Income tax for eCommerce: Do I need to pay income tax in New York State?
State income tax rules to determine if your eCommerce business needs to pay tax in NY.
As an online seller, you have the ability to sell your products all over, including in many other states. With the major shift to eCommerce, the issue of state tax has become, well, for lack of a better word, quite taxing.
For a state to require you to pay state income tax or register with their state authorities, your business would need to have a significant connection, or 'nexus' to that state.
There are two types of nexus - (1) Physical - where you have some kind of physical connection to the state, such as a warehouse or an office, or (2) Economic - a certain threshold of transactions occurred in the state.
The definition and threshold for creating nexus in a state may be different for state income tax purposes and state sales tax purposes and differs amongst the states.
For New York state, what generates state income tax nexus?
The NY corporate franchise tax applies to all corporations - both corporations organized in NY and those organized outside of NY - for the privilege of being able to conduct certain business activities in their state. The rules can get a bit complex, but we'll walk you through the key points.
Here are the activities that can cause New York to say, "Hey, eCommerce biz, I want a piece of your pie" (perhaps, in slightly more sophisticated language):
1. You are a NY corporation
If you are a corporation that was formed in NY, you are required to pay a tax in the State. This applies whether or not your corporation does any business in New York.
2. You 'do business' in NY
This determination is based on a 'big picture' view of your business and its overall activities in New York. There is no specific definition but it includes all activities that occupy the time or work of people for a profit. In other words, if you're spending time working on something in NY to make a profit (whether or not you actually make a profit), you could fall under this definition.
See 'What is considered 'doing business' in New York?' below where we discuss this point in more detail.
3. You use assets to maintain a business or activity in NY
For example, if you are maintaining inventory or raw materials in New York, your activities could fall under this category.
4. You own or lease property in NY
This includes property held, stored, or warehoused in New York. This applies even if the property in NY isn't being used by your business for its day-to-day activities.
5. You maintain an office in NY
This includes maintaining an office (even a home office) in New York but does not include an office maintained by your corporate officers or directors that are not employees of your corporation.
6. You have economic nexus in NY
This means that even if you have no physical activities in New York, you can still be subject to income tax there if you conduct a certain level of business transactions.
For eCommerce businesses specifically, this category can be a real pain in the assets. If any of the following applies, you can be subject to income tax in NY even without any physical ties:
- Sales of $1 million or more to New York customers during the tax year (for years beginning after Jan 1, 2022, the number increased to $1.138 million), OR
- At least 1,000 customers with billing addresses in New York.
The good news is that there is an important exception under Pub. L. No 86-272 for activities in NY that are limited to the solicitation of orders by the corporation's employees or contractors for sales of certain property. This exception can apply if: (1) orders are sent outside of NY for approval or rejection and, (2) if approved, are filled by shipment or delivery from a point outside of NY.
In other words, if you have no other ties to NY except for customers that purchase products from your eCommerce store, you generally shouldn't be subject to income tax in NY.
Note that this rule does not apply to sales tax in the same way, but that's an entirely different beast :).
What is considered 'doing business' in New York?
'Doing business' is a pretty broad term with no clear definition.
Before a non-NY corporation can do business in NY, you may be required to apply for and receive a certificate of authority from the Department of State.
When deciding if you are 'doing business' in NY, the state tax authorities will generally consider the following factors:
- The nature, frequency, and regularity of your activities in New York State;
- The purposes for which your corporation was organized;
- The location of your offices and other places of business;
- The employment in New York State of officers, employees, and contractors; and
- The location of the actual seat of management or control of the corporation.
If you are a non-NY corporation and only do the following activities in NY (and nothing more) you won't have nexus in New York:
- Handling legal disputes;
- Holding director or shareholder meetings;
- Maintaining bank accounts;
- Keeping books and records in New York;
- Using fulfillment services of a person other than an affiliated person and owning property stored on the premises of such person relating to the services provided.
State income tax can be pretty complex. Unless the answer is a no-brainer for you, we highly recommend you speak to a tax advisor or CPA to ensure your business is compliant with state tax requirements.
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The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.
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