Unlocking Potential New York City Tax Savings for Software Providers

Executive Summary / Abstract

New York City (“NYC”)-based developers and resellers of software-as-a-service (“SaaS”) and software that is downloaded by the user likely have a significant NYC tax savings and refund opportunity if they pay the Unincorporated Business Tax (“UBT”) and General Corporation Tax (“GCT”). These are taxes imposed on business entities that are disregarded, entities taxed as partnerships, and entities which have elected to be taxed as S corporations which conduct business in NYC.

Key Details

Both the NYC UBT and GCT measure taxable income by multiplying the business’s net income by the receipts factor. The receipts factor is simply the ratio of receipts from sales sourced to NYC divided by total receipts from all sales sourced to all locations and jurisdictions, whether inside and outside the Unites States.

While the rules for sourcing revenue from sales of tangible personal property and services are provided for in the UBT and GCT laws and regulations, there is a lack of clear guidance pertaining to sourcing revenues from sales of electronically delivered software, SaaS, and other cloud computing licenses and resources. Based on a lack of definitive guidance and clear application of the above-cited rules to these products, many of these NYC-based businesses source all their revenues to NYC for UBT and GCT purposes.

Despite this practice, there is a strong tax return position for sourcing sales from these software, SaaS and other cloud computing licenses and resources using a customer location approach. This sourcing method should significantly reduce the receipts factor and resulting taxable income for NYC-based businesses providing these software/SaaS products.

How We Can Help / Contact Information

NYC UBT and GCT provisions afford taxpayers with a 3-year statute of limitations for amending returns. Therefore, there may be an opportunity to secure tax savings for prior tax periods in addition to prospective periods. Please contact Jaime Reichardt or another member of Citrin Cooperman’s SALT leadership team if your business is based in NYC, engaged in sales of downloaded software, SaaS and various cloud computing services, and paying significant amounts of UBT or GCT.