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Report on Executive Budget

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It’s “budget season!” On January 16th, Governor Cuomo released the FY 2019 Executive Budget, which is available here, and one day later the Department of Taxation and Finance issued a preliminary report on consequences of the Federal Tax reform and possible legislative responses, which can be found here. We blogged about some of this last month. Then, just last week, in his “30-day amendments” to the FY 2019 Executive Budget, we got to see more of the Governor’s proposals take shape.  Now the dust has somewhat settled on all these proposals, so let’s take a look.  The highlights of the proposed amendments, which include a new optional Employer Compensation Expense Tax system, increasing the options for charitable deductions, and provisions designed to decouple the state tax code from the federal tax code, are summarized below. 

FY 2019 Executive Budget Provisions:

  • Statute of Limitations Extension for Assessing Additional Tax on Amended Returns. Under current law, the Department of Taxation and Finance (“DTF”) generally has three years from the original filing date of a tax return to audit and assess additional tax and an amended return does not extend the statute of limitations. The bill would extend the statute of limitations for assessing additional tax when a tax return has been amended. For assessments concerning Article 9, Article 9-A, Article 22, Article 33, and NYC personal income tax payers, the statute of limitations would be three years after the amended return is filed.
  • Employee Wage Reporting. On a quarterly basis, employers and other entities responsible for the collection, remittance, and reporting of withholding taxes are required to file a Form NYS-45, which is used by both the Department of Labor (“DOL”) and DTF. Currently, these entities provide employee-level details to DOL on a quarterly basis and to DTF on an annual basis. The bill would amend the Tax Law to require quarterly reporting to DTF.
  • Simplification of Resale Exemption for Prepared Food. Tax Law § 1105(d) currently imposes sales tax, with no resale exclusion, on any purchase of restaurant-type food when sold in establishments such as restaurants, cafeterias, or taverns, or by caterers. The bill would amend the Tax Law to allow restaurants, cafeterias, taverns, caterers, and other vendors to purchase food exempt from sales tax when such purchases are for resale.
  • Change Treatment of Carried Interests. 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 non-resident. 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.
  • Right to Appeal Tax Tribunal Decisions for the Department of Taxation and Finance. Under current law, only a taxpayer may seek judicial review of an adverse decision from the Tax Appeals Tribunal; DTF may not appeal a Tribunal decision. The bill would grant DTF the right to appeal adverse Tax Appeals Tribunal decisions within four months after notice of such decision.
  • Clarification of Statutory Residency Requirements. In 2015, an Administrative Law Judge ruled that in part-year domicile cases, only the portion of the year the taxpayer is not domiciled in New York should be considered when determining whether the “more than 183 days” test of statutory residency is met. The bill would codify DTF’s policy of counting all days an individual is present in New York to determine statutory residency, regardless of whether or not an individual was a part-year domiciliary.
  • Maintain 2017 Empire State Child Tax Credit Benefits at Current Levels. The Empire State Child Tax Credit amount is presently written as a percentage of the Federal child tax credit. However, because the Federal child tax credit has been increased by Federal tax reform legislation (Public Law 115-97), the bill would tie the New York credit to Federal law existing immediately prior to the Federal reform.
  • Deferment of Business Related Tax Credit Claims. For taxable years beginning on or after January 1, 2018, and before January 1, 2021, the bill would require taxpayers to defer the use and refund of certain business-related tax credits if, in the aggregate, they exceed $2 million. Taxpayers would be instructed to calculate the amount of each credit that would be applied absent this provision, and reduce each proportionally if the credits total more than $2 million. The deferred credit amounts would be accumulated in one of two credits: the temporary deferral nonrefundable payout credit and the temporary refundable payout credit. The nonrefundable credit could be applied to 2021 tax returns, and any amount not used could be carried forward. Taxpayers would be able to apply 50% of the refundable credit to their 2021 tax return, 75% of the remaining credit to their 2022 tax return, and the remainder to their 2023 tax return.
  • Change in Real Estate Transfer Tax Refund and Liability Provisions. The bill would extend the statute of limitations under Tax Law § 1412(a) from two years to three years for filing an application for refund of real estate transfer tax paid erroneously. Additionally, Tax Law § 1402-a(b) would be amended to provide joint liability between the grantor and grantee for payment of the mansion tax. Under current law, a grantor is only liable for the mansion tax if the grantee is explicitly exempt.
  • Elimination of Energy Services Sales Tax Exemption. As written, Tax Law §§ 1101(b) and 1105(b) impose sales tax on the transportation, transmission, and delivery of gas or electricity; however, Tax Law § 1105-C reduces the rate of tax to zero when the transportation, transmission, or delivery of gas or electricity is sold separately from the commodity. The bill would eliminate the § 1105-C exemption.
  • Change the Veterinary Sales Tax Credit to an Exemption. Under current law, veterinarians may apply for a credit or refund for sales tax paid on purchases of drugs or medicine used by the veterinarian in treating livestock and poultry used in farm production. The bill would create an exemption for such purchases, for both veterinarians and farmers, and eliminate the existing credit.
  • Responsible Person Sales Tax Relief for Minority LLC Owners. all LLC members and partners as responsible persons. Under the bill, members of an LLC and limited partners in a limited partnership would be liable only for their pro-rata share of the business’s original liability, if they show that: (i) they were not under a duty to act for the LLC or limited partnership in complying with the requirements of the sales tax; and (ii) their ownership interest and the percentage of their distributive share of the profits and losses of the LLC or limited partnership are each less than 50%. The bill would codify DTF’s policy described in TSB-M-11(17)S.
  • Vending Machine Sales Tax Exemption Increase. The bill would maintain an exemption for food or drink purchases costing $1.50 or less from any vending machine accepting only coin or cash. The bill would increase the exemption to $2.00 for any vending machines that are capable of accepting payment in a form other than coin or cash, regardless of whether those machines also accept coin or cash.
  • Technical Changes to Local Sales Tax Statutes. Chapter 61 of the Laws of 2017 sought to extend the revenue distribution provisions for additional rates of sales and use taxes for all counties that currently impose them to November 30, 2020. However, the revenue distribution provisions for Genesee, Monroe, Onondaga, and Orange Counties were inadvertently extended only until November 30, 2019. The bill would extend such provisions in those four counties through November 20, 2020.
  • Imposition of Internet Marketplace Collection/Reporting Requirement. Without extending the rules concerning sales tax nexus, the bill would impose an “internet fairness conformity tax” by requiring marketplace providers with annual sales in excess of $100 million to collect sales tax on taxable sales of tangible personal property by third-party vendors. Additionally, the bill would require sellers and marketplaces that do not collect New York sales taxes to file information returns regarding sales of tangible personal property in New York.

