On August 31, 2022, New York Governor Kathy Hochul signed into law A.10506 / S.9454 (the Act), which amends the New York City (NYC) administrative tax code by expanding NYC's economic nexus rules. Among other business tax changes, the Act also allows taxpayers to elect the NYC pass-through entity (PTE) tax, starting in 2022.

Nexus

Effective for tax years beginning on or after January 1, 2022, the Corporate Tax of 2015 (also known as the NYC Business Corporation Tax or BCT) applies to corporations "deriving receipts from activity in the city." A corporation is "deriving receipts from activity in the city" if it has $1 million or more in receipts from NYC sources in the tax year. For purposes of this provision, "receipts" are those subject to NYC's allocation rules, while "receipts within the city" are those included in the numerator of the receipts factor. Receipts include merchant discount fees received by a corporation from processing credit card transactions. A corporation that does not meet the $1 million threshold but has at least $10,000 in receipts from NYC sources and is a member of a unitary group will be "deriving receipts from activity in the city" if it and the other unitary group members with at least $10,000 in NYC receipts meet the $1 million threshold.

A corporation is doing business in NYC if it (1) issues credits cards to 1,000 or more customers with mailing addresses in NYC; (2) has merchant customer contracts covering 1,000 or more locations in NYC to which the corporation remitted payments for credit card transactions during the tax year; or (3) the sum of both customers and merchant contracts equals 1,000 or more. A corporation that is part of a unitary group and does not meet any of these thresholds can still be considered "doing business in NYC" if (i) it has at least 10 customers, locations, or customers and locations, and (ii) the corporation and the other members of the unitary group with at least 10 customers, locations, or customers and locations meet any of the thresholds described in (1) — (3).

The provisions creating nexus for unitary groups do not apply to corporations excluded from a combined report under N.Y.C. Admin. Code Section 11-654.3(2)(c).

The economic nexus threshold amounts may be adjusted annually to reflect changes in the consumer price index.

NYC PTE tax

The Act modifies NYC's elective PTE tax, which was enacted into law earlier this year (N.Y. Laws 2022, ch. 59, Part MM, enacted April 9, 2022). As originally enacted, the NYC PTE tax could be elected starting in 2023. The Act moves the effective date forward to tax years beginning on or after January 1, 2022. The Act also changes how the annual election is made, requiring the NYC PTE tax election to be made by the person who made the New York State (NYS) PTE election.

The Act includes provisions that apply to a NYC PTE tax election made for 2022. The election must be made by March 15, 2023. Electing city partnerships and city S corporations will not be required to make estimated tax payments for 2022. City partners, members or shareholders of an electing partnership or S corporation must calculate their required NYC personal income tax estimated tax payments as if they were not entitled to the NYC PTE tax credit.

The changes to the NYC PTE tax apply to tax years beginning on or after January 1, 2022.

Additional information on the NYS and NYC PTE taxes, including a link to the portal used to opt into the PTE tax, is available on the NYS department's PTE tax webpage.

Other changes

The Act also:

• Excludes amounts received through the COVID-19 pandemic small business recovery grant program¹ or the small business resilience grant program from the Unincorporated Business Tax (UBT), the General Corporation Tax (GCT), the Financial Corporation Tax (FCT) and the BCT, to the extent those amounts were included in federal taxable income, retroactive to tax years beginning on and after January 1, 2021
• Amends the BCT's provision on determining "entire net income" (ENI) to add references to NYC and NYS elective PTE taxes, effective for tax years beginning on and after January 1, 2022
• Applies the credit for an overpayment of UBT or a city business tax (e.g., GCT, FCT, BCT and transportation corporation tax) to any NYC tax liability of the person making the overpayment before the overpayment is sent to the NYS Commissioner of Taxation and Finance for application against the person's outstanding NYS tax debts, effective upon enactment

Implications

The addition of the "deriving receipts from activity in the city" economic nexus threshold only applies to the NYC BCT, not the NYC GCT applicable to S corporations or the UBT. Out-of-state taxpayers should review this change and determine whether they meet the economic threshold, which would subject them to the NYC BCT.

City partnerships and city S corporations making the NYS PTE tax election should consider whether it is beneficial to also make the new NYC PTE tax election. The NYC PTE election can only be made by city partnerships and city S corporations that timely make the NYS PTE election. Accordingly, city partnerships and city S corporations intending to make the NYC PTE tax election must make the NYS PTE tax election by September 15, 2022. City partnerships and city S corporations that fail to timely make the state election for 2022 will not be able to make the city election for 2022.

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ENDNOTE

¹ Under Section 16-ff of the New York State Urban Development Corporation Act.