New York State Governor Andrew M. Cuomo has released the New York State 2018-2019 Executive Budget, containing several potentially significant tax proposals. They include the following: 

1. Require marketplace providers to collect sales tax. For the second straight year, the Governor is seeking to require “marketplace providers,” defined as persons who collect the purchase price and provide the physical or virtual “forum” where the sales transaction occurs, to collect sales tax from customers on sales of tangible personal property that they “facilitate,” where they facilitate at least $100 million in sales each calendar year. New to this year’s proposal, now captioned in the Governor’s supporting memorandum as the “Internet fairness conformity tax,” are several sales tax information return and notice to purchaser requirements imposed on marketplace sellers and marketplaces that do not collect sales tax, whenever the non-collecting seller’s receipts from New York purchasers are at least $5 million in the prior calendar year. If enacted, the new law would go into effect on September 1, 2018. (Part AA.)

2. Tax nonresidents on “carried interests” and impose a 17% “fairness fee” but only if nearby states conform. The Governor has revisited previous failed attempts by New York State to treat carried interests earned by hedge fund promoters as income earned from a trade or business, which would allow the State to tax nonresident promoters with New York hedge fund operations on their carried interests. However, this proposal goes further than prior efforts, introducing a new 17% “carried interest fairness fee,” which would remain in effect until federal law is amended to treat carried interests as service income (which the newly enacted federal tax reform legislation does not do). If enacted into law, these provisions would only go into effect if similar legislation is also enacted in four nearby states (Connecticut, New Jersey, Massachusetts and Pennsylvania), reflecting the concern that enactment by New York alone would prompt hedge funds to simply move their operations from New York into those surrounding states. (Part M.)

3. Allow the Tax Department to appeal adverse Tax Appeals Tribunal decisions. The Governor has revived past efforts to give the Department the ability to appeal adverse decisions of the New York State Tax Appeals Tribunal, which currently is afforded only to taxpayers. This would be a significant change to the existing Tax Appeals Tribunal system, which since its inception more than 30 years ago has precluded the Department from appealing Tribunal decisions. (Part N.)

4. Defer use of large business tax credits for three years. Taxpayers with business tax credits exceeding $2 million in the aggregate for tax years beginning between 2018 and 2020 would be required to defer the use of those credits for three years, with different deferral treatment depending on whether or not the credit is refundable. (Part S.)

5. Codify responsible person administrative relief from sales tax liability for members of LLCs holding minority interests. Under this proposal — which would codify existing administrative practice by the Department — a member of a limited liability company, or a limited partner in a partnership, could obtain relief from per se liability for sales tax owed by the LLC or partnership, but only if the member or partner was not under a “duty to act” with respect to the sales tax requirements, and only if the member or partner held less than a 50% share of the profits and losses in the business. Those members and limited partners would then only have sales tax liability based on their pro rata share of the LLC or partnership. (Part X.)

6. “Clarify” statutory residency day-count requirements. Under this proposal, made to counter a contrary but nonprecedential 2015 decision of an Administrative Law Judge, in determining whether an individual is present in New York State or City for more than 183 days during the year for purposes of the statutory residency test, days spent in the State or City for a part of the year in which the taxpayer was a domiciliary would still count toward the 183-day test. The memorandum in support refers to this as a “clarification” to reflect its long-standing policy and, if enacted, this would be effective for all open tax years. (Part O.)

7. Impose a healthcare insurance windfall profit fee. In the only proposal in the Executive Budget directly responding to the federal tax reform legislation, the Governor seeks to impose a new tax on corporate healthcare insurers. It would be imposed at the rate of 14% of the net underwriting gain from providing health insurance in New York State. The memorandum in support states that the tax rate is the equivalent of the 14% federal corporate tax rate reduction, noting that health insurance rates for 2018 were set before the federal rate reduction was enacted, perhaps suggesting that this is why the legislation targets this industry. (Part DD.)

The deadline for enactment of the New York State budget is April 1, 2018. It is widely expected that the Governor will make extensive modifications during the next two months to respond to the myriad of tax changes affecting individuals and corporations under federal tax reform, possibly including those discussed immediately below