April 6, 2023
New York budget negotiations continue with extended budget deadline
The New York State Legislature is currently negotiating the details of the 2023–2024 New York State (NYS) budget. The final budget bill generally is due before the April 1 start date of the state's new fiscal year. This year's budget, however, did not meet this deadline. On April 3, 2023, lawmakers passed a budget extender through April 10, 2023.
The final shape of the budget bill remains to be seen, but it will likely include some of the tax proposals put forth by Governor Kathy Hochul, the Assembly and the Senate. This Tax Alert summarizes significant tax proposals included in (1) the Revenue Article VII Legislation proposed by the governor in the executive budget bill issued on February 1, 2023 (A.3009-A/S.4009-A, referenced here as the Executive Bill), (2) the Assembly's Revenue Article VII Legislation (A.3009-B, referenced here as the Assembly Bill), and (3) the Senate's Revenue Article VII Legislation (S.4009-B, referenced here as the Senate Bill). Consistent with prior years, the Executive Bill seeks more moderate revenue increases than the Assembly Bill and Senate Bill. Each bill, however, includes provisions that affect corporate and individual taxpayers across various industries.
The Executive Bill, the Assembly Bill and the Senate Bill would modify various tax credit and incentive provisions, as well as other tax provisions. These proposed changes are not discussed in this Tax Alert.
Comparison of Executive Bill provisions to Assembly Bill and Senate Bill provisions
PART B — Clarification of the treatment of limited partners for the Metropolitan Commuter Transportation Mobility Tax (MCTMT)
The Executive Bill, the Assembly Bill and the Senate Bill would amend the definition of the term "net earnings from self-employment" as defined in NY Tax Law Section 800(e) to clarify how limited partners are treated for purposes of the MCTMT. Current law conforms to the definition of "net earnings from self-employment" in IRC Section 1402, which exempts, via IRC Section 1402(a)(13), certain limited partners from paying self-employment tax. For purposes of the MCTMT, the Executive Bill would clarify that this exemption would not apply "if the individual, directly or indirectly, takes part in the control, or participates in the management or operations of the partnership such that the individual is not a passive investor, regardless of the individual's title or characterization in a partnership or operating agreement." If enacted, this provision would take effect immediately.
The proposed change follows an active tax audit campaign initiated by the NYS Department of Taxation and Finance (the Department) and would involve a significant change for individuals that maintain ownership interests in limited partnerships and limited liability companies that operate active businesses. In some cases, it would collapse the capital structure for MCTMT purposes and subject certain limited partner income allocations to MCTMT as if those allocations were made to a general partner, even when those income allocations are not subject to federal self-employment taxes.
PART E — Abatement of penalties for underpayment of estimated tax by a corporation
NY Tax Law Section 1085 contains rules for additions to tax and civil penalties. Subsection (c) imposes a penalty for failure to file a declaration or underpayment of estimated tax. The Executive Bill, the Assembly Bill and the Senate Bill would add new subsection (e-1), which would give the Commissioner discretion to waive any penalties under subsection (c) if the Commissioner determines "by reason of casualty, disaster or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience." The Commissioner already has this discretion for personal income tax purposes, so the new provision would extend that discretion to corporate taxpayers. If enacted, this provision would take effect immediately. It remains unclear under what "unusual circumstances" the Commissioner would allow abatement of any underpayment penalties; nevertheless, this provision would be a helpful addition as the current abatement process for underpayment of estimated taxes is rather mechanical. This provision would allow the Commissioner to make subjective decisions when considering abatement requests.
Part H — Create a New York City (NYC) Biotech Tax Credit
The Executive Bill, the Assembly Bill and the Senate Bill would authorize NYC to provide a biotechnology tax credit against a taxpayer's general corporation tax, unincorporated business tax and banking corporation tax beyond tax year 2019, but "any such credit may not apply to taxable years beginning before [January 1, 2023] or beginning on or after [January 1, 2026]." These bills, however, do not make this credit available for business corporation taxpayers. If enacted, this provision would take effect immediately.
