What are Substantially Similar Taxes?

Back in August, the Department confirmed in TSB-M-21(1)C, (1) that, beginning this year, resident partners, members, or shareholders will be allowed a resident tax credit against their New York State personal income tax for any pass-through entity tax imposed by another state, local government, or the District of Columbia, that is substantially similar to the PTET. The question remaining was: “what does substantially similar mean?” Well, we have our answer. On Monday, the Department published a list, which specifically enumerated the states (and corresponding qualifying state taxes) that impose a pass-through entity tax that is substantially similar to New York’s PTET.

There were a handful of jurisdictions notably absent from the list which have some form of pass-through entity tax, including: Massachusetts, New Hampshire, Tennessee, and the District of Columbia. However, we suspect that Massachusetts will be included on the list in the Department’s next update because the chart indicated that it “Includes all legislation enacted as of September 24, 2021.” Massachusetts enacted its pass-through entity tax on September 30, 2021.

Where Massachusetts’s pass-through entity tax differs from New Hampshire’s, Tennessee’s and the District of Columbia’s is that it is a designed as a true SALT workaround. New Hampshire and Tennessee have legacy entity tax regimes that tax only certain types of income, e.g., business profits, interest, dividends because these states do not have personal income taxes. Similarly, the District of Columbia subjects pass-through entities to tax through its unincorporated business tax. But none of these measures were designed as SALT workarounds, so for taxpayers whose entities pay these taxes, resident credits are still not allowed.

For prior coverage of New York’s PTET, check out prior blog posts here and here and our Tax Notes State article from this past summer.

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