USA – NEW YORK Trends and Developments Contributed by: Eugene J. Gibilaro and Joshua M. Sivin, Blank Rome LLP
Sourcing methodology divergence Another critical difference involves the sourcing rules used to determine how much of a business’s income is taxable in New York City. As discussed above, New York State uses market-based sourcing for services under Article 9-A, looking to where the customer receives the benefit of the service. New York City’s Business Corporation Tax – which applies to C-corporations – follows the same mar - ket-based sourcing approach as the State. However, the City’s General Corporation Tax (which applies to S-corporations) and the Unincorporated Business Tax (which applies to partnerships and sole proprietors) use cost-of-performance sourcing for services. Under cost-of-performance, receipts are sourced based on where the taxpayer performs the income-producing activity, not where the customer is located. See NYC Administrative Code § 11-508; 19 RCNY 11-65. This divergence can produce very different results depending on a company’s circumstances. For example, if a New York City-headquartered compa - ny performs most of its work at its City offices but serves clients located throughout the country, under market-based sourcing, only the receipts from ser - vices benefiting customers located in New York would be sourced to New York. Under cost-of-performance sourcing, however, all of the company’s receipts would be sourced to New York because that is where the work is performed. For businesses that perform work in New York but have significant out-of-state customers, the choice of entity type can have major tax implications. A C-cor - poration would benefit from market-based sourcing at both the State and City level, while an S-corporation or partnership might find a greater share of its income subject to City tax under cost-of-performance rules. This is something tax advisers and taxpayers should carefully consider when selecting or restructuring an entity. Regulatory status Finally, the regulatory landscape differs between the State and City. New York State finalised its corporate franchise tax regulations in December 2023. New York City’s Department of Finance is still working on regula -
ferences can produce unexpected tax consequences for businesses that assume the State and City rules work the same way. S-corporation and pass-through entity treatment One of the most significant differences involves how S-corporations are treated. At the State level, corpo - rations that have made a valid federal S-election can also elect to be treated as a New York S-corporation. When this election is made, the corporation itself is generally not subject to tax on its income; instead, income passes through to shareholders who report it on their personal income tax returns. The S-corpora - tion pays only a fixed dollar minimum tax at the entity level – a nominal amount compared to what a C-cor - poration would owe. See N.Y. Tax Law §§ 210, 660. New York City takes a very different approach. The City does not recognise federal or State S-corporation elections for purposes of its General Corporation Tax. As a result, an S-corporation doing business in New York City is still subject to the GCT at the full 8.85% corporate rate at the entity level. And the S-corpora - tion’s shareholders who are New York City residents must also report their pass-through income on their personal New York City returns. See NYC Administra - tive Code § 11-603. The practical result is that some S-corporation owners may face double taxation in New York City: the entity pays GCT on its City-allocated income, and the share - holders pay personal income tax on the same income that flows through to them. This is a stark contrast to the State treatment, where the pass-through structure is respected and entity-level tax is minimal. This divergence goes beyond S-corporations to other pass-through entities. New York State does not gener - ally impose an entity-level income tax on partnerships, limited liability companies, and sole proprietorships; instead income flows through to the owners and is taxed only on their personal income tax returns. In New York City, however, these entities are subject to the Unincorporated Business Tax at a rate of 4% on City-source income. This means a pass-through entity that has no entity-level State tax obligation may none - theless face a City tax at the entity level. See NYC Administrative Code § 11-503.
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