New York Taxation and Interstate Commerce

William J. Killory, CPA, Partner (Dec, 2015)

Manufacturers in New York State have a good deal going for them.  They are not subject to the corporate income tax.  Manufacturers may still be subject to other taxes, such as the capital-based tax that will eventually phase out in 2021 or the fixed dollar minimum that could be as much as $4,385 in 2015, based on the level of your New York receipts. The fixed dollar minimum for non-manufacturers C-Corps with New York receipts in excess of $50 million increased dramatically in 2015 so you may want to check your New York receipts from this year to avoid a surprise on your tax return.

The corporate tax is imposed on C-Corps so S-Corps and partnerships do not enjoy that luxury.  New York will look at an S-Corp’s New York activity based on a single sales factor to determine how much to reach out and touch the non-New York shareholders.  New York residents are subject to tax on the entire income, but may get a credit for taxes paid to other states.  Partnerships in New York are subject to a three-part allocation method adding payroll and property to the mix to determine income allocated to the state.  Like S-Corps, New York resident partners are subject to tax on the entire amount and can get a credit for taxes paid to other states.

Each state has a right to tax businesses operating in that state only if there is sufficient contact, or nexus, with that state.  Congress is empowered with controlling interstate commerce and their role is to lay down some basic rules so that each state treats foreign business fairly and does not subject businesses to double taxation.  Public Law 86-272 states that no state can impose a tax on a business where the business activity consist of mere solicitation of orders where these orders are sent out of state for approval or rejection and are filled by delivery from a point outside the state.  In simple terms, if you take an order from out-of-state and it is approved by the home office and then shipped by common carrier to that state then you do not have sufficient contact with the state to be subject to tax.

The Wisconsin Department of Revenue v. William Wrigley, Jr. Co. is a seminal Supreme Court case where sales reps were actively checking the stock of vendors and swapping out stale gum with fresh gum from inventory they had stored within the state.  The fact that Wrigley had sales reps in the state using automobiles supplied by the company was not fatal to the company.  The fact that they did the restocking and had inventory, however slight the amount, subjected the company to Wisconsin tax.

Another landmark interstate commerce case decided by the Supreme Court in the early 90’s was Quill Corporation v. North Dakota.  This case involved the collection of sales tax on the office supply company that sold everything via catalog.  The National Bellas Hess decision from 25 years earlier held that selling via catalog was not sufficient nexus, but North Dakota argued with changing technology and changing economic times the concept of nexus was changing as well and that Quill should collect sales tax on sales to North Dakota.  The Supreme Court disagreed indicating that without any physical presence there was no nexus, therefore Quill was under no obligation to collect tax for the benefit of North Dakota.

We now fast-forward another 25 years or so and we have the Amazon and Overstock sales cases against New York State.  These well-known internet vendors utilized “affiliates” where New York based web sites linked to either Amazon or Overstock and would then receive a commission based on the volume of sales through that particular portal.  New York acknowledged that these companies did not have physical contact with the state, but successfully argued that the affiliates created sufficient nexus for the collection of sales tax.  The Supreme Court declined to hear the appeal from the New York Court so this decision stands in New York.

There are different standards for the collection of sales tax than there is for the imposition of income tax.  Any physical presence may subject a company to collect sales tax on behalf of the state.  The imposition of income tax requires that you have more than a sales presence in the state.  If you have any assets (real estate, equipment or inventory) or deliver product in your own truck then you will create nexus.  If you use your employees to install or repair products in a foreign state, you will create nexus.

New York has developed a new standard for economic nexus with revisions in the tax law starting in 2015.  They are looking at taxing a corporation if it “derives receipts from activity” in New York in excess of one million dollars.  This ‘economic substance” standard is squarely aimed at service providers such as credit card processors, management consultants and software companies.  It appears that New York State is taking the tact that only the sales of tangible property is affected by Public Law 86-272 and sales of intangibles and services would be taxed on the location of the customer.  Other states have moved in this direction, most notably with credit card companies, so it will be interesting to see how this plays out over the next few years.

If you are operating in several states, you need to determine your points of contact and the rules in those particular states.  In theory, you will get a credit in New York for taxes paid in the foreign state so your overall tax bill should be the same.  If you do not file the foreign tax return, the statute of limitations does not run in that state so they can go back to the beginning of your first contact with that state. The ability to get a credit in New York will be limited, generally, to a three-year limit on the foreign state tax credit.

Despite strong federal protection concerning interstate commerce, several states are becoming much more creative in determining what nexus is and will be pursuing foreign corporations aggressively. With each state clamoring for more revenue, out-of-state companies are a target for new sources of revenue so you need to be cognizant of what you do in each state.  As a tag line from an old television show once said, “be careful out there.”

If you have any question as to what your out-of-state obligations might be, as always, please call your Dermody, Burke and Brown tax professional.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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