PART I — Extend certain provisions of tax law: Subpart A- Income and capital base rate changes
As part of the FY2021-22 budget process, NYS increased the business income base tax rate for Article 9-A taxpayers to 7.25% from 6.5% for tax years beginning on or after January 1, 2021, and before January 1, 2024, for any taxpayer with a business income base of more than $5 million for the tax year. It also extended, at a higher rate, the business capital base tax, which had been set to fully phase out starting in 2021, for an additional three years. For tax years beginning on or after January 1, 2021 and before January 1, 2024, a 0.1875% rate applies for Article 9-A taxpayers (increased from the 0.025% rate that applied in 2020), with a 0% rate for qualified NY manufacturers, qualified emerging technology companies, cooperative housing corporations and small-business taxpayers. (See Tax Alert 2021-0806.)
Both the Executive Bill and the Senate Bill would extend the 7.25% business income base tax and the 0.1875% capital base tax for an additional three years through tax year 2026.
The Assembly Bill would instead increase the business income base tax to 9.25% for any taxpayer with a business income base of more than $5 million for the tax year. This rate would apply to tax years beginning on or after January 1, 2023, and before January 1, 2027. (The Assembly Bill also would shorten the applicable period of the 7.25% rate to tax years 2021 and 2022.) Like the Executive and Senate Bills, the Assembly Bill also would extend the business capital base tax for an additional three years.
If enacted, this provision would take effect immediately.
PART J — Technical changes to tax law: Subpart C- Technical changes to the NYS and NYC pass-through entity tax (PTET)
Sections 1 and 3: Amendments to the definition of pass-through entity (PTE) taxable income for NYS's and NYC's PTET: The Executive Bill, the Assembly Bill and the Senate Bill would address a "mathematical error" in the definition of "pass-through entity taxable income" by amending NY Tax Law Section 860(h) for electing partnerships, electing standard S corporations and electing resident S corporations. They would also amend NYC Admin. Code Section 867(b) for electing city partnerships and electing city resident S corporations. The amendments would broaden PTE taxable income to include "all [PTETs] including taxes paid under [Article 24-A, NYS's PTET,] to New York, taxes paid under [Article 24-B, NYC's PTET] to the city of New York, and taxes paid to other jurisdictions that are substantially similar to the taxes paid under [Article 24-A], to the extent that, for federal income tax purposes, the taxes are paid and deducted in the taxable year, and are included in the taxable income of the partners [or shareholders] subject to [NYS's personal income tax under Article 22] for the taxable year." Per the Memorandum in Support of the Executive Bill, the amendments would resolve "unintentional mathematical error[s]" because "currently, in calculating [PTE] taxable income, any entity is required to deduct certain taxes paid, including the PTET, a circular calculation." If enacted, Section 1 would be effective retroactively to 2021 (NYS provisions) and Section 3 would be effective retroactively to 2022 (NYC provisions). These changes would allow the PTET base to reflect the personal income tax base, including the addback for PTET deductions.
Sections 2 and 7: Amendment to the due date of the NYS and NYC PTET election: The Executive Bill, the Assembly Bill and the Senate Bill would amend NY Tax Law Section 861(c) and NYC Admin. Code Section 868 to clarify when the NYS and NYC PTET election is due and when it becomes irrevocable. Currently, PTEs must make the election by the due date of the first estimated payment, and the election is irrevocable as of the due date. As amended, the election would be due on or before the due date of the first estimated payment, and the election would be irrevocable after the due date. If enacted, Section 2 would be effective retroactively to 2021 (NYS provisions) and Section 7 (NYC provisions) would be effective retroactively to 2022.
Section 4: Amendment to the definition of "City taxpayer" for NYC's PTET: The Executive Bill, the Assembly Bill and the Senate Bill would amend the definition of "City taxpayer" in NYC Admin. Code Section 867(e) to include (1) a city resident individual and (2) a city resident trust or estate, both of which are further defined in NYC Admin. Code Section 1305. Per the Memorandum in Support, this amendment would address an "unintentional omission of city resident trusts and estates from participating in NYC PTET where city resident trusts and/or estates are shareholders in S-corporations and/or members or partners in a partnership." If enacted, this provision would apply to tax years beginning on or after January 1, 2023. Affected PTEs should consider the effects of this change in calculating estimated payments for 2023.
