New York’s most recent budget — passed 125 days late — raises City income tax rates, reduces charitable deductions for high earners, increases the definition of New York source income for non-residents, requires deferral of credits, and makes certain changes in the sales tax law, among other things. Following is a summary of some of the more significant tax changes. The effective date for all amendments is January 1, 2010, unless otherwise noted.
Personal Income Tax
Increased NYC Income Tax Rate. A new top rate for NYC personal income tax of 3.876% was added for taxable income over $500,000. This increases the rate from 3.648%.1 Note that the effective date of January 1 makes this retroactive to the beginning of the year. Estimated payments may need to be increased accordingly to avoid penalties; the New York State Department of Taxation and Finance advised that increased withholding rates for affected taxpayers go into effect September 1, 2010, so withholding does not need to be otherwise adjusted.
Reduced Charitable Deductions. The charitable deduction for taxpayers with NY adjusted gross income above $10 million is limited to 25% of the federal charitable deduction; no other itemized deductions are permitted. Under 2009 legislation, taxpayers with adjusted gross income above $1 million are permitted to claim only 50% of their federal charitable deductions and are not permitted to claim any other itemized deductions. This new provision is set to expire after the 2012 tax year.
Expansion of New York Source Income for Non-Residents
- Now included in New York source income are termination pay, covenants not to compete, and any other employment-related compensation for past services received by non-residents if they relate to a trade, business, profession or occupation previously carried on in New York.
- Non-resident shareholders of S corporations who sell their stock in the corporation and make an election under Internal Revenue Code § 338(h)(10) are now required to compute their New York source income as if the deemed asset sale had actually occurred and to allocate any gain from the deemed sale of the assets according to New York income sourcing rules. (Generally the sale of an intangible, such as stock, by a non-resident is not New York source income; the new law is intended to “correct” a decision of the Tax Appeals Tribunal which held that the sale of stock with a §338(h)(10) election was not subject to New York income tax.) When a non-resident shareholder exchanges S corporation stock as part of the deemed liquidation, any gain or loss recognized is to be treated as the disposition of an intangible asset and will not increase or offset any gain from the deemed sale of the assets.
- Additionally, if the S corporation distributes an installment sale obligation to its shareholders under Internal Revenue Code § 453(h)(1), any gain recognized on receipt of the payments will be subject to allocation under New York income sourcing rules.
- If a New York S corporation terminates its New York S election, any income or gain recognized on the receipt of payments from an installment sale entered into before the termination will be allocated according to New York income sourcing rules.
The provisions regarding Internal Revenue Code sections 338(h)(10) and 453(h) apply to taxable years beginning on or after January 1, 2007, for which the statute of limitations is still open. These provisions further increase the scope of New York source income for non-residents. A statute enacted last year provides that a nonresident’s sale of an interest in an entity which owns New York real property will be subject to New York State income tax where the value of the real estate is 50% or more of the value of all assets held by the entity. (See previous GT Alert, New York State Now Taxes Non-Resident's Gain from Sale of Interests in an Entity that Holds New York Real Property.)
Addback of state sales tax deduction. In computing state itemized deductions, the state income tax component is excluded. This does the same for the state sales tax deduction for taxpayers who deduct the sales tax rather than state income from their federal returns.
Clothing Exemption. The exemption from sales tax for clothing and footwear selling for less than $110 per item or pair is suspended for the period October 1, 2010 to March 31, 2011. A more limited exemption for clothing priced at under $55 per item or pair will be in effect from April 1, 2011 to March 31, 2012. The former $110 exemption will be reinstated on April 1, 2012.
Sales Tax on “Room Remarketers.” Beginning September 1, 2010, “room remarketers” will be required to collect sales tax on the sale of hotel rooms. A “room remarketer” includes a person who reserves, arranges for, conveys, or furnishes occupancy to an occupant for an amount determined by the room remarketer. (Examples are Orbitz, Expedia, etc.) A credit will be allowed to the room remarketer for sales tax paid to the hotel. Before the change in the law, no sales tax was paid on the mark-up of the hotel room by the remarketer.
Narrowed Definition of Affiliate Nexus. The definition of “affiliate nexus” for sales tax purposes is narrowed to exclude those providing accounting or legal services or advice to a seller, or in directing the activities of a seller, including making decisions about strategic planning, marketing, inventory, staffing, distribution, or cash management. This provision is effective immediately and is deemed to have been in effect on and after June 1, 2009, the effective date of the affiliate nexus provisions passed last year. (See previous GT Alert, New York Increases Tax Rates and Penalties and Adds New Taxes and Penalties to Reduce Deficit.)
Aircraft and Vessels. Certain transactions, such as contributing property to a partnership or corporation in exchange for an interest in the entity, are not taxable as retail sales, and thus are exempt from sales tax. A provision of the new law removes this exemption in the case of aircraft and vessels, in order to prevent the avoidance of use tax on aircraft and vessels purchased out of state and then transferred to a New York entity. This provision is effective immediately, i.e., on August 11, 2011.
Repeal of Bad Debt Provisions for Private Label Credit Card Lenders. Under prior law, private label credit card lenders and vendors who use them could claim a sales tax credit or refund on accounts financed by or assigned to such a lender that were written or charged off as uncollectible. The repeal takes effect July 1, 2010.
Repeal of Sales Tax Vendor Credit for Monthly Filers. The credit for timely filing monthly sales tax returns is repealed. This takes effect on June 1, and applies to tax returns due on September 20, 2010, and thereafter.
Replacement of Empire Zones Program with Excelsior Jobs Program. This new program replaces the Empire Zones program. It consists of a jobs tax credit, an investment tax credit, a research and development credit, and a real property tax credit The program is effective July 1, 2010 and the credits are first available in the 2011 tax year.
Deferral of Certain Credits. Taxpayers are now required to defer the use and refund of certain tax credits if they exceed $2 million in the aggregate. Among the credits are Empire Zone credits, green building credits, alternative fuel credits, and the investment tax credit and employment incentive credit. Affected taxpayers will be permitted to claim $2 million in credits, prorated by the total amount of each credit.2 The remainder of each credit is deferred. Credit amounts are accumulated in either the “temporary deferral nonrefundable payout credit” or the “temporary deferral refundable payout agreement.” Taxpayers may begin to use the nonrefundable credits on their 2013 returns; unused amounts can be carried forward indefinitely. Taxpayers may use and refund 50% of the refundable credits on their 2013 returns, 75% of the remaining credit on their 2014 returns, and the entire remainder in 2015.
The Film Production Tax Credit has been allocated an additional $2.1 billion, to be awarded annually in the amount of $420 million in 2010 through 2014.
Credit and Debit Card Reporting. Financial institutions and other major organizations that handle payment transactions will be required to report annually to the Department of Taxation and Finance the aggregate amount of payment card and third-party payments settled with New York payees. The first report will be due within 30 days of January 31, 2012, the date required for analogous federal reporting.
Repeated Failure to File. A new class E felony has been created for repeatedly failing to file returns, with the intent to evade personal or corporate tax. A person is guilty of this new offense if she fails to file returns for three consecutive taxable years with the intent to evade taxes, provided the person had an unpaid liability for personal income tax in any amount or an unpaid liability in excess of the threshold amount of $250 for corporate tax, for each of three years.
These are some of the more significant recent changes in New York’s tax laws, and add to their complexity after the provisions enacted by last year’s budget. You should consult with your tax advisors to see how they impact on your existing or anticipated activities.