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Jan 1994

NYS business apportionment calculations for corporations and nonresident individuals. (State & Local Taxation)

by Bodan, Joseph R.

    Abstract- New York State's tax regime allows businesses that conduct operations both within the state and outside it to apportion business income so that only the portion derived from in-state activities is subject to state taxation. However, computation rules covering nonresident individuals involved in a business and those covering S corporations with shareholders who are nonresidents can differ substantially even if circumstances are similar. These differences in the receipt factor are due to variances in the definitions of what constitutes a receipt arising from business activities within the state. For nonresident individuals, this definition includes all sales transacted within the state, whereas for corporations the criteria are somewhat different.

The Business Apportionment Percentage

Before explaining the receipts factor differences, it is helpful to first briefly summarize the business apportionment factor rules. A corporation doing business within and outside New York State is required to apportion its entire New York income by its business apportionment percentage using the three-factor formula stated above. A corporation's business apportionment percentage is applied to its total business income in arriving at the amount of such income that is subject to New York State taxation.

A nonresident individual who carries on a business both within and outside of New York State must first determine if his or her books and records allow for the specific apportionment of its business income to New York State sources. This specific apportionment method requires approval from the New York State Department of Taxation and Finance. If approval is not granted, a nonresident individual is required to apportion his or her income based upon the above mentioned three factor formula.

Receipts Factor Differences

The receipts factor used in determining a nonresident individual's business apportionment percentage can vary greatly from that used by corporations. Both mechanically determine the receipts factor using a ratio of New York sourced receipts to total receipts. However, the difference lies in what constitutes a receipt from New York State sources. The nonresident individual apportionment regulations consider as New York sourced receipts, "all sales negotiated or consummated, and charges for services performed by an employee, agent, or agency, or independent contractor chiefly situated at, connected by contract or otherwise with, or sent out from, offices, branches of the business, or other agencies, situated within New York State." Therefore, sales of tangible personal property are New York receipts where the sale was negotiated or consummated by an individual that worked out of a New York office regardless of where the sales effort took place or the location of the customer. This same "location of home office" concept also applies to receipts from services, regardless of where the services are performed.

Corporations use different criteria to determine New York State sourced receipts. For example, receipts from sales of tangible personal property are sourced to New York if shipments are made to customers located within the state. Similarly, receipts from services are sourced to New York if the services are performed in New York State, regardless of who performs such services or where the customer is located. Once New York State receipts are determined, the sales factor is double-weighted (single-weighted for New York State S corporations) in calculating their business apportionment factor. New York State does not have a "throw- back" rule in determining its receipts factor which can make this "destination" or "point of service" methodology very pro-taxpayer.

An Example

In applying these rules, assume a taxpayer is a retailer who sells tangible personal property entirely to customers located outside of New York State. Furthermore, the taxpayer's only office is located in New York State, and the taxpayer utilizes its employees and independent contractors as sales persons. All solicitation activities are performed by these employees or agents at the customers' location outside of New York State. Under this fact pattern, a corporation would not have any New York State sourced receipts because the destination of its merchandise was to customers located outside of New York. For a nonresident individual, however, all the sales would be considered New York sourced because the sale was negotiated and consummated by employees or agents of a business that was headquartered in New York.

The above example illustrates that the results from applying the rules for determining the receipts factor used in calculating the New York State business apportionment percentage can be vastly different for a corporation and for a nonresident individual that perform identical business activities.

Therefore, these differences should be considered when advising on the initial organizational structure of a business and when doing ongoing state and local tax planning. This is an example of the need to continually evaluate the way in which businesses involved in interstate commerce operate.

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