On January 17, 2017, New York State Governor Andrew Cuomo released his 2017-2018 New York State Executive Budget and accompanying legislation. It contains proposed amendments to New York State's personal income tax, corporate franchise tax, sales and use tax, and real estate transfer tax. Reed Smith will be monitoring this proposal as it moves quickly through the legislative process. Amended legislation will be released by February 16, 2017â€Ž. We encourage you to contact us prior to then to discuss how the changes may effect your New York tax liability.
On January 17, 2017, New York State Governor Andrew Cuomo (D-N.Y.) released his fiscal year 2018 New York State Executive Budget and accompanying legislation (hereinafter jointly referred to as the "FY 2018 Budget Bill").
The FY 2018 Budget Bill includes numerous proposed changes to the New York State Tax Law. This alert highlights some of the proposed amendments to the Tax Law's personal income tax, corporate franchise tax, sales and use tax, and real estate transfer tax provisions, as well as provisions related to the authority of the New York State Department of Taxation and Finance to collect delinquent tax debts. A complete version of the FY 2018 Budget Bill can be seen here.
The Reed Smith State Tax team will continue to monitor the FY 2018 Budget Bill as it advances through the legislative process. For a deeper discussion of how these changes might affect your New York tax obligations, please contact any member of our New York State Tax team, or the Reed Smith attorney with whom you work.
Corporation Franchise Tax
Reform the Investment Tax Credit. The FY 2018 Budget Bill proposes to amend Tax Law Â§Â§ 210-B(1)(b)(i) and 606(a)(2)(A) to state that the investment tax credit (the "ITC") does not apply to tangible personal property used (1) in the production or distribution of electricity, natural gas, steam or water delivered through pipes and mains; or (2) in the creation, production or reproduction of a film, visual or audio recording, or commercial, where the costs are incurred outside of New York. The amendments would apply to tax years beginning on or after January 1, 2018.
Reed Smith Insights. The amendments related to electricity, natural gas, steam and water seek to codify the Department's position that property used in the production and distribution of electricity, natural gas, and steam, and other similar property, are not eligible for the ITC. The amendments related to film production would clarify the Department's goal of using the ITC to promote activities in the State, as opposed to outside the State.
Treat Disregarded Entities as a Single Taxpayer for Tax Credit Purposes. The FY 2018 Budget Bill proposes to add a new Tax Law Â§ 43 to explicitly state that a single member limited liability company (a "SMLLC") that is disregarded for federal income tax purposes is also treated as a disregarded entity when determining whether its owner is eligible to claim any state tax credit under Articles 9, 9-A, 22, 32 (prior to its repeal) and 33 of the Tax Law. The amendment would take effect immediately, and apply not only prospectively, but also retroactively to all taxable years for which the statute of limitations for seeking a refund or assessing additional tax is still open.
Reed Smith Insights. This proposal is in response to a decision of the New York State Tax Appeals Tribunal in Matter of Lisa A. Weber (August 25, 2016). According to the Memorandum in Support of the FY 2018 Budget Bill, the Tribunal's decision in Weber held that two federally disregarded SMLLCs should be treated as distinct entities, separate from each other and separate from their owner, Ms. Weber, for purposes of computing her eligibility for the Empire Zone wage tax credit. This proposal raises multiple concerns, including due process issues related to its retroactive application, the appropriateness of the Department using the legislative process to overturn a decision that it disagrees with, and the potential impact of the proposal on taxpayers with open audits or litigation that would be entitled to relief under the Tribunal's binding decision in Weber.
S Corporation Conformity. The FY 2018 Budget Bill would require all federal S corporations to be treated as S corporations for New York tax purposes, thereby removing the New York election to be treated as an S corporation or a C corporation. The amendment would apply to tax years beginning on or after January 1, 2018.
Reed Smith Insights. While this proposal could result in increased New York tax liabilities for some taxpayers, it would undoubtedly simplify corporations' and their shareholders' tax filings and planning, and eliminate the need for a separate election that was a trap for the unwary.
