn’t definitively tells us, though it seemed to tacitly bless South Dakota’s law, which required out-of-state sellers to generate $100,000 in sales to customers in the state or enter into more than 200 separate transactions with customers in the state.

New York originally indicated that an out-of-state seller would have nexus with the state if its sales in the state exceeded $300,000 AND the seller made more than 100 sales of property delivered in the state. The new law increases the state’s economic nexus threshold for sales and use tax purposes from $300,000 to $500,000. The law also applies this increase to the state’s marketplace legislation discussed in greater detail here.

This mirrors action recently taken by California, which also increased its economic nexus threshold to $500,000 (up from $100,000). So it looks like the larger states are going to permit more economic activity within their borders without requiring out-of-state sellers to collect and remit sales tax (Texas, Ohio, and Massachusetts also impose a $500,000 threshold). But while California’s amended rule did away with that state’s transaction requirement (previously more than 200 transactions), New York kept its transaction requirement in place. This is significant because while most states impose an “or” test (e.g., $100,000 OR 200 transactions), New York’s threshold contains an “AND” requirement. In other words, an out-of-state seller has to satisfy both the $500,000 sales requirement AND the more than 100 transactions requirement in order to create nexus in the state (assuming the seller has no physical presence in New York). Thus, as discussed in our previous posts on this topic, infrequent sales of highly valuable property in the state (e.g., sales of expensive art) will not create economic nexus for the seller.

Moreover, unlike many other states, New York’s economic nexus rule is limited exclusively to sales of tangible personal property. Remote sales of services (e.g., online access to information services) will not trigger the state’s economic nexus rule. The recently enacted law did not broaden the scope of the state’s economic nexus rule to apply it to services.

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