A recently enacted budget bill in New York makes several changes to tax law that will take effect in 2015. The impact of these changes will be significant for any multistate businesses with a presence in New York or companies that sell in New York.

The most significant changes are:

The adoption of a bright-line economic nexus standard for corporate income tax (i.e., Corporate Franchise Tax)
The adoption of a “market-based” sourcing rule for service revenue

The new bright line nexus standard will result in a corporation having nexus in New York if it has $1 million or more in receipts generated from within the state.

Additionally, the market-based sourcing rule for service revenue provides that revenue is attributable to the state where the customer is located rather than to the state where a service is performed.

These changes means that corporations that have never entered New York could be required to pay income tax to the state if they derive at least $1 million from New York customers.

Other states, including California, Colorado, Connecticut, Michigan, Ohio, and Washington, have already adopted these rules.

The new nexus and sourcing rules are limited in application to corporations (including S Corporations) in New York currently, which means a different set of rule for corporations as compared to partnerships and other business tax filers.

Generally, the other states that have enacted an economic nexus standard and a market-based sourcing rule have done so for both corporate and pass-through entities. Thus, choice of entity will become more important for potential New York taxpayers.

While these rules do not take effect until 2015, the impact may be significant and is deserving of more immediate attention to ensure proper compliance and planning.

Contact Faith Gorman, State and Local Tax Director, at fgorman@dbllp.com with questions.