May 5, 2023
New York governor signs budget legislation that includes various tax changes affecting businesses and individuals
On May 3, 2023, Governor Kathy Hochul signed into law revenue legislation (A3009-C/S4009-C, hereafter Final Bill) that is a necessary component of the 2023—2024 budget. The Final Bill includes a variety of tax law changes that will affect corporate and individual taxpayers across various industries. Most notably, it extends the expiration dates of the increased tax rate on Article 9-A taxpayers and the business capital base tax. Governor Hochul also signed the transportation bill (A.3008-C/ S.4008-C), provisions of which increase the MCTMT rate for employers in the counties of Bronx, Kings, New York, Queens and Richmond (Staten Island).
This Tax Alert discusses the significant tax proposals that made their way into the Final Bill from (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). (See Tax Alert 2023-0680.)
The Final Bill modifies various tax credit and incentive provisions, as well as other tax provisions. These changes are not discussed in this Tax Alert.
Tax changes in the Final Bill
PART B — Clarification of the treatment of limited partners for the MCTMT
The Final Bill amends 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. Previously, the law conformed 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 Final Bill clarifies that this exemption does 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." This provision took effect immediately. (This provision was in the Executive Bill, the Assembly Bill and the Senate Bill.)
This change follows an active tax audit campaign initiated by the NYS Department of Taxation and Finance (the Department) and is a significant change for individuals that maintain ownership interests in limited partnerships and limited liability companies that operate active businesses. In some cases, it will 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 Final Bill adds new subsection (e-1), which gives 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." This provision took effect immediately. (This provision was in the Executive Bill, the Assembly Bill and the Senate Bill.)
The Commissioner already has this discretion for personal income tax purposes, so the new provision extends that discretion to corporate taxpayers. It remains unclear under what "unusual circumstances" the Commissioner will allow abatement of any underpayment penalties; nevertheless, this provision is a helpful addition as the current abatement process for underpayment of estimated taxes is rather mechanical. This provision will allow the Commissioner to make subjective decisions when considering abatement requests.
Part H — Create a New York City (NYC) biotech tax credit
The Final Bill authorizes NYC to temporarily provide a biotechnology tax credit against a taxpayer's general corporation tax and unincorporated business tax beyond tax year 2019. Unlike the Executive, Assembly and Senate bills, the Final Bill does not allow taxpayers to use the credit against NYC's banking corporation tax and links this credit to one within the business corporation tax of 2015 under NYC Admin Code Section 11-654. In addition, the Final Bill gives authority to issue these credits to "any city in this state having a population of one million or more, acting through its local legislative body … for a maximum of three consecutive calendar years, [but] such credit may not apply to taxable years beginning before [January 1, 2023] or beginning on or after [January 1, 2026]." This provision took effect immediately and applies to tax years beginning on or after January 1, 2023.
PART I — Extend certain provisions of tax law: Subpart A- corporate income and capital base rate changes
The Final Bill extends the 7.25% business income base tax and the 0.1875% capital base tax for an additional three years, through tax year 2026.1 This provision took effect immediately. (The Assembly Bill would have increased 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 have applied to tax years beginning on or after January 1, 2023, and before January 1, 2027.)
PART J — Technical changes to tax law: Subpart C- technical changes to the NYS and NYC pass-through entity tax (PTET)
The Final Bill makes various technical amendments to (1) the definition of pass-through entity taxable income for NYS's and NYC's PTET, (2) the due date of the NYS and NYC PTET election, and (3) the definition of "City taxpayer" for NYC's PTET. Specifically, pass-through entity taxable income is expanded 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 [NYC], 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." These changes are effective retroactively to 2021 for NYS purposes and to 2022 for NYC purposes. These changes will allow the PTET base to reflect the personal income tax base, including the addback for PTET deductions.
The Final Bill amends 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. Previously, PTEs had to make the election by the due date of the first estimated payment, and the election was irrevocable as of the due date. As amended, the election is due on or before the due date of the first estimated payment, and the election is irrevocable after the due date. This change is effective retroactively to 2021 for NYS purposes and to 2022 for NYC purposes.
The Final Bill amends 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. Trusts and estates were not originally included. This provision applies 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 — Transfer tax rates for qualifying transfers to real estate investment trusts (REITs)
The Final Bill amends NY Tax Law Sections 1201 and 1402 and NYC Admin. Code Section 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. This provision took 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. The disconnect between those two values magnifies the benefit (and makes qualifying much easier).
