New York State Corporate Tax Law Reform: The Impact On Companies Providing Digital Products


On March 31, 2014, Governor Cuomo signed into law legislation that provides for an extensive reform of the state's corporate tax regime (the "Act"), most notably for out-of-state corporations providing digital products to New York customers. Prior to the enactment of the Act, the general corporate franchise tax law had not been substantially modified since 1945. Generally, the provisions of the Act are effective for tax years beginning on or after January 1, 2015, unless noted otherwise.

Other significant changes include a decrease in the corporate franchise tax rate, the imposition of a mandatory unitary combined reporting system, elimination of a separate tax regime for banking corporations, and the creation of various tax incentives and rate reductions for "qualified manufacturers" in the state. The changes to estate tax, property tax, and additional tax credits mean these reforms will also affect other types of taxpayers. The main provisions of the Act are outlined below.

At this time, the enacted reforms to the New York State tax law regime generally do not apply to New York City, with limited exceptions. Conformity by New York City will require its own legislation.


The Act would significantly impact the number of corporations subject to tax under the Article 9-A franchise tax. A number of the changes would adversely affect companies that operate predominately through the internet. Many of these companies would become subject to New York State corporate taxation. It would also mandate so-called "water's edge" (U.S. incorporated entities only) unitary reports. A small number of states require combined reporting on a worldwide basis.

The Act adopts a bright line "economic" nexus threshold for corporations that would not otherwise be doing business in New York State. It would also eliminate the nexus exception for out of state businesses that use fulfillment services. Finally, the Act adopts market-based sourcing rules for digital products. Most changes are effective for taxable years beginning on or after January 1, 2015. Interestingly, no corresponding changes are being made to the New York City corporate tax laws, which operate independently from the New York State corporate tax law.

While there are many changes to the corporate tax law contained in the Act, this memorandum will focus on the reforms that will impact internet-based companies.


A. Economic Nexus

  1. Current Law

    New York's franchise tax is currently imposed on all corporations for the privilege of exercising their corporate franchise in New York; doing business in New York; employing capital in New York; owning or leasing property in New York in a corporate or organized capacity; and maintaining an office in New York.1 Pursuant to the Constitution's Commerce and Due Process clauses, the U.S. Supreme Court has held that an out-of-state corporation must have "substantial nexus" with a state before the corporation may be subject to taxation by the state.2 While the Supreme Court has ruled that the Constitution requires physical presence for a state to impose a sales tax collection responsibility on a vendor, the Court has not ruled as to whether this applies in the franchise tax context.3

    "Substantial nexus" has historically been interpreted in New York as requiring an in-state physical presence.4 New York has viewed the physical presence standard as applying to gross receipts and corporate income-type taxes.5 This physical presence can result from, among other things, the activities of the corporation, or its employees or agents. However, the franchise tax on banking corporations currently imposes an "economic" nexus standard upon out-of-state credit card issuers; that is, nexus is also determined based on the economic activity of the corporation in New York.6

    New York joins a small but growing number of states adopting...

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