The 2009-2010 New York State (“NYS”) Budget Act, enacted on April 7, 2009, makes numerous changes to New York’s Tax Law -- increasing taxes, creating new fees, imposing stricter reporting obligations and increasing penalties. The Budget Act also extends several tax credits, including a one-year extension of the Empire State Film Production Tax Credit. The changes are generally effective for taxable years beginning on or after January 1, 2009. Set forth below is a description of some of the most important changes made by the new legislation. California also raised certain taxes in its budget, enacted in February.
Changes Affecting Individuals
Higher Personal Income Tax Rates
The Budget Act increases the top personal income tax rate for the 2009 through 2011 tax years from 6.85% to 8.97% and adds a new 7.85% rate. The 7.85% rate applies to married individuals filing jointly with NYS taxable income over $300,000 but not over $500,000, heads of households with NYS taxable income over $250,000 but not over $500,000 and unmarried individuals and married individuals filing separately with NYS taxable income over $200,000 but not over $500,000. The 8.97% rate begins for NYS taxable income over $500,000, without regard to filing status. The lower rates phase out as income increases.
Elimination of Itemized Deductions For High Income Taxpayers
The Budget Act eliminates the ability of taxpayers with NYS adjusted gross income over $1 million to claim any itemized deductions (other than 50% of the charitable contribution deduction). Under prior law, a taxpayer with NYS adjusted gross income over $525,000 who itemized deductions for U.S. federal income tax purposes was generally permitted to deduct 50% of her federal itemized deductions for NYS tax purposes. Individuals with NYS adjusted gross income over $1 million now have to choose between the standard deduction or 50% of their U.S. federal charitable contribution. This change also affects the New York City (“NYC”) personal income tax on residents of NYC.
Less Favorable NYS Residency Test
Under prior law, an individual domiciled in NYS was not taxed as a resident if within any 548 consecutive day period (1) the individual was in a foreign country for at least 450 days, (2) the individual was not present in NYS for more than 90 days and (3) the individual’s spouse or minor children did not reside at the individual’s permanent place of abode in NYS for more than 90 days. The Budget Act changes the third prong of this test to provide that the spouse or minor children must not be present anywhere in NYS. This change is intended to combat situations where spouses or children stay in hotels or with relatives in NYS in order to prevent the individual from qualifying as a NYS resident.
Non-Residents Subject to Tax on Sales of Interests in Entities Holding NY Real Property
A nonresident individual will now be subject to NYS personal income tax on gain from the sale of an interest in a partnership (including an LLC), S corporation or closely held C corporation (with 100 or fewer shareholders) if 50% or more of the entity’s fair market value on the date the interest is sold is attributable to real property located in NYS. The gain that is subject to NYS tax under this new provision is equal to the individual’s pro rata portion of the portion of the gain allocable to the value of the NYS real property held by the entity, determined by dividing the value of NYS real estate held by the entity by the value of all the entity’s assets. Without a withholding obligation on the buyer, it is unclear how NYS will enforce this provision.
Changes Affecting Entities
Expansion of Nexus to Certain Sales Tax Collections
NYS previously expanded the scope of NYS’s jurisdiction to tax, or “nexus,” to presume a seller to have nexus with NYS for sales tax purposes if (1) one or more NYS residents directly or indirectly refer customers to the seller for consideration, and (2) the cumulative gross receipts from sales in NYS pursuant to such referrals exceeds $10,000 during the four preceding sales tax quarters. The new legislation further extends the requirement to collect NYS sales tax to non-NYS vendors who have no physical presence in NYS but who make sales in NYS on the internet or through mail order if the non-NYS vendor has an affiliate in NYS that either (1) uses, in NYS, a trademark, service mark or trade name that is the same as or similar to that of the non-NYS vendor, or (2) engages in activities in NYS that benefit the non-NYS vendor’s development or maintenance of a market for its goods or services in NYS. The threshold for “affiliation” under this new provision is exceedingly low – a more than 5% ownership connection will suffice.
Increased Estimated Tax Installment
For tax years beginning on or after January 1, 2010, the first required installment of corporate estimated tax for such year is increased from 30% to 40% of the prior year’s tax, if such prior year’s tax was more than $100,000. The new legislation also provides that, for purposes of determining estimated tax installments for 2009, the corporation must compute the prior year’s tax as if the Budget Act had been in effect throughout 2008.
Certain Partnerships Subject to Filing Fees
For tax years beginning on or after January 1, 2009, the filing fees previously required only from LLCs and LLPs will now also be required of general partnerships and limited partnerships with $1 million or more of NYS source gross income. The fees range from $1,500 if the partnership’s NYS source gross income does not exceed $5 million, to $4,500 if the partnership’s NYS source gross income exceeds $25 million. The Budget Act also authorizes NYC to impose similar filing fees.
The Budget Act contains numerous provisions which impose new penalties or increase the amount of existing penalties. For example, the penalties for failing to file an information return, filing a return with a frivolous position, fraudulently failing to pay tax or willfully failing to pay over withholding tax have all been increased significantly. The new legislation also increases the interest rates applicable to underpayments of tax by 1.5 percentage points (generally from 6% to 7.5%).
More Funds Allocated to NYS Qualified Film Production Credit
One bright spot in the Budget Act is a one-year extension of the Empire State Film Production Tax Credit and an authorization of an additional $350 million to fund the credit. The legislature had previously increased this credit from 10% to 30% of qualified film productions costs in January 1, 2008, and had allocated $685 million to fund the program through 2013, but this amount was exhausted by February of 2009. The Budget Act provides for an increase of $350 million in qualified film production credits, and extends the availability of the credit itself for one year.
Our California readers have no doubt noticed that taxes have gone up as well. The California budget, enacted in February, contained several tax provisions which primarily were tax increases:
i) The sales tax rate was increased by 1% beginning April 1, 2009.
ii) Vehicle license fees were increased from 0.65% to 1.15% beginning May 19, 2009.
iii) Personal income tax rates were increased by 0.25%. The income tax rate increase would have been limited to .125% if California had been entitled to receive $10 Billion of federal stimulus funds through 2010; however the State Treasurer recently determined that only $8.17 Billion will be received.
iv) Beginning in 2011, California will also provide a credit for motion picture production within the state. Taxpayers will apply to the Film Commission for the credit.
v) Beginning in 2011, multi-state taxpayers will be permitted to elect to apportion their business income using only the sales factor in lieu of the current three factors of property, payroll and sales.