Hot off the Press: New NY Tax Proposals in 2020 Budget

On January 15^th, Governor Cuomo released the FY 2020 Executive Budget, which is available here. The highlights of certain proposed revenue provisions are summarized below. Keep an eye out for further updates in mid-February when the “thirty-day amendments” to the Executive Budget will be out.

• Make the e-File Mandate Permanent. Currently, Tax Law § 29 requires tax preparers who meet certain criteria e-file New York tax returns. See TB-MU-220 (Mar. 19, 2014). The e-filing mandate was originally enacted in 2008 and is currently set to expire after the 2019 tax year. The bill, however, would make the mandate permanent.  
• Provide a Sourcing Rule for GILTI Apportionment. Internal Revenue Code (“IRC”) § 951A(a) requires global intangible low-taxed income (“GILTI”), as defined by IRC § 951A(b)(1), to be included in federal gross income. To determine net GILTI, IRC § 250(a)(1)(B)i) allows certain taxpayers a deduction for part of this income. Under current New York law, there is no rule for the net GILTI included in business income. The bill would establish a statutory sourcing rule for GILTI by requiring the net GILTI to be included in the denominator of the apportionment factor, with zero in the numerator. Such treatment of GILTI would mirror the discretionary adjustment previously provided by the Commissioner and described in Form CT-3-1, Instructions for Form CT-3.
• Decouple from IRC Federal Basis for NYS Manufacturing Test. To determine whether a manufacturer is a qualified New York manufacturer—for purposes of the reduced corporate business income base tax rate, the reduced tax rate and cap on the capital tax base, lower fixed dollar minimum tax amounts, and the manufacturer’s real property tax credit—current law requires the use of the federal adjusted basis of the taxpayer’s property in the state. Potentially reducing the federal adjusted basis of such property, the limitation on the amount taxpayers may elect to treat as an expense has increased under federal law. The bill would amend Tax Law § 210(1)(a)(vi) and (b)(2) and New York City Administrative Code § 11-654(1)(k)(4)(ii) to use the New York State adjusted basis instead of the federal adjusted basis. The bill would take effect immediately and apply to taxable years beginning on or after January 1, 2018.

• Extend Three-Year Gift Addback Rule and Require Binding NYS QTIP Election. First, the bill would extend, until January 1, 2026, the requirement gifts that are made within three years of death are added back, if taxable for federal gift tax purposes, when calculating the decedent’s New York gross estate. Second, to claim a marital deduction for qualified terminable interest property (“QTIP”) passing to the decedent’s spouse, the bill would require a binding QTIP election be made on a decedent’s New York State estate tax returns, whether or not a federal estate tax return was required. Under current law, to determine an estate’s QTIP status, New Yorkers have been required to look at the federal estate tax return filed for the estate of the first spouse to die or, if a federal estate tax return was not previously required to be filed, by looking to a pro forma federal return that was required to be filed with the New York state tax return.

• Eliminate Internet Tax Advantage. The bill would require marketplace providers to collect sales tax on taxable sales that they facilitate. Under the proposed law, a marketplace provider would be a person who, pursuant to an agreement with a marketplace seller, facilitates sales of tangible personal property by providing “a forum in which, or by means of which, the sale takes place or the offer of the sale is accepted, including a shop, store, booth, an internet website, catalog, or similar forum.” The stated goal of the bill is to minimize the number of people with tax collecting responsibilities by relieving marketplace sellers of such responsibility. The bill would be effective immediately and apply to sales made on or after September 1, 2019.

• Discontinue the Energy Services Sales Tax Exemption. Under current law, the effective tax rate on the transportation, transmission, or distribution of gas and electricity has been reduced to zero when it is sold separately from the commodity. Effective June 1, 2019, the proposal would remove the disparity by repealing the exemption for the transportation, transmission, and distribution charges associated with gas and electricity whether sold separately from the commodity or not.

• Create the NYS Employer-Provided Child Care Credit. Currently, under IRC § 45F, employers are allowed a credit for qualifying expenditures paid or incurred in providing child care alternatives for their employees. This bill, in the form of a credit equal to 25% of qualified child care expenditures related to a child care facility located in New York plus 10% of qualified child care resources and referral expenditures, seeks to provide a similar state tax credit for New York employers. Like the federal credit, the New York credit would be capped at $150,000 per taxable year. The bill would take effect immediately and apply to taxable years beginning January 1, 2020.

