Skelos And Morelle Announce Passage Of Legislation To Spur Investment In New York
Single Sales Factor Example
The enactment of a Single Sales Factor will save businesses $130 million when fully implemented.
In order to determine the New York State corporate franchise tax liability of companies that conduct a business in multiple states, a formula was created to allocate income according to three factors: sales, payroll and property.
A company is required to calculate the New York State percentage of each of these factors and average them together. The combined average is said to be the percentage of corporate income that was generated in New York State. A number of years ago, in an effort to assist New York’s manufacturing community in particular, the sales factor was doubled and now represents half of the combined percentage instead of one third.
Problem: Consider two different companies that have the same percent of sales in New York State, but drastically different payroll and property investment levels. As you can see below, Company A, a New York based company has made significant investments in our state. Company B, makes little investment in people or plant. Yet Company B enjoys considerable advantages in tax treatment, because New York’s income allocation formula rewards out-of-state companies over those that invest in our state.
Property Payroll Sales
Company A 50 % 50 % 10 %
Company B 5% 5% 10%
Company A formula 50 + 50 + 10 (2) = 120 120 / 4 = 30%
Company B formula 5 + 5 + 10 (2) = 30 30 /4 = 7.5%
Company A’s income allocation is four times higher than Company B’s allocation, despite the fact that both have the same percentage of sales in New York and Company A has hired 10 times the percentage of New Yorkers and bought property in New York State at 10 times the rate of Company B. In fact, should Company A hire more workers or invest more heavily in facilities, the disparity will only grow wider.
Solution: New York will now join the growing number of states that have moved to a single sales factor allocation method. Simply put, the percentage of a company’s sales that are conducted in New York State is determined to be the percentage of income generated here as well.