On January 15, 2019, New York Governor Andrew Cuomo released his proposed fiscal year 2019–2020 Executive Budget Bill (A2009/S1509 or the Budget Bill). Some of the provisions addressed by the Budget Bill include the following: apportionment related to the inclusion of global intangible low-taxed income (GILTI) in entire net income (ENI), decoupling from the federal adjusted basis for purposes of applying the New York State (NYS) test to qualify as a manufacturer, elimination of internet sales tax advantage, extension of tax shelter provisions and updates to tax preparer penalties, extension of certain sales tax exemptions related to the Dodd-Frank Protection Act, and closing the carried interest loophole.

The following is a detailed summary of the more significant tax provisions in the Budget Bill.

Apportionment of GILTI (Part C)

Part C of the Budget Bill proposes a receipts factor sourcing rule for the inclusion in ENI of GILTI as set forth in Section 951A of the Internal Revenue Code of 1986, as amended (IRC). This proposed statutory provision is consistent with the language included by the NYS Department of Taxation and Finance (Tax Department) in its recently published instructions to corporation franchise tax returns (i.e., forms CT-3 and CT-3-A).¹ The Budget Bill would add a new subdivision 5-a to N.Y. Tax Law section 210-A to provide that "[r]eceipts constituting net [GILTI] shall not be included in the numerator of the apportionment fraction" but "[r]eceipts constituting net [GILTI] shall be included in the denominator of the apportionment fraction." Net GILTI is defined as "the amount required to be included in the taxpayer's federal gross income pursuant to subsection (a) of [Section] 951A of the [IRC] less the amount of the deduction allowed under clause (i) of [Section] 250(a)(1)(B) of [the IRC]." The Budget Bill includes identical provisions for purposes of the New York City (NYC) tax law as set forth in the NYC Administrative Code. These provisions would be effective for tax years beginning on or after January 1, 2018.²

Decoupling from the federal adjusted basis for the NYS manufacturing test (Part D)

The Budget Bill would decouple the N.Y. Tax Law from the Tax Cuts and Jobs Act (TCJA) provisions for determining federal adjusted basis for purposes of determining whether a manufacturer is a qualified NYS manufacturer eligible for favorable tax rates and credits under Article 9-A of the N.Y. Tax Law. Under this proposed provision, the tax basis of NYS qualified eligible manufacturing property would be computed based upon NYS depreciation, not federal depreciation.

Eliminate internet tax advantage (Part G)

Like a proposal made in the fiscal year 2018–2019 Executive budget bill, the Budget Bill 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. If enacted, this requirement would become effective September 1, 2019.

Extension of tax shelter provisions and updates to tax preparer penalties (Part O)

The Budget Bill would make permanent the tax shelter reporting and penalty provisions in the N.Y. Tax Law. These provisions were modeled after the federal tax shelter provisions. The Budget Bill also would update Article 22 of the N.Y. Tax Law (Personal Income Tax (PIT)) to include penalties for tax preparers that take positions on returns or claims that are not properly supported by the N.Y. Tax Law and would impose penalties for failing to sign a return or provide required identification numbers on those returns.

Extension of certain sales tax exemptions related to the Dodd-Frank Protection Act (Part V)

The Budget Bill would extend for two years the current sales and use tax exemption provided to financial institutions on certain transfers of property or provision of services to affiliates that are required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, the Budget Bill would extend the date by which transfers must be made, or a binding contract entered into, from June 30, 2019 to June 30, 2021.

Closing the carried interest loophole (Part Y)

Like provisions included in the fiscal year 2018–2019 Executive budget bill proposal, the Budget Bill would close the carried interest loophole contingent on certain neighboring states passing similar provisions. In general, the proposal would define carried interest income of hedge fund and private equity investors and impose, in addition to other taxes and surcharges imposed under Articles 9-A and 22, a 17% carried interest fairness fee on such income intended to make up for the difference between the treatment of such income for federal income tax purposes as capital gain income as opposed to ordinary income.³ This provision would take effect when Connecticut, New Jersey, Massachusetts and Pennsylvania enact provisions with a similar effect.⁴

Enactment of the Cannabis Regulation and Taxation Act (Part VV)

