• New York's Budget Bill is Finally Done!
  • October 12, 2010 | Author: Carolyn Joy Lee
  • Law Firm: Jones Day - New York Office
  • The sun set many times on the Empire State between April 1, when the Budget is constitutionally required to be passed, and August 11, when Governor Paterson finally signed Chapter 57 of the Laws of 2010 into effect. The good news is that, despite a strained economy, and despite (or because of?) an unruly Legislature, the damage inflicted by the 2010 tax legislation, while painful to those affected, was not as bad as it could have been.

    Credits Deferred

    For businesses, one of the most significant changes is the temporary deferral of tax credits. New Tax Law § 33 provides that, for tax years beginning on or after January 1, 2010 and before January 1, 2013, only $2 million of credits can be claimed in any tax year. The $2 million is pro rated among the various types of credits to which a taxpayer may be entitled. The excess is carried forward and freed up beginning in 2013 - assuming of course the limitation is not further extended. The new legislation further added provisions specifying that, in the case of biofuels and incubator facility credits earned in a pass-through entity, the dollar limitations imposed on those particular credits are to be measured at the entity level, not at the member level.[1]

    Stewardship Rewarded

    Another significant change, and a rare improvement for businesses, is a loosening of the circumstances under which the New York activities of an affiliated entity can create sales tax nexus for an out-of-state entity. The law had generally provided that an out-of-state seller with no New York contacts will nonetheless have nexus to New York if an affiliated vendor, measured by a 5% common ownership threshold, uses the same trademarks, service marks or trade names in New York, or engages in activities inuring to the benefit of the out-of-state entity in the development or maintenance of a market in New York. The 2010 legislation now carves out of the latter category the provision of accounting or legal services, and directing the activities of the out-of-state entity, for example in making decisions about strategic planning, marketing, inventory, staffing, distribution or cash management. Stewardship-type activities carried on by an affiliate in New York thus will no longer taint the out-of-state seller with nexus.[2]

    REITs Captured

    Captive REITs have been addressed yet again in the 2010 legislation. The new law has eliminated the clause that automatically excluded any publicly-traded REIT from captive REIT status. Thus, a captive REIT is now any entity that is more than 50% owned by an association classified as a corporation. "Listed Australian Property Trusts" and certain qualified foreign entities have, however, been excluded from the category of owner that causes captive status. Furthermore, and perhaps not surprisingly, the sunset provision that had been negotiated in enacting the captive REIT provisions a few years ago, under which the entire captive REIT regime was to disappear for taxable years beginning after January 1, 2011, has now been repealed. Thus, the captive REIT rules, as they have changed from year to year since their 2007 enactment, do not seem to be going away any time soon.[3]

    Factored Sales Tax Credits Repealed

    On the sales tax front the 2010 legislation contained bad news for private label credit cards and similar structures. The legislation repealed a relatively recently enacted rule that had allowed certain factors and similar lenders to claim sales tax credits for bad debts when the purchaser/debtors whose obligations they had acquired defaulted on payment. This relief provision had been enacted to provide some equity, where tax has been remitted in respect of a sale but the customer ultimately fails to pay the bill. With the repeal of this provision we return to an unfortunate mismatch between the taxes paid to New York and the tax dollars ultimately actually collected from customers.[4]

    Tourism Taxed for Remarketing

    "Room remarketers," including online travel companies, also got stung by the new legislation. They are now treated as subject to sales tax on the "margin" earned for providing travel booking services. In addition, the New York City Hotel Occupancy Tax was directly amended to authorize the imposition of that tax on the margins earned by room remarketers, and to conform the City's tax to the new sales tax.[5]

    Carried Interest Comes and Goes

    Perhaps the biggest news in the budget legislation is the tax that wasn't. As originally enacted, the 2010 budget bill included "carried interest" provisions, which would have recharacterized, for both corporations and individuals, that portion of a distributive share of partnership income attributable to their provision of "investment management services." New York has sought for some time now to get out ahead of the federal income tax on the treatment of carried interests, and for a while it appeared they might. However, the day after passing the Budget Bill that included the carried interest provisions, the New York Legislature passed a second bill repealing that portion of the Budget Bill, and the Governor signed both, meaning that the carried interest rules came and went at the same time. Interesting approach to legislating!

    338(h)(10) Reinstated Retroactively for S Corps

    For individuals the 2010 legislation included some expensive changes. Nonresident S corporation shareholders had enjoyed a favorable Tax Appeals Tribunal decision that essentially undid section 338(h)(10) elections, treating them as selling stock, and also favorably treating their collections on installment notes distributed by an S corporation. The recent legislation undoes this, retroactively for all open years. The good news on that front, however, is that buyers of S corporations in § 338(h)(10) transactions, who might have been concerned that they no longer had the treatment they had bargained for, can now be assured that, for all open years, their intended treatment is assured.[6]

    Nonresidents to Share More Income

    Nonresidents also now face tougher rules for sourcing income derived under covenants not to compete, termination agreements, and the like. The exact contours of these new rules remain to be seen, but nonresidents, and those responsible for withholding in respect of nonresidents, need now to take this new statute into account in quantifying their tax exposures.[7]

    Deductions Slashed and Rates Increased for Top Earners

    Nonresidents are not, however, the only ones feeling new pain. Itemized deductions have now been all but eliminated from the Personal Income Tax for those with incomes over $1,000,000. Between $1 million and $10 million of income, the only itemized deduction still allowed is 50% of charitable deductions. Over $10 million the charitable deduction is cut back to 25%. In addition to eliminating itemized deductions for high-income earners, the top tax rate on New York City residents was increased from 3.2% to 3.4%. And for all New York State filers the modifications to deductions allowed (where itemized deductions are still relevant) now excludes from deductible amounts any federal deduction claimed for sales taxes in lieu of state income taxes.[8]

    Failure-to-File Felonies and Other Refined Print

    In addition to the rather varied tax law changes described above, the newly enacted budget legislation included some additional items of note. A new provision has been enacted making it a Class E felony for individuals and corporations to fail to file New York returns for 3 successive years, unless it is shown no tax is due. New reporting provisions have been enacted to mirror the federal provisions of Internal Revenue Code § 6050W, requiring reporting in respect of the settlement of payment card and third party network transactions. There have been changes to the film production credit and low income housing credit rules; changes to the QEZE and IDA rules; tighter sales tax rules for transfers of vessels and aircraft; and a shortening to three years of the period after which unclaimed amounts for services not rendered or goods not delivered will be considered abandoned.

    All in all, it could have been worse. We are now deep into campaign season, and certain to have a new Governor, and perhaps a differently oriented Legislature. Our government never seems to get smaller. So unless, in particular, personal income tax and sales tax revenues have rebounded from the recession, keep a watchful eye on New York for more revenue raisers.

    [1] N.Y. Tax Law §§ 28(a), 210-G(f).
    [2] N.Y. Tax Law § 1101(b)(8)(i)(I).
    [3] N. Y. Tax Law § 2(9); Ch. 57, L. 2008, Part FF-1, § 18.
    [4] N.Y. Tax Law § 1132-e, repealed.
    [5] N.Y. Tax Law § 1101(c), N.Y.C. Admin Code Chapter 25.
    [6] N.Y. Tax Law §§ 632, 631(b)(1)(E-1).
    [7] N.Y. Tax Law § 631(b)(1)(F).
    [8] N.Y. Tax Law §§ 615(g)(1), 615(c)(1), 1304.