Sales and Use Tax
Require Marketplace Providers to Collect Sales Tax. The FY 2018 Budget Bill would require "marketplace providers" that facilitate sales of tangible personal property to collect sales tax on taxable sales. A marketplace provider is defined as a person who provides the forum where the transaction occurs (physical or virtual) and collects the purchase price. Persons who facilitate sales exclusively by means of the internet and have less than $100 million in sales in a calendar year would be excluded from the definition of a marketplace provider. As such, the proposed law would effectively apply only to "large" marketplace providers. The proposal also includes a mechanism for sellers to be relieved from sales tax collection and remittance responsibility (as opposed to being held joint and severally liable with the marketplace provider). The amendments would apply to sales made and uses occurring after September 1, 2017.
Reed Smith Insights. The Governor's FY 2016 Executive Budget and supporting legislation included a similar proposal. However, the prior proposal would have also applied to marketplace providers that facilitate "sales, occupancies or admissions." The prior proposal additionally did not include the exclusion for "small" online providers. The current proposal continues to raise potential nexus concerns and deviates substantially from the sales tax collection rules currently in place; however, it does impact fewer taxpayers than the prior proposal.
Impose Sales Tax on Transactions Between Related Entities. The FY 2018 Budget Bill includes amendments to prevent the use of certain types of intercompany transactions to avoid sales tax. Tax Law Â§ 1101(b)(4)(v) would be added to prevent the purchase for resale exclusion from applying when tangible personal property is purchased and resold to a related person or entity. In particular, the sales tax definition of "retail sale" would be amended to include any transfer of tangible personal property to certain entities when the property would be resold to a related person or entities, including (1) sales to single member LLCs or subsidiaries that are disregarded for federal income tax purposes, for resale to a member or owner; (2) sales to a partnership for resale to one or more partners; and (3) sales to a trustee for resale to a trust beneficiary.
Tax Law Â§ 1118(2) would also be amended to require that New York use tax be paid when a nonresident entity brings property or services into New York State, and the entity has been doing business outside New York for fewer than six months.
Reed Smith Insights. These amendments seek to combat what some view as abusive tax avoidance transactions, often involving purchases of art, boats, or other high-valued items. For example, a corporation could purchase a high-ticket item and then re-sell the item for a nominal amount to an SMLLC wholly owned by the corporation. In this situation, under current law the corporation could take the position that the initial acquisition of the item was an exempt purchase for resale, and only pay sales tax based on the nominal consideration paid by the SMLLC. As was the case in the Governors FY 2016 Executive Budget, which contained a similar provision, the language as drafted may create unintended consequences by removing what should otherwise be viewed as valid tax exemptions for bona fide business transactions.
Real Estate Transfer Tax
Impose the Real Estate Transfer Tax on the Transfer of a Real Estate Business Interest. Under current law, New York real estate transfer tax applies to transfers of a controlling interest in certain legal entities that hold an interest in New York real property. New York Tax Law Â§ 1401(e). This provision does not prevent property owners from conveying a less than controlling interest in New York real property free of transfer tax by first contributing the property to a legal entity, and then selling a less than 50% interest in the legal entity to the intended transferee. The FY 2018 Budget Bill would close this "loophole" by expanding the definition of "conveyance" for purposes of the transfer tax to include all transfers of interests in partnerships, limited liability companies, S corporations and certain closely held C corporations, where New York real property constitutes 50% or more of the assets of the entity. In addition, the proposal provides that "consideration" for such a transfer would be calculated by multiplying the fair market value of the New York real property owned by the entity, by the percentage ownership interest in the entity conveyed. (For example, if 10% of the ownership interests in a partnership are transferred, and the partnership owns New York real property with a fair market value of $1 million, the transfer, under the proposal, would be treated as a conveyance subject to transfer tax based upon a consideration of $100,000.)