The Budget Bill would "create and amend existing laws to legalize adult-use cannabis … and taxation of cannabis within [NYS]." Among amendments to other provisions of NYS laws, the Budget Bill would amend the N.Y. Tax Law by adding new Article 20C entitled "Tax on Adult-use Cannabis Products." The following new taxes would apply: a tax on cannabis cultivation, a 20% tax on the invoice price of a wholesaler's sale of cannabis to a retail dispensary; an additional 2% tax on a wholesaler's sale of cannabis to a retail dispensary. Revenue from the taxes would be deposited into the NYS Cannabis Revenue Fund and expended for various enumerated purposes. Adult-use cannabis products would be exempt from NYS sales tax.

Other changes

Other proposals in the Budget Bill include:

• Amending the real property tax law (Part J) to make administration more effective and efficient
• Extending the top PIT rate (Part P) (i.e., 8.82% tax rate) for five years through 2024
• Extending charitable deduction limitations under NYS and NYC PIT (Part Q) for individuals with adjusted gross income over $10 million for five years through 2024
• Excluding from ENI, for NYS and NYC purposes, certain contributions of capital (Part X) to corporations that are included in federal taxable income as a result of the TCJA⁵
• Making technical corrections to various N.Y. Tax Law and NYC Administrative Code provisions (Part Z), such as removing a reference to the IRC for real estate investment trusts that are outdated as a result of the TCJA, removing a reference to the publication of issuers' allocation percentages in the Tax Law, as such provisions no longer apply after NYS's corporate tax reform, deleting a provision related to estimated payments of the Metropolitan Transit Authority (MTA) surcharge by S corporations, and amending the NYC Administrative Code to refer to the "second preceding [tax] year" to be consistent with amendments enacted in 2016 for estimated tax payments, among others
• Creating, expanding, and/or extending several tax credit related provisions, including: expanding the employee training incentive program and the historic rehabilitation credit, extending the workers with disabilities tax credit, and creating the NYS employer-provided child care credit

Implications

The Budget Bill may be modified further before being enacted 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 through the concurrent 21- or 30-day amendment process. After that 30-day period, however, the Legislature may revise the Budget Bill by passing related bills in the Senate and Assembly. Ultimately, the final budget bill will need to be approved by the Senate, Assembly and the Governor. Because the next fiscal year for New York State begins April 1, 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 as related to New York State and City.

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ENDNOTES

¹ The Tax Department included GILTI apportionment provisions in its form instructions before issuing any other guidance to taxpayers and practitioners. The instructions, like the provision in the Budget Bill, require the net GILTI amount determined under IRC Sections 951A and 250 to be included in the denominator of the apportionment fraction (but zero in the numerator) and require the net amount to be included on the discretionary adjustment line (i.e., line 53, of the taxpayer's apportionment fraction form).

² As set forth in the fiscal year 2018–2019 budget bill, the foreign-derived intangible income (FDII) deduction under IRC Section 250(a)(1)(A) must be added back for NYS and NYC purposes. Therefore, the FDII amount would be presumably included in the apportionment receipts factor.

³ On January 9, 2019, legislation (S. 303) was introduced in the NYS Senate that, if adopted, would impose a 19% surtax on income from "investment management services" and re-characterize that income (even if treated for federal purposes as capital gains included in federal taxable income) as business income. As proposed, S. 303 broadly defines "investment management services" (likely to include management fee and carried interest income) as: (i) advising the partnership, S corporation, or entity as to the advisability of investing in, purchasing, or selling any specified asset; (ii) managing, acquiring or disposing of any specified asset; (iii) arranging financing to acquire specified assets; or (iv) any activity in support of any previously described services. S. 303 would apply to pass-through entities, S corporations and C corporations with a carve-out for entities that provide investment management services if at least 80% of the average fair market value of the specified assets of the partnership, S corporation or other entity during the tax year consists of real estate.

⁴ Thus far, only New Jersey has adopted similar provisions.

⁵ The proposed amendments to the NYS Tax Law apply to Articles 9-A and 33. The proposed amendments to the NYC Administrative Code apply only to the General Corporation Tax, not the Business Corporation Tax.