Part U — Extend reduced transfer tax rates for qualifying transfers to real estate investment trusts (REITs) for three years
The Executive Bill and the Assembly Bill would amend NY Tax Law Sections 1201 and 1402 and NYC Admin. Code Sections 11-2102 to extend for three years, until September 1, 2026, the 50% tax rate reduction in NYS's real estate transfer tax and NYC's real property transfer tax for qualifying transfers to REITs. Otherwise, the reduced tax rates will expire in 2023. These provisions would take effect immediately. This special benefit has consistently been extended since it was originally enacted. The application of the benefit, however, has recently been the source of litigation because the qualifying criteria require calculations that refer to estimated market value for property tax purposes, rather than fair market value, and the disconnect between those two values magnifies the benefit (and makes qualifying much easier).
The Senate Bill intentionally omitted Part U.
PART V — Allow the Department to appeal Tax Appeals Tribunal Decisions
As in prior budget cycles, the Executive Bill would allow the Department to appeal adverse Tax Appeals Tribunal (Tribunal) decisions.1 Currently, NY Tax Law Section 2016 only gives a taxpayer petitioner the opportunity to appeal the decision of the Tribunal, not the Department. That appeal is made to the applicable Appellate Division of the New York State Courts. Tribunal decisions are binding on the Department and taxpayers, and the Department contends that it should have the opportunity to appeal decisions that will create binding law. Its arguments have been unpersuasive with the legislature because (1) the Tribunal is considered a friendly forum, (2) taxpayers have the burden of proof, and (3) allowing Department appeals would expand the costs and uncertainty around appeals. This provision would take effect immediately and apply to decisions and orders issued by the Tribunal on or after such date.
Both the Senate and Assembly Bill intentionally omit Part V.
PART CC — Require State S corporation conformity with federal return
As in prior budget cycles, the Executive Bill would amend Tax Law Articles 9-A, 13 and 22 by treating all federal subchapter S corporations as New York S corporations, thereby eliminating the need to elect S corporation status for NYS purposes. When a federal S corporation does not elect to be a New York S corporation, it becomes the equivalent of a C corporation for New York franchise tax and personal income tax purposes, and the income does not flow through to the shareholders for New York personal income tax purposes. This change would, therefore, prevent S corporation shareholders from adopting a "hybrid" status, whereby New York personal income tax is only paid on distributions to NYS residents. Due to differences in rates and tax bases, this status can meaningfully affect annual NYS tax liabilities of S corporation shareholders. If enacted, this provision would take effect immediately.
Both the Senate and Assembly Bills intentionally omit Part CC.
Provisions in the Assembly Bill or Senate Bill but not in the Executive Bill
Part DD of the Assembly Bill and Part LL of the Senate Bill — Increased personal income tax rates
Both the Assembly Bill and Senate Bill would amend the NYS personal income tax law to increase the highest tax rate for taxpayers filing under any filing status from 10.30% to 10.80% if their NYS taxable income exceeds $5 million but does not exceed $25 million. For those with NYS taxable income over $25 million, the rate would increase from 10.9% to 11.40%. When combined with the proposed changes to the MCTMT, the effective rate on income subject to both the personal income tax and MCTMT could reach 11.44% (if, however, Part Q of the governor's transportation bill is also enacted, the increase in the MCTMT rate would produce an effective rate of 11.46%). If enacted, this provision would take effect immediately and would apply to tax years beginning on or after January 1, 2023.
Part DD of Senate Bill — Treatment of gains from Qualified Opportunity Zone
During the FY2021-22 budget cycle, NYS enacted several provisions that would decouple NYS's Articles 9-A, 22 and 33 and NYC's general corporation tax, business corporation tax and personal income tax from IRC Section 1400Z-2 (i.e., capital gains that have been deferred or excluded because of investments in federal opportunity zones). The FY2021-22 budget bill accomplished this through various addition and subtraction modifications to a taxpayer's tax base, which applied to tax years beginning on or after January 1, 2021.
The Senate Bill would decouple NYS's Articles 9-A, 22 and 33 and NYC's general corporation tax, business corporation tax and personal income tax from additional IRC Section 1400Z-2 provisions, and, in particular, provisions that deem the basis in qualified opportunity zone investments held for 10 years to be their fair market value on the date they are sold or exchanged. The Senate Bill would require taxpayers to revert back to the basis of the investments as if the election under IRC Section 1400Z-2(a)(1)(C) was not made.
If enacted, this provision would take effect immediately and would apply to tax years beginning on or after January 1, 2023.