• Include Certain NYS Gambling Winnings in Nonresident NYS Income. The bill would amend Tax Law § 631(b) to include New York gambling winnings in excess of $5,000 as taxable New York source income to New York nonresidents. The bill would also amend Tax Law § 671(b) to require withholding on gambling winnings in New York, when such winnings would be subject to withholding under IRC § 3402. The proposal would take effect immediately and apply to taxable years beginning on or after January 1, 2019.

• Permanently Extend the Tax Shelter Provisions and Update Tax Preparer Penalties. Since 2005, taxpayers and advisors who are required to report tax shelter activity to the IRS must also report that activity to New York State. Penalties apply for nondisclosure and underpayment of taxes related to participation in certain transactions. The bill would permanently extend these tax shelter reporting and penalty provisions. In addition, the bill would update the Tax Law to: (1) clarify the penalties against preparers who take positions on returns or claims that are not properly supported by the tax law and (2) ensure that penalties for failing to sign a return and for failing to provide a required identification number on a return apply to all tax preparers. This provision would take effect immediately.

• Extend Higher PIT Rates for Five Years. The top New York State personal income tax bracket of 8.82% is currently scheduled to expire after 2019. The bill would immediately extend the higher bracket through 2024.

• Extend PIT Limitation on Charitable Contributions for Five Years. Under current law, the New York itemized charitable deduction is limited to 50% of the federal deduction for individuals with adjusted gross income (“AGI”) between $1-10 million, and to 25% of the federal deduction for individuals with AGI over $10 million. The 25% limitation for individuals with an AGI over $10 million is set to expire at the end of 2019. The bill, which would be effective immediately, will extend the current 50% and 25% limitation structure through 2024 and make conforming amendments to NYC Administration Code § 11-1715(g).

• Extend Authorization to Manage Delinquent Sales Tax Vendors Permanently. Currently, where the Tax Commissioner deems it necessary to protect sales tax revenues, a noncompliant or delinquent vendor may be required to deposit the sales tax it collects into a segregated account. Additionally, a 2011 amendment to Tax Law § 1137 authorized the Commissioner to debit segregated accounts, to require a vendor to deposit the sales tax moneys at least weekly, and to require the vendor to obtain a bond if the vendor failed to comply. Tax Law § 1134 was also amended to authorize the Commissioner to suspend or revoke a vendor’s sales tax certificate of authority if the vendor did not comply with the segregated accounts program’s requirements. The segregated accounts provision is set to expire in December 2019; however, the bill would repeal the sunset date and allow the current provision to remain in place.

• Exclude From Entire Net Income Certain Contributions to the Capital of a Corporation. Effective December 22, 2017, the Tax Cuts and Jobs Act amended IRC § 118(b) to include contributions by a governmental entity or civic group to a corporation’s federal gross income. In New York, because of New York’s federal conformity, this resulted in the inclusion of entire net income. The bill would restore favorable non-tax treatment of these contributions by amending Tax Law §§ 208(9)(a) and 1503(b) and NYC Administrative Code § 11-602(8)(a) to exclude from entire net income any contributions to the capital of a corporation by a governmental entity or civic group. The bill would be effective immediately and apply to taxable years beginning on or after January 1, 2019.

• Close the Carried Interest Loophole. Currently, federal tax treatment allows hedge fund managers and private equity investors to treat carried interest income as capital gains, rather than ordinary income. New York is unable to tax such capital gain income when earned in New York by a nonresident. Mirroring a similar proposal from last year, this part of the bill would require all income from investment management services to be treated, for New York purposes, as income earned from a trade or business and would subject the gain to an additional 17% carried interest “fairness” fee. However, the portion of the bill dealing with carried interests would take effect only if Connecticut, New Jersey, Massachusetts, and Pennsylvania enact legislation having a substantially similar effect.
• Enact the Cannabis Regulation and Taxation Act. The bill includes a proposal for a new Cannabis Regulation and Taxation Act. High points of the Act include provisions to legalize adult-use of marijuana along with the availability of hemp products, and to expand the state’s current medical marijuana program. The legislation would also add a new article to the Tax Law—Article 20-C, titled “Tax on Adult-Use Cannabis Products”—which would impose three new taxes: First, a tax on the producer on the cultivation of cannabis at the rate of $1 per “dry-weight gram of cannabis flower” and $0.25 per “dry-weight gram of cannabis trim;” second, a state-level tax on the sale by a wholesaler to a retail dispensary at the rate of 20% of the invoice price; and third, a county-level tax on the sale by a wholesaler to a retail dispensary at the rate of 2% of the invoice price. In addition, all wholesalers would be required to apply for and obtain a Certificate of Registration from the New York State Tax Department before starting business and the registration would be renewable every two years. The initial application and renewal would be subject to a fee of $600.

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