Reed Smith Insights. This proposal would create parity between persons owning real property as tenants-in-common and persons owning interests in closely held entities that own real property. Specifically, it would align the tax treatment of the conveyances described above for purposes of the real estate transfer tax with the personal income tax rules for determining the New York source income of a nonresident individual who sells an interest in an entity that owns real property in New York.
Close the "Mansion Tax Loophole." The FY 2018 Budget Bill would make it harder to avoid the 1% "mansion tax" imposed on transfers of residential real property with a consideration of $1 million or more, by granting the Commissioner authority to impose the mansion tax on any conveyance "structured in a manner intended to avoid or evade the tax." For example, under current law, if a developer constructing a new residential building were to enter into separate contracts conveying the vacant land and the building, the developer could claim that the mansion tax did not apply to the land transfer, because the land was vacant at the time of the conveyance. The legislation would authorize the Department to treat both contracts as conveyances to the mansion tax if the purposes of the separation of the contracts was to avoid or evade the tax. This amendment would take effect immediately.
Reed Smith Insights. The Memorandum in Support of the FY 2018 Budget Bill notes that there has been an increase in the number of transactions that appear to be structured in a manner intended to avoid the mansion tax. The proposed legislation seeks to combat what is perceived to be tax avoidance planning.
Personal Income Tax
Tax Nonresidents on Co-Op Sales. The FY 2018 Budget Bill includes a proposal to amend the definition of "real property located in this state" found in Tax Law Â§ 631(b)(1)(A)(1), to include sales by nonresidents of ownership interests in partnerships and corporations that own shares in a cooperative housing corporation located in New York. As a result, gains from the sale of such ownership interests would result in taxable New York source income when more than 50% of the entity's assets consist of shares in a cooperative housing corporation. The amendments would apply to tax years beginning on or after January 1, 2017.
Reed Smith Insights. The Tax Law currently provides preferential treatment to nonresidents who sell interests in entities that own cooperative housing shares. The Memorandum in Support of the FY 2018 Budget Bill argues that this provision is necessary to treat similarly situated taxpayers the same (e.g., to tax nonresidents who sell ownership interests in entities that own cooperative housing shares the same as nonresidents who sell either directly held interests in real property or interests in partnerships that primarily own real property located in the state).
Tax Nonresidents on Sales of Assets Held by Certain Partnerships. The FY 2018 Budget Bill also includes a proposal to amend Tax Law Â§ 632(a)(1), to treat the sale of an interest in a partnership by a nonresident partner as taxable New York source income when the sale is subject to Internal Revenue Code ("IRC") Â§ 1060. (Under IRC Â§ 1060, certain sales of interests in a partnership holding a trade or business are treated as an asset sale.) Sales of such interests by nonresidents would therefore be subject to New York personal income tax to the extent that the trade or business assets held by the partnership were located in New York. The amendment would take effect immediately.
Reed Smith Insights. Under current law, the sale of a partnership interest by a nonresident is treated as the sale of an intangible, and therefore is treated as not resulting in any New York source income subject to personal income tax. This proposal would eliminate what some argue is preferential tax treatment for nonresidents.
Warrantless Wage Garnishment and Bank Account Data Matching. The FY 2018 Budget Bill proposes to make permanent the Commissioner's authority under Tax Law Â§ 174-c to garnish wages on individual debtors without filing a public tax warrant. The authority is otherwise set to expire April 1, 2017. The FY 2018 Budget Bill also includes a proposal that would require financial institutions doing business in New York to provide the Department with information for any tax debtor identified by the Department that maintains an account at the institution who has a fixed and final liability. Currently, the Department must file a public tax warrant to obtain this information. The amendments would take effect immediately.
Reed Smith Insights. Tax warrants can have a debilitating effect on taxpayers who are struggling to pay their outstanding liabilities. These provisions would help to eliminate the negative effects a public warrant has on a taxpayer's credit history, lasting even after an outstanding liability is paid in full.