January 22, 2018 New York governor's proposed budget includes tax law changes aimed at closing the budget gap On January 16, 2018, New York Governor Cuomo released his proposed Fiscal Year 2018-2019 Executive Budget Bill (Budget Bill). With the exception of Parts P and DD of the Budget Bill (i.e., which would maintain the Empire State Child Tax Credit at the 2017 level and impose a health care insurance windfall profit fee, respectively), the Budget Bill contains no provisions related to the recently enacted federal tax reform, nor are there any provisions related to Governor Cuomo's initiative to address the significant reduction of the personal state and local income tax deduction at the federal level.1 In addition, with the exception of a revision to the definition of "investment income" in Part M of the Budget Bill to close the purported loophole on the taxation of carried interests, no provisions directly concern the corporate tax reform provisions enacted over the last few years by both New York State (NYS) and New York City (NYC). If enacted, the key changes in the Budget Bill to New York tax law would do the following: — Impose an internet fairness conformity tax on marketplace providers — Close the carried interest loophole (provided certain other states enact similar provisions) — Provide the New York Department of Taxation and Finance (Department) with expanded rights to appeal decisions adverse to it by the New York Division of Tax Appeals Tribunal (DTA Tribunal) — Defer certain business-related tax credit claims. The following is a summary of the proposed tax changes in the Budget Bill. Internet fairness conformity tax Part AA of the Budget Bill, titled "Impose an internet fairness conformity tax," would require marketplace providers to collect and remit sales and use taxes on third-party vendor taxable sales of tangible personal property facilitated through the provider's market. This requirement would apply to marketplace providers that have facilitated over $100 million in sales in each year after 2016. In addition, a notice and reporting requirement for non-collecting sellers and marketplace providers would be established. If enacted, these provisions would take effect September 1, 2018, and apply to sales and taxable uses of tangible property in the state occurring after that date; certain reporting requirements for non-collecting sellers, however, would not apply until January 1, 2019. Closing the carried interest loophole Part M of the Budget Bill would close the perceived carried interest loophole but only become effective if certain neighboring states of New York enact similar provisions. In general, the proposal would treat carried interest income of hedge fund and private equity investors as income earned from a trade or business (instead of as income subject to reduced federal capital gains rates) and impose, in addition to other taxes and surcharges imposed under New York statutory law, a 17% carried interest fairness fee on such income. These provisions would only take effect if Connecticut, New Jersey, Massachusetts and Pennsylvania enact provisions with a similar effect. Clarify New York residency requirement for tax purposes Part O of the Budget Bill would clarify New York's statutory residency requirements for purposes of New York State's personal income tax law (Article 22 of the New York Tax Law) by codifying the Department's long-standing policy of counting all days present in New York to determine whether the individual meets the "more than 183 days" threshold, regardless of whether the individual is domiciled in the state for any portion of the year. A similar change would be made for New York City personal income tax purposes. If enacted, this change would take immediate effect and apply to open years. Deferral of use and refund of certain business tax-credits claims Part S of the Budget Bill, effective for years beginning on or after January 1, 2018 and before January 1, 2021, would require taxpayers to defer the use or refund of certain business-related tax credits for three years, if the aggregate of such credits exceeds $2 million. According to the Memorandum in Support of the Bill, taxpayers would calculate the amount of each credit they would otherwise use and refund absent this provision; if the total of the specified credits sums to more than $2 million, taxpayers would have to reduce each credit proportionally. Credits that would be subject to the deferral generally include business tax credits, including, but not limited to: the investment tax credit, employment incentive credit, low-income housing credit, and special additional mortgage recording tax credit. Tax credits that would be exempt from the deferral include the film production, post production and commercial production credit, the New York Youth Jobs credit and the Hire-a-Vet tax credit. Taxpayers would be able to use 100% of the temporary deferred nonrefundable payout credits on their 2021 tax returns, and would be able to carry forward unused amounts indefinitely. Taxpayers would be able to use and refund 50% of temporary deferred refundable payout credits on their 2021 returns, 75% on their 2022 returns, and the remainder on their 2023 returns. Extend the statute of limitations on amended tax returns Part H of the Budget Bill would extend provisions of the statute of limitation to allow the Department to assess additional taxes on