On April 7, 2021, the New York Legislature passed the New York Budget Bill for fiscal year 2022 (S2509–C/A3009-C) (the “Enacted Budget”), ushering in a slew of tax increases for businesses and high-income earners. As of the time of publication of this post, New York Governor Andrew Cuomo had not yet signed the Enacted Budget, but has indicated that he will do so.
The Enacted Budget is the result of a months-long negotiation process that began on January 19, 2021 when Governor Cuomo introduced his original budget proposal. Evidence of the Governor’s weakened negotiation power can be seen in comparing the Governor’s original proposal to the Enacted Budget. For example, despite the Governor’s proposal not containing any significant changes to business taxes and proposing only a modest, temporary personal income tax surcharge, the Enacted Budget contains both business and personal income tax increases. While Governor Cuomo has stated that he expects the personal income tax increases in the Enacted Budget to be offset by a repeal of the federal cap on state and local tax deductions that was enacted as part of the Tax Cuts and Jobs Act of 2017, it is far from certain whether a repeal of the federal SALT deduction cap will ultimately materialize.
This blog summarizes some of the key provisions of the Enacted Budget and looks at how the Enacted Budget diverges from the Governor’s original proposal. Where did the Legislature win and where did the Governor win? Where were the true compromises?
Legislature Win: Business Tax Increases
The Enacted Budget contains business tax increases for Article 9-A taxpayers (which were not part of the Governor’s proposal).
First, for taxable years beginning on or after January 1, 2021 and before January 1, 2024, the tax rate for taxpayers with more than $5 million in business income apportioned to New York will increase from 6.5% to 7.25%.
Second, the capital tax, originally set to phase out this year, has been reinstated at a rate of 0.1875% from 2021 until 2024. This new rate exceeds the old 0.125% rate in place in 2016, when the phase out began as a result of New York’s corporate tax reform. Cooperative housing corporations, qualified manufacturers, and small businesses are exempt from the reinstatement.
To the extent the Governor fought against business tax increases, he was moderately successful. For example, the Assembly proposal to enact a temporary 18% business tax surcharge on certain business taxpayers is absent from the Enacted Budget. The Enacted Budget is also a tempered version of the Senate proposal, which proposed raising the business tax rate from 6.5% to 9.5% for taxpayers with a business income base above $5 million and included no sunset provision (as noted above, the Enacted Budget’s rate is 7.25% and sunsets in 2024). However, the Senate proposal contained a lower capital base tax rate of 0.125% (as compared to the Enacted Budget’s rate of 0.1875%).
Governor Win: Real Property Transfer Tax Amendments
The Enacted Budget omits Senate and Assembly proposals that would have expanded the mortgage recording tax to require the recording of mezzanine debt related to real property at the time any mortgage instrument on such property is recorded in the office of the county recorder. Additionally, the Governor and Senate agreed to authorize the Commissioner of Taxation and Finance to combine the real estate transfer tax return (TP-584) required by the NYS Tax Law and the real property transfer report (RP-5217) required by the NYS Real Property Law. The Commissioner is also authorized to implement an online system for the electronic submission of this consolidated form and paying the associated taxes and fees. Any information appearing on this consolidated form is subject to public disclosure. This provision takes effect immediately.
Legislature Win: No Department Appeals of Tax Tribunal Decisions
The Governor’s budget proposed an amendment that would have allowed the Department of Taxation and Finance (the “DTF”) to appeal Tax Appeals Tribunal losses to the New York State Supreme Court, Appellate Division (the “Appellate Division”). Taxpayers were particularly concerned about this provision because it would have prolonged and increased the legal costs for tax disputes when taxpayers already bear the burden of proving their case in the Division of Tax Appeals. However, the Assembly and Senate proposals omitted this provision and no such provision made it into the Enacted Budget.