Governor’s 30-Day Amendments:

  • Creation of a New Employer Compensation Expense Tax System. Under the Employer Compensation Expense Tax (“ECET”) system, employers that opt-in would be subject to a tax on all annual payroll expenses in excess of $40,000 per employee. The tax would be phased in over three years beginning on January 1, 2019, resulting in a 1.5 percent rate in the first year, a 3 percent rate in the second year, and a 5 percent rate in the third year. Employees would receive a tax credit corresponding in value to the ECET, which would lower the personal income tax liability on wages. Overall, the proposal aims to be revenue neutral for the state while allowing employers the opportunity to reduce their employees’ federal taxes, so they do not experience a decline in take-home pay. The deadline for employers to opt-in to the ECET for the 2019 tax year will be on October 1, 2018. The proposed rule is available here.
  • Increasing Options for Charitable Deductions. For the purpose of accepting donations to improve health care and education in New York, the proposed legislation would create two state-operated charitable funds. Taxpayers who itemize deductions could claim donations to either fund as deductions on their federal and state tax returns. In addition, taxpayers may claim a New York State tax credit equal to 85 percent of the donation amount for the tax year following the year in which the donation is made. The proposal also grants school districts, counties, towns, cities, and villages the authority to create similar funds for education, health care, and other charitable purposes. Donations to these local charitable funds would result in a local credit, reducing local property taxes equal to 95 percent of the donation. The proposed legislation is available here.
  • Decoupling from Federal Changes. Currently, New York law allows state residents to itemize deductions on their personal income tax returns only if they also itemize on their federal returns. And under current law, deductions and limitations follow federal rules, which means the new federal laws limiting certain deductions, including the new $10,000 SALT deduction limit, would flow through to the state level. So under this proposed rule, New York would decouple from the federal tax code in certain situations. This would allow taxpayers to continue claiming the same itemized deductions allowed by the previous federal tax law. The rules would also decouple from the federal tax law to allow the New York State standard deduction for single filers. The proposed decoupling legislation is available here.

Will these proposals pass? It’s hard to say. Treasury Secretary Steve Mnuchin has called some similar workaround proposals "ridiculous," so perhaps that has an effect on whether these types of proposals will pass. The full budget is required to be passed by the end of March, so we’ll know soon enough.

Topics: Tax Reform

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