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On April 12, 2019, the New York Governor Andrew Cuomo signed into law the fiscal year 2019–2020 Budget Bill (A2009CS1509C or the Final Bill) . Provisions addressed by the Final 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 qualified NYS manufacturer, requiring marketplace providers to collect and remit NYS sales and use tax, extension of tax shelter provisions and revision of tax preparer penalties, extension of certain sales tax exemptions related to the Dodd-Frank Protection Act, adoption of an excise tax on opioids and imposing an additional real estate transfer tax.

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

Apportionment of GILTI (Part C)

Part C of the Final Bill includes a receipts factor sourcing rule related to the amount of GILTI, as set forth in Section 951A and Section 250 of the Internal Revenue Code of 1986, as amended (IRC), included in ENI under the corporation franchise tax law. This provision is consistent with the language included by the NYS Department of Taxation and Finance (Tax Department) in its instructions to the 2018 corporation franchise tax returns (i.e., NYS Forms CT-3 and CT-3-A).¹ Specifically, new subdivision 5-a is added 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 the amount of GILTI included in federal gross income under IRC Section 951A(a) less the amount of GILTI deducted under IRC Section 250(a)(1)(B)(i). Identical provisions are adopted for New York City (NYC) General Corporation Tax and 2015 Corporate Tax purposes. The Final Bill, however, does not amend the NYC Banking Corporation Tax to provide a similar receipts factor sourcing rule for banking corporations that are subchapter S corporations. These provisions take immediate effect and apply retroactively to tax years beginning on or after January 1, 2018.²

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

The Final Bill decouples the N.Y. Tax Law from the changes to the computation of adjusted basis brought about through enactment of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) for purposes of measuring the NYS basis of property used to determine whether a taxpayer is a qualified NYS manufacturer eligible for the favorable tax rate (i.e., 0%) and credits available under Article 9-A of the N.Y. Tax Law. Under the Final Bill, the tax basis of NYS qualified eligible manufacturing property is computed based upon NYS depreciation, not federal depreciation, as had existed under prior law. This provision takes immediate effect and apply retroactively to tax years beginning on or after January 1, 2018.

Eliminate internet tax advantage (Part G)

The Final Bill requires marketplace providers to collect and remit sales and use taxes on third-party vendor taxable sales of tangible personal property facilitated through the marketplace provider's market. Under these provisions, a person "facilitates" a sale of tangible personal property when it meets both of the following: (1) the person provides the forum in which the sale takes place or the offer of sale is accepted (including not only an internet website but also a shop, store, booth, catalog, or similar forum); and (2) the person or an affiliate collects the receipts paid by a customer to a marketplace seller or contracts with a third party to collect such receipts. The Final Bill also provides a safe harbor for small marketplace providers. Specifically, a person that is not otherwise registered to collect and remit sales and use tax is not a marketplace provider if:

• It has no physical presence in the state and can show, for the immediately preceding four quarterly periods (ending on the last day of February, May, August and November), that the cumulative total gross receipts from sales it made or facilitated of property delivered in NYS does not exceed $300,000

Or

• It has not made or facilitated more than 100 sales of property delivered in NYS

Those meeting this exemption, nevertheless may voluntarily elect to register and collect tax. The Final Bill includes another provision not in prior versions that relates to the distribution of sales/use tax revenue generated under this Part to a newly created "New York central business district trust fund." These provisions take immediate effect and apply to sales made on or after June 1, 2019.

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

The Final Bill extends NYS's tax shelter reporting and penalty provisions in the N.Y. Tax Law through July 1, 2024 (from July 1, 2019). These provisions were modeled after the federal tax shelter provisions. In addition, the Final Bill updates Article 22 of the N.Y. Tax Law (Personal Income Tax (PIT)) to include penalties for tax preparers that take positions on any tax returns or credit claim forms that are not properly supported by the N.Y. Tax Law (this provision takes effect immediately). It also imposes penalties for failing to sign a return or provide required identification numbers on those returns (this provision applies to tax documents filed or required to be filed for tax years beginning on or after January 1, 2019).

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

The Final Bill extends through June 30, 2021 (from June 30, 2019) 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. Thus, to qualify for the exemption under this provision, transfers must be made, or a binding contract entered into, by June 30, 2021.

New excise tax on the sale of opioids (Part XX)

The Final Bill imposes a new excise tax on the first sale of every opioid unit in NYS that will be charged against and paid by the registrant³ making the first sale. The tax accrues at the time of sale and is imposed at a rate of (i) a quarter of a cent per morphine milligram equivalent when the wholesale acquisition cost is less than 50 cents, or (ii) one and a half cents per morphine milligram equivalent when the wholesale acquisition cost is 50 cents or more. It is presumed that any sale of an opioid unit in NYS by a registrant is the first sale of the opioid unit in NYS unless the contrary is established by the registrant. Tax does not apply if the first sale of the opioid is to a program operated under Article 40 of the N.Y. Public Health Law and Article 32 of the N.Y. Mental Hygiene Law.