Part FF of Assembly Bill — Sales tax imposed on digital products
The Assembly Bill would amend NYS's sales and compensating use tax law to include sales of "digital products" within the definition of "retail sale of tangible personal property" for purposes of the 4% sales and compensating use tax. The Assembly Bill would define "digital product" to mean, among other items: certain television shows and movies; photographs; audiobooks; any taxable printed matter electronically or digitally delivered, streamed or accessed, other than newspapers and periodicals; "apps;" certain games; music; podcasts; any other audio, including satellite radio or any subscription service; or any taxable tangible personal property electronically or digitally delivered, streamed or accessed.
If enacted, this provision would take effect immediately and apply to sales made on or after June 1, 2023.
Part JJ of Assembly Bill — Fee on delivery transactions
The Assembly Bill would impose a new $0.25 per transaction fee on delivery transactions that result in the delivery of personal tangible property from a retail sale, online or not, to a purchaser within the state. This new fee would be effective for transactions beginning on September 1, 2023. The proposal would require (1) the fee to be "passed along to the purchaser and separately stated on any receipt that is provided to such purchaser"; and (2) any taxpayer subject to remitting the fee to file a new return on a monthly basis. The proposal would require the seller to remit the fee, including sellers using a marketplace provider, unless the marketplace provider collects the fee on the seller's behalf. Delivery of certain products, including certain drugs and medicines, diapers, baby formula and food, would be exempt from the fee, as would specified delivery transactions for certain public-assistance-program recipients and governmental instrumentalities.
Parts KK of Senate and Assembly Bill — Amended State Finance Law for False Claims Act Provisions
The Senate and Assembly Bill would amend the NYS finance law to make certain tax violations subject to NYS's False Claims Act if "the person is alleged to have knowingly concealed or knowingly or improperly avoided an obligation to pay taxes to the state or a local government." If those circumstances exist, then the person would be liable for a civil penalty of not less than $6,000 and not more than $12,000, plus three times the amount of all damages, including consequential damages, that the state or local government sustains because of that person's act. This provision is overly broad as it goes beyond the legislature's intent to create a violation of the False Claims Act when no return is filed. It represents a drastic change in the application of the False Claims Act to tax matters because it means that a violation can occur even when no false statement has been submitted or even created, thereby lowering the standard of liability. The governor has previously vetoed substantially similar versions of this provision.
If enacted, this provision would take effect immediately and, in any pending case, would apply to any tax obligation knowingly concealed or knowingly avoided before, on, or after its effective date.
Tax changes included in the Transportation bill
Part Q of the Governor's Transportation Bill — MCTMT rate increase
The governor's proposed transportation budget bill (A. 3008-A/S. 4008-A) would increase to 0.5% from 0.34% the top rate of the MCTMT, effective on July 1, 2023. The transportation bill also would increase the rate imposed upon net earnings from self-employment to 0.42% for tax year 2023 and to 0.50% for tax years beginning on or after January 1, 2024.
Part BBBB of the Senate's Transportation Bill Article VII — Increase to the Metropolitan Transportation Business Tax (MTA) surcharge
The Senate Transportation Bill (S.4008-B) would amend the NYS Tax law to increase the MTA surcharge tax rate imposed on corporate taxpayers subject to Article 9-A to 45% from 30% of the tax imposed under Article 9-A for the tax year "beginning on or after 2023." In addition, the proposal would end the requirement that the Commissioner annually adjust the MTA surcharge tax rate if necessary to ensure that receipts from the surcharge meet and not exceed financial projections. Such adjustment would only be required for tax year beginning on or after January 1, 2016, and ending before January 1, 2023.
With multiple moving parts in the proposed budget revenue bills, it remains unclear which provisions will be included in a final budget deal as executive branch and legislative negotiators reach the extended April 10 budget deadline. The total budget package could ultimately include significantly higher rates for taxpayers and new compliance requirements for sellers of both tangible personal property and digital products.
EY will be closely monitoring this development and will issue additional Alerts as warranted.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 In general, taxpayers may protest business and excise tax assessments by requesting a conciliation conference with the Bureau of Conciliation and Mediation Services or filing a protest with the Division of Tax Appeals. (The Division of Tax Appeals protest may be filed after receiving an assessment or after a conciliation process that does not result in a resolution of the assessment.) At the Division of Tax Appeals, an administrative law judge makes the initial determination and the taxpayer, or the Department may appeal that determination to the Tribunal.