The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address how the Budget implements unitary combined reporting and expands the use of economic presence nexus.

Unitary Combined Reporting

1.         Background

The Budget’s most significant change to the Corporate Franchise Tax is the adoption of unitary combined group reporting. Although the Corporate Franchise Tax has been a separate entity reporting regime, combined reporting has been permitted or required under New York tax law in select circumstances. Specifically, taxpayers were permitted or required to file a combined return when filing a separate company return would not properly reflect the taxpayer’s income or expense in New York. More recently, New York tax law was supplemented for tax years beginning after January 1, 2007 to require taxpayers to file a combined return when the taxpayer had “substantial intercorporate transactions” with related affiliates. This selective combined return regime has caused an overwhelming amount of controversy and uncertainty for taxpayers determining their filing status and, if filing a combined return, the composition of the combined group.

2.         Adoption of Water’s-Edge Combined Reporting

The Budget addresses the composition of group issue by adopting a water’s-edge unitary combined group tax return. Specifically, the Budget provides that taxpayers shall file a combined report with entities it (a) owns or controls directly or indirectly, and (b) with which it is engaged in a unitary business. The term “unitary business” is not defined in the newly enacted provisions. The new law eliminates the controversial issue of whether related entities have “substantial intercorporate transactions” or “distortion.”

The Budget includes an election that permits taxpayers to include all the members of its commonly owned group in a single return, regardless of whether the members establish a unitary relationship. Such an election is required to be made on an original timely filed return of the combined group and is irrevocable for seven years. An effective election automatically renews after the seven-year term for another seven years unless revoked.

3.         Additional Included Group Members

However, the combined return extends beyond the standard water’s-edge unitary combined group. Specifically, the new unitary combined reporting regime further expands the combined filing group filing by requiring taxpayers to include:

  1. “Combinable” captive insurance companies;
  2. Alien corporations with effectively connected income; and
  3. Captive real estate investment trusts (REITs) and regulated investment companies (RICs).

Further, the new law retains the exclusion from the Corporate Franchise Tax corporations subject to Insurance Tax (Article 33) (except combinable captive insurance corporations as stated above) and the franchise tax on transportation and transmission corporations (Article 9).

a.         Combinable Captive Insurance Companies

The New York unitary combined group will include a “combinable captive insurance company.” Historically, insurance corporations have been subject to Insurance Tax (Article 33), including captive insurance companies, which excluded such entities from the Corporate Franchise Tax. However, the New York tax law was amended to subject an overcapitalized (or “stuffed”) captive insurance company to the Corporate Franchise Tax. New York defines an “overcapitalized” captive insurance company as those insurance companies with 50% or less of its gross receipts consisting of premium income. The Budget renames “overcapitalized” captive insurance companies as “combinable” captive insurance companies. Further, the Budget limits the definition of “premiums” to “premiums from arrangements that constitute insurance for federal income tax purposes” for purposes of the determination.

b.         Alien Companies with Effectively Connected Income

In addition, the New York unitary combined group will include an alien corporation that has effectively connected income for the taxable year. Historically, New York has excluded alien corporations from a combined return. The Budget provisions require taxpayers to determine the alien corporation’s effectively connected income regardless of any treaty protections (when the treaty does not prohibit state taxation of such income). As a result of such non-conformity, alien corporations may have effectively connected income for New York Corporate Franchise Tax purposes but not for Federal income tax purposes.

c.         “Overcapitalized” Admitted Non-Life Insurance Corporations

Further, the Budget adds a curious provision that expands the Commissioner’s authority to make a discretionary adjustment related to “overcapitalized” admitted non-life insurance corporations. Specifically, the Commissioner is granted the authority to include all of the non-premium income of an “overcapitalized” non-life insurance subsidiary in the taxable income of an Article 9-A parent (direct or indirect). The insurance company would be considered “overcapitalized” if it derives 50% or less of its gross receipts from premiums. This is similar to the “combinable” captive insurance company provision, except for the fact that this provision permits the Commissioner to make an IRC § 482 type discretionary adjustment to simply shift the investment income to the Article 9-A parent, while the captive insurance company is included in the combined group return. This discretionary type of adjustment results in premiums still being subject to Article 33 (the premium tax under New York Tax Law § 1502-a), the investment income being subject to Corporate Franchise Tax under Article 9-A, and no potential apportionment dilution from the insurance company (because the company is not combined with the parent, as it is in the captive insurance company context).

4.         Finnigan Method

The Budget retains the Finnigan method for the computation of income and factors for the members of the unitary combined reporting group. Disney Enterprises, Inc. v. Tax Appeals Tribunal, 10 N.Y.3d 92, 888 N.E.2d 1029 (2008). The Budget specifies that the group member’s income, apportionment and attributes (NOL and PNOL) are aggregated and applied against the group’s aggregate business income to compute the group business income. As a result, the income and factors for all members of the combined group return are aggregated to arrive at a single business income and apportionment percentage to compute New York business income that is subject to the statutory tax rate.


The Budget expands New York’s imposition of the Corporate Franchise Tax with the application of an economic presence nexus standard, partnership nexus, and repealing an exemption from the imposition statute for activities related to fulfillment services.

New York tax law currently applies economic presence nexus under the Bank Franchise Tax for credit card companies. The Budget incorporates the Bank Franchise Tax economic presence nexus standard for Corporate Franchise Tax purposes. Specifically, the amended New York tax law provides that corporations that derive more than $1 million of receipts from New York are subject to the Corporate Franchise Tax. Further, the Budget provides that the analysis of economic presence nexus for a combined group is performed on an aggregated basis. The receipts from members of a combined group with more than $10,000 of receipts from New York are aggregated to determine whether the group has exceeded the $1 million of receipts threshold.

In addition, the Budget includes new legislation that expressly provides that a corporate partner in a partnership operating in New York has nexus by way of its partnership interest. The amended New York tax law provides that a partnership that has nexus (even economic presence nexus) with New York will subject its partners to the Corporate Franchise Tax.

The Budget also repeals the fulfillment center exemption from the imposition statute. As a result, corporations that have fulfillment services conducted on their behalf in New York no longer enjoy an exemption from the Corporate Franchise Tax.

Remember to stay tuned tomorrow for our discussion on the Budget (a) modifying the income tax base and (b) reducing the income tax rate.