PART V — Tax Appeals Tribunal decisions
The Final Bill allows the Department to appeal certain adverse Tax Appeals Tribunal (Tribunal) decisions, including decisions based on federal and state constitutional law.2 Previously, NY Tax Law Section 2016 only gave a taxpayer petitioner the opportunity to appeal the decision of the Tribunal, not the Department. This provision allows the Commission to "petition for judicial review of a decision of the [Tribunal] that is premised on interpretation of the state or federal constitution, international law, federal law, the law of other states, or other legal matters that are beyond the purview of the state legislature." In addition, Part V stays the running of interest and penalties on assessments until 15 days after the issuance of a judicial decision from which no further appeals are allowed. This provision took effect immediately and applies to decisions and orders issued by the Tribunal on or after such date.
The amendment responds to the Tribunal decisions in In re Bayerische Beamtenkranekenkasse AG, DTA No. 824762 (N.Y. Tax App. Trib. Sept. 11, 2017) and In re Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Tax App. Trib. Sept. 11, 2017) in which the Tribunal determined that the Department's assessments violated the non-discrimination clause of the US-Germany Tax Treaty. It is, therefore, intended to address circumstances where the Tribunal's decision turns on an interpretation of a law that was not enacted by the New York State Legislature, and to allow the Department an opportunity to challenge that interpretation. This means that the Department could challenge a decision based on common sources of authority in state tax disputes, in particular, the commerce clause of the US Constitution.
Parts DD — Amended state finance law for False Claims Act provisions
The Final Bill amends 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 and improperly avoided an obligation to pay taxes to the state or a local government." If those circumstances exist, then the person will be liable for a civil penalty of not less than $6,000 and not more than $12,000 for each violation, 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 took effect immediately and applies, in any pending case, to a tax obligation knowingly concealed or knowingly avoided before, on, or after its effective date (i.e., May 3, 2023). For actions filed after May 3, 2023, this provision only applies to tax obligations knowingly concealed or knowingly avoided on or after May 1, 2020.
Part GG — Permanent rate for Metropolitan Transportation Business Tax Surcharge (MTA Surcharge)
Unlike Part BBB of the Senate's Transportation Bill (S.4008-B), which would have provided a fixed but increased MTA surcharge tax rate of 45%, the Final Bill provides a fixed MTA Surcharge tax rate of 30% for tax years beginning on or after January 1, 2024. This change ends the requirement that the Commissioner annually adjust the MTA Surcharge tax rate using the financial projections for the state fiscal year. This provision took effect immediately.
Final Transportation Bill
Part Q of Final Transportation Bill — MCTMT Rate increase
Similar to Part Q of the Executive Bill, the Final Transportation Bill provides various MCTMT rate increases; unlike the Executive Bill, the Final Transportation Bill increases the MCTMT rate for employers "in the counties of Bronx, Kings, New York, Queens and Richmond" to a top rate of 0.60% of payroll expense for employers whose payroll expense exceeds $437,500 in any calendar quarter. For individuals in these counties, the Final Transportation Bill increases the top rate to 0.60% of net earnings from self-employment "if such earnings attributable to the Metropolitan Commuter Transportation District exceed [$50,000] for the tax year." Those employers and individuals in the counties of "Nassau, Orange, Putnam, Rockland, Suffolk and Westchester" retain the old 0.34% top MCTMT rate.
Provisions not in the Final Bill but appearing in either the Executive, Senate and/or Assembly Bill
Several tax proposals that had been considered as part of the budget process did not make it into the Final Bill. These proposals, which could be considered by the Legislature in the future, include:
See Tax Alert 2023-0680 for analysis of these proposals.
Taxpayers should be aware that several of the provisions in the Final Bill are retroactive to prior tax years, especially those related to NYS's and NYC's PTET. Accordingly, NYS and NYC taxpayers should consider modeling out the impact of these changes and consider them in preparing their upcoming estimates and returns. In addition, taxpayers currently in litigation with the Department need to consider the provisions allowing the Department to appeal certain adverse Tribunal decisions. Taxpayers considering the need to file within NYS and NYC will need to closely review the provisions associated with the False Claims Act.
Taxpayers should also consider these changes for financial statement reporting purposes.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 As part of the FY2021-22 budget process, NYS increased the tax rate on the business income base 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. (See Tax Alert 2021-0806.)
2 Taxpayers generally 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.