New York State Governor Andrew Cuomo released his Fiscal Year 2020 budget and accompanying legislation on January 15, 2019 (the Budget Bill). Among other things, the Budget Bill proposes statutory revisions to respond to the Tax Cut and Jobs Act of 2017 (TCJA) and to impose a sales tax collection obligation on “marketplace providers.” A brief summary follows:
Corporate and Personal Tax Proposals
- GILTI – The Budget Bill proposes to codify the global intangible low-taxed income (GILTI) apportionment rule that the New York State Department of Taxation and Finance (the Department) recently published in the instructions to the State’s Corporation Franchise Tax returns. See our prior Legal Alert. Under the proposed legislation, a taxpayer’s net GILTI amount is included in the denominator of the taxpayer’s apportionment factor but not in the numerator. The same apportionment methodology would also apply to New York City’s Business Corporation Tax.
- Qualified Manufacturer’s Rate – The Budget Bill proposes to amend the requirements for “qualified manufacturer” eligibility under N.Y. Tax Law §§ 210(1)(a)(vi) and (b)(2) by decoupling from federal adjusted basis for purposes of determining whether a taxpayer owned sufficient property in the State to be a qualified manufacturer. Instead, a taxpayer would determine its eligibility as a qualified manufacturer (and the reduced rate—currently 0%) by referencing the New York State adjusted basis. The Budget Bill also makes a similar adjustment to the New York City qualified manufacturer’s regime.
- Exclusion From Entire Net Income for Certain Contributions to Capital – The Budget Bill proposes to address the inclusion of contributions by a government entity or civic group to the capital of a corporation in federal gross income under the TCJA, IRC § 118, by restoring New York’s treatment of such contributions as non-taxable contributions for New York State and New York City purposes.
- Carried Interest – The Budget Bill proposes to tax the carried interest income of hedge fund and private equity investors as ordinary earned income. Under the proposed law, New York State will recharacterize the investment management income earned by partners and shareholders of hedge funds and private equity firms and subject the amount of that income to tax as income earned from a trade or business that is in excess of what the partner or shareholder would have received if it had not provided investment management services. Further, the excess amount of income that is treated as income from a trade or business would be subject to a special 17% “carried interest fairness fee.” The fee would remain in effect until federal law is amended to treat the provision of investment management services the same as under the Budget Bill’s proposed treatment.
Interestingly, the effective date of the carried interest provisions is contingent upon the adoption of substantially similar legislation in Connecticut, New Jersey, Massachusetts and Pennsylvania. New Jersey enacted a similar contingent law in 2018.
Sales and Use and Excise Tax Proposals
- Marketplace Providers – The Budget Bill requires marketplace providers to collect and remit sales tax on all New York sales occurring on the marketplace (i.e., the forum). A “marketplace provider” is a person that facilitates sales, i.e., provides a forum in which sales may take place and collects payment from customers on these sales. “Marketplace sellers,” persons selling on a marketplace provider’s forum, may be relieved of their obligation to collect and remit sales tax on their sales sold through the forum. The seller is relieved of its obligation if it receives in good faith certification that the marketplace provider will collect and remit sales tax on the seller’s sales sold through its forum. Alternatively, the Department may develop a program whereby a marketplace provider may publicly agree to collect sales tax on all New York sales conducted on its forum.
- On the day the Governor released the Budget Bill, the Department issued a sales tax notice N-19-1 applicable to remote sellers. The guidance provides that a business with no physical presence in the State but that has made more than $300,000 in sales and transacted 100 sales of tangible personal property delivered in the State in the immediately preceding four sales tax quarters is required to register as a sales tax vendor. Per the notice, sellers who meet the threshold should register immediately.
- Sales Tax Exemption Under Dodd-Frank – The Budget Bill proposes to extend for two years the exemption from sales and use tax for some transactions between certain financial institutions and their subsidiaries pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- Auto Rental Surcharge – New York State currently imposes a 6% auto rental tax statewide, and an additional surcharge of 5% is imposed only in the Metropolitan Commuter Transportation District (MCTD). The Budget Bill would expand the 5% supplemental auto rental surcharge on auto rentals to the remainder of the State.
The Budget Bill proposes the creation of a cannabis control law to regulate adult-use cannabis and create a structure to oversee the licensure, cultivation, production, distribution, sale, and taxation of cannabis within New York State. The Tax Law would be amended to add a new Article 20-C, Tax on Adult-Use of Cannabis Products, which would: (a) impose a tax on cannabis cultivation charged by the weight of certain products; and (b) impose two taxes, totaling 22%, on a wholesaler’s sale to a retail dispensary. If the wholesaler is the retail dispensary, the tax is charged to the retail customer.
New York’s budget process is extensive. Under this system, the Governor is responsible for preparing a comprehensive budget proposal that the Legislature modifies and enacts into law. The Governor coordinates requests from agencies and submits a budget to the Legislature, along with the appropriation bills and other related legislation. The Legislature analyzes the Governor’s budget bill, holds public hearings, and seeks further information from agencies. Following that review, both houses of the Legislature reach agreement on spending and revenue recommendations that may amend the Governor’s proposed appropriation bills and related legislation. The State’s fiscal year begins April 1, so the timeline for the Legislature to review the Budget Bill is compressed.