Registrants subject to the tax will file a return with the NYS Tax Commissioner showing the total morphine milligram equivalent and wholesale acquisition costs of the taxable opioid units, the amount of tax due, and any additional information required by the NYS Tax Commissioner. Returns are due on a quarterly basis (for periods ending on the last day of March, June, September and December) within 20 days of the end of the quarterly period. The first return for the new tax, however, is due January 20, 2020, and covers all opioid sales occurring between the effective date of these provisions and December 31, 2019. Registrants can seek a refund or credit of tax paid on the sale of an opioid unit when the sale is cancelled by the purchaser.

These provisions take effect July 1, 2019.

Real estate transfer tax (Part OOO)

The Final Bill makes the following changes to the NYS real estate transfer tax:

• Enact an additional NYS transfer tax rate of 0.25% on transfers of (i) residential real property that is located in NYC, the consideration for which is $3 million or more, and (ii) any other type of real property that is located in NYC, the consideration for which is $2 million or more. Currently, the NYS transfer tax rate is 0.4%. Under the revised provisions, the tax rate on the transfers described above is 0.65%.
• Enact an additional supplemental NYS "mansion tax" rate of up to 2.9% on transfers of NYC residential real property. Transfers of such property for consideration of at least $2 million are subject to the smallest additional mansion tax rate (0.25%), while the top rate of 2.9% applies to transfers for consideration of at least $25 million. This new mansion tax rate is in addition to the existing NYS 1% mansion tax on transfers of residential real property anywhere in the state for consideration of $1 million or more. Thus, the combined top NYS transfer tax rate on such transfers of NYC residential real property is 4.55% [0.4% + 0.25% + 1.0% + 2.9%]. Further, NYC continues to impose its own transfer tax rate of 1.425% on residential real property (for transfers for consideration of more than $500,000). Thus, a total combined NYS and NYC rate applicable to such transfers is up to 5.975% [4.55% NYS + 1.425% NYC].⁴

The new transfer tax and mansion tax rates are effective for transfers occurring on or after July 1, 2019. They do not, however, apply to conveyances made under binding written contracts entered into on or before April 1, 2019 (even if the transfer occurs on or after July 1, 2019).

See the attached table summarizing the NYS and NYC transfer tax rates, including the new 0.25% NYS rate and 2.9% maximum mansion tax rate.

Other changes

Other tax changes in the Final 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 capital contributions (Part X) 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 deleting a provision related to estimated payments of the Metropolitan Transit Authority (MTA) surcharge by S corporations, and amending the NYC Administrative Code's General Corporation Tax to provide that ENI is determined without the exclusion, deduction or credit of the amount of any deduction that would have been allowed for FDII under IRC Section 250(a)(1)(A) if the taxpayer had not made an election to be treated as an S corporation, among others
• Creating, expanding and/or extending several tax credit-related provisions, including: expanding the employee training incentive program (Part B) and the historic rehabilitation credit (Part U), extending the workers with disabilities tax credit through 2022 (Part E) and the film post production credit (through 2024) (Part SSS), creating the NYS employer-provided child care credit (Part L) and the recovery tax credit program (Part W), and modifying the empire state commercial production credit (Part AAA)
• Imposing a supplemental tax on vapor products (Part UU)
• Imposing a special supplemental tax on passenger car rentals outside of the metropolitan commuter transportation district (Part WW)
• Temporarily exempting from sales and use tax certain food and drinks sold from vending machines for $1.50 or less (provided the machine accepts only coin or currency) or $2.00 or less (if the machine accepts all forms of payment), beginning June 1, 2019 through May 31, 2021 (Part CCC)
• Making permanent the 2% property tax cap on school district and local government tax levies (Part NNN)
• Establishing the "MTA Reform and Traffic Mobility Act" under which a toll charge will be imposed on vehicles entering or remaining in the central business district in NYC (specific area defined in the Final Bill). The program will be administered by the Triborough Bridge and Tunnel Authority and will not start earlier than December 31, 2020 and only after a 30-day testing period (Part ZZZ)

Implications

Similar to prior years, the proposed provision to close the carried interest loophole that appeared in earlier versions of this year's budget bill failed to make it into the Final Bill. Also excluded from the Final Bill were provisions that would have (i) imposed an additional property tax of up to 4% on residential real property that is located in NYC, owned by non-residents and valued at more than $5 million, and (ii) legalized and taxed cannabis. Some of these changes could be revisited in other legislative proposals that may be introduced later this year.

EY New York state and local tax professionals will continue to monitor the progress of these provisions and any relevant developments as related to NYS and NYC taxes.

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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 provisions in the Final 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 A "registrant" is defined as (1) any person, firm, corporation or association that (a) must be registered with the NYS Department of Education as a wholesaler, manufacturer or outsourcing facility (or any such person, firm, corporation or association that would be required to do such but for the exemption for certain nonresident establishments in N.Y. Education Law Section 6808-b(2)) and (b) holds and transfer title to an opioid unit; or (2) any person, firm, corporation or association that (a) must be registered with the NYS Department of Health as a manufacturer or distributor of a controlled substance and (b) holds and transfers title to an opioid unit.

⁴ The mansion tax rates (new and existing) only apply to certain residential real property; the top combined NYS and NYC rate on other properties in NYC will be, generally speaking, a combined 3.275% [0.4% + 0.25% + 2.625%].

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