New York State Governor Andrew M. Cuomo released his 2017-2018 Executive Budget, containing an assortment of potentially important tax proposals, including the following:
1. Extends top personal income tax rates. Extends the top tax bracket under the personal income tax (the so-called "Millionaires Tax"), which is imposed at a rate of 8.82%, for an additional three years through 2020. The top tax bracket was originally set to expire after 2017. (Part R)
2. Expands scope of real estate transfer tax. Significantly broadens the scope of the real estate transfer tax to include as a "conveyance" the transfer of any interest (not only a "controlling interest") in a partnership, limited liability corporation, S corporation, or non-publicly traded C corporation with less than 100 shareholders if the entity in question owns New York real property having a fair market value that equals or exceeds 50% of the value of all of the entity's assets on the date of transfer of an interest in that entity. (Part JJ). The Department of Taxation and Finance would also be given the authority to subject to the "Mansion Tax" an additional tax on sales of residential real property for consideration of $1 million or more any conveyance "made pursuant to an agreement, understanding or arrangement that results in avoidance or evasion of the tax." (Part KK)
3. Conforms New York State S corporation treatment to federal. Conforms the New York State S corporation treatment to the federal S corporation treatment in all cases. Currently, a federal S corporation has the option of electing to be taxed as a New York State S corporation or instead be taxed as a C corporation under Article 9-A by the unanimous consent of all of its shareholders. This would also result in the nonresident individual shareholders having New York source income from their distributive share of S corporation income even in the absence of an election. The proposal would apply to taxable years beginning after 2017. (Part Y)
4. Requires marketplace providers to collect sales tax. Requires a marketplace provider, defined as a person who collects the purchase price and provides the physical or virtual forum where the transaction occurs, to collect sales tax from customers on sales of tangible personal property they facilitate unless they facilitate less than $100 million in sales each calendar year. Marketplace sellers who are sales tax vendors would be relieved from the duty to collect sales tax on those sales where the marketplace provider has certified that it is registered to collect the tax and that it will collect the tax. If enacted, the new law would go into effect on September 1, 2017. Currently, marketplace providers are not "persons required to collect tax" under the sales tax law. (Part BB). A similar marketplace provider proposal was included in the 2015-2016 Executive Budget but was not enacted.
5. Closes sales and use tax "loopholes" for certain related party transactions. In a scaled-down version of a proposal made (but not enacted) in the 2015-16 Executive Budget, this proposal would amend the definition of "retail sale" to include sales of tangible personal property made to legal entities (such as single member LLCs or partnerships) in situations where the property is resold to related persons or entities. The Governor's Memorandum in Support states that this would close a sales tax "loophole" whereby an entity buys property exempt from sales tax as a purchase for resale, which it then leases to a related entity so that only the lease payments are subject to sales tax. (Part CC)
Another proposal would eliminate the existing use tax exemption for property or services brought into New York State by a non-resident (other than an individual) unless the non-resident has been doing business outside the State for at least six months prior to the date the property or services are brought into the State. The Memorandum in Support states that this would close a use tax "loophole" whereby a New York State resident avoids use tax by forming an out-of-State entity to purchase property or services outside the State and then bring them into the State tax-free. (Part CC)
6. Disregarded entity treatment to be followed for tax credit purposes. A single member LLC disregarded for federal income tax purposes will be disregarded in determining its owner's eligibility for State tax credits. As a result, any tax credit requirements and the tax credit computation are made based on treating the taxpayer and the disregarded entity as a single entity. The Memorandum in Support (and the draft legislation itself) states that the proposal is intended to reverse the effects of a New York State Tax Appeals Tribunal decision holding in favor of the taxpayer that two disregarded SMLLCs owned by an individual should be treated as separate entities in determining
entitlement to an Empire Zone tax credit. Matter of Lisa A. Weber, DTA No. 825857 (N.Y.S. Tax App. Trib., Aug. 25, 2016). The proposal, if enacted, would apply to all open taxable years. (Part Q)
7. Closes co-op sale "loophole." Proposes to close a personal income tax "loophole" whereby the sale by a non-resident individual of shares in a co-op housing corporation generates New York source income subject to personal income tax, but the sale by a non-resident of an ownership interest in an entity whose assets consist solely of co-op stock does not. The current definition of "real property located in this state" would be amended to include an interest in a partnership, LLC, S corporation, or non-publicly traded C corporation with 100 or fewer shareholders that owns New York real property or shares in a co-op where the fair market value of such real property and co-op shares equals or exceeds 50% of the value of all of the entity's assets. (Part Z)
The deadline for enactment of the New York State budget is April 1, 2017.