amended returns for Articles 9, 9-A, 22 and 33 taxpayers and New York City individual income taxpayers. Under current law, the Department cannot assess additional taxes on an amended return that is filed after the general three-year statute of limitations has expired on the originally filed return. The proposed change would extend the general statute of limitations on assessments to three years after the amended return is filed to allow an assessment of tax, including recovery of a previously paid refund, attributable to a change or correction on the amended return from a prior return. If enacted, this change would apply to amended returns filed on or after the date of enactment of the Budget Bill. Department's Right to Appeal DTA Tribunal decisions Part N of the Budget Bill would allow the Department to appeal an adverse decision of the DTA Tribunal. Under current law, only taxpayers can make such appeals. Moreover, according to the Memorandum in Support of the Budget Bill, the legislature does not have the authority to enact legislation to overturn an adverse ruling of the DTA Tribunal. If enacted, this change would take immediate effect and apply to DTA Tribunal decisions and orders issued on or after that date. Other changes Other proposed changes would: — Codify the Department policy set forth in TSB-M-11(17)S by providing responsible person sales tax payment relief to certain minority owners of limited partnerships and limited liability companies (Part X of Budget Bill) — Simplify the resale exemption for prepared food by allowing vendors (e.g., restaurants, cafeterias, caterers and others) to purchase prepared food exempt from sales and use tax by providing a resale certificate at the time of purchase (Part J of the Budget Bill) — Repeal the sales tax exemption for gas and electricity purchased from an energy service company (Part V of the Budget Bill) — Increase the sales tax exemption for purchases of food and drink from vending machines (Part Y of the Budget Bill) — Require a real property transfer report (Form RP-5217) to be filed with the Department for a transfer or acquisition of a controlling interest in an entity with an interest in real property (i.e., an equity sale) or sale of a co-op apartment/unit (Part C of the Budget Bill) — Make technical amendments to various property tax provisions, including the property tax freeze, partial payments of property tax and property tax payment deadline extension, among others. (Part E of the Budget Bill) — Extend through January 1, 2023, provisions allowing the State to determine assessment ceilings for telecommunications property (current provisions expire on January 1, 2019), and restructure the provisions to gradually phase in transition from the current assessment ceiling values to more accurate values (Part G of the Budget Bill) — Maintain the Empire State Child Tax Credit at the 2017 level; decoupling from the changes made to the federal credit (the calculation of the federal credit flows through to the state credit) by the TCJA, which increased the amount of the federal credit and expanded its reach. (Part P of the Budget Bill) — Extend the Hire a Vet Tax Credit for an additional two years, through 2020, for employment starting before January 1, 2020 (Part Q of the Budget Bill) — Increase by 50% the amount of credit available to employers that hire and employ at-risk youth under the New York Youth Jobs Program. (Part R of the Budget Bill) — Impose a health tax on vapor products for use with electronic cigarettes (Part BB of the Budget Bill) — Impose an opioid epidemic surcharge on the first sale of any opioid in the state — tax would fall on the manufacturer, producer and distributor (Part CC of the Budget Bill) — Impose a healthcare insurance windfall profit fee equal to 14% of the net underwriting gain from the sale of health insurance in New York (Part DD of the Budget Bill) Implications The Budget Bill is subject to further modification before its adoption into law. At any time within 30 days of submitting the Budget Bill to the Legislature, the Governor may unilaterally amend or supplement the proposed legislation via the concurrent 21- or 30-day amendment process. After that 30-day period, however, the Budget Bill is subject to the Legislature's revisions via the passage of related bills in the Senate and Assembly. Ultimately, the final budget bill will need to be approved by the Senate, the Assembly and the Governor. Because the next fiscal year for New York State begins April 1, 2018, the goal of the Governor and the Legislature generally is to pass a budget bill by that date. EY New York tax professionals will continue to monitor the progress of these provisions and any relevant developments related to New York State and City. ———————————————
——————————————— 1 Many of the recently enacted federal corporate tax reform provisions and alternatives related to Governor Cuomo's initiative regarding the loss of the state and local tax deduction for individuals are, however, addressed in the "Preliminary Report on the Federal Tax Cuts and Jobs Act" issued by the New York State Department of Taxation and Finance and distributed to the Tax Committee on January 17, 2018 (a copy of which is available on the Internet here (last accessed January 22, 2018.) The report will be discussed in a forthcoming Tax Alert. | |||||||||||||||||
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