In New York, taxpayers who disagree with a DTF determination can appeal the determination to the Division of Tax Appeals, an independent administrative body within the executive branch. The Division of Tax Appeals, Administrative Law Judge (“ALJ”) Division hears the initial appeal. Afterwards, either party (the taxpayer or the DTF) can appeal the ALJ’s determination to the Tax Appeals Tribunal, which is the appellate-level body within the Division of Tax Appeals. Under current law, only the taxpayer is allowed to appeal Tribunal decisions to the Appellate Division for further litigation. If the DTF loses at the Tax Appeals Tribunal, the DTF must abide by the Tribunal’s decision and cannot appeal the case to the Appellate Division. Given the significant costs associated with appellate litigation, the taxpayer’s burden of proof, and deference standards that favor the Department, we believe the current system is fair to both taxpayers and the Department.
Governor and Legislature Agreement: Elective Pass-Through Entity Tax (SALT Cap Workaround)
Both the Governor and Legislature agreed to enact an optional pass-through entity tax, which will permit partners, members, and shareholders of electing entities to indirectly deduct state and local taxes as a workaround to the federal $10,000 SALT deduction cap. Under the Enacted Budget, partnerships, LLCs treated as pass-through entities for federal income tax purposes, and New York S corporations are allowed to pay an optional 6.85% tax on their New York-sourced income below $2 million (above $2 million, the tax rates and brackets for the elective tax mirror the new rates for the personal income tax). The partners, members, or S corporation shareholders then receive a credit for their direct share of the pass-through entity tax paid. The Enacted Budget also provides resident taxpayers with a credit for similar pass-through entity taxes paid to another state or the District of Columbia.
Legislature Win: Keep State-level S Corporation Elections
Currently, New York tax law does not conform to federal S corporation elections. Instead, New York requires taxpayers to make state-level S elections. The Governor’s budget proposed amending New York’s S corporation law to conform to a corporation’s federal election. The Enacted Budget, however does not contain an S corporation conformity provision.
Legislature Win: Allowing Employer Tax Benefits Jeopardized by Remote Work
The Enacted Budget will allow employers to receive tax benefits that are based on maintaining a presence within the state or specific areas within the state, even if their employees are no longer physically present and working in the state. However, employers are required to certify that they would have been eligible for the tax benefit but for the shift to remote work caused by COVID-19 shutdowns. The Enacted Budget allows a waiver for any “tax benefit,” which can be construed more broadly than just tax credits. This provision will be deemed to have been in full force and effect since March 7, 2020 and will expire on December 31, 2021 or whenever New York’s state of disaster emergency is declared over, whichever is sooner.
Legislature Win: No Sales Tax on Vacation Rental Marketplace Providers
The Governor’s bill proposed a sales tax on vacation rentals and required marketplace providers to collect sales tax, file returns, and remit the tax collected. It would also have included vacation rentals in the imposition of the $1.50 NYC hotel unit fee. This proposal was omitted from the Enacted Budget.
Governor and Legislature Agreement: Technical Correction to Sales Tax Remote Vendor Registration
The Enacted Budget corrects a technical legislative error. In 2019, the Tax Law was amended to trigger the mandatory registration and collection of sales tax from vendors with no physical presence in New York (i.e., “remote vendors”) only if their sales were $500,000 or more over the four previous sales tax quarters. However, another section of the Tax Law was inadvertently not amended and still requires remote vendors to register if their sales exceed $300,000 (the previous threshold). The Enacted Budget increases the registration threshold to $500,000 in order to eliminate confusion and conform to the 2019 amendments to the Tax Law.
Governor and Legislature Agreement: Extend Certain Sales Tax Exemptions Related to Dodd-Frank Protection Act
The Enacted Budget extends the current sales and use tax exemptions for certain transactions between financial institutions and their affiliates as a result of the Dodd-Frank Protection Act. The Enacted Budget extends the date by which transfers must be made from June 30, 2021 to June 30, 2024. For sales made, services rendered, or uses occurring pursuant to binding contracts entered into on or before the new extended June 30, 2024 date, the Enacted Budget extends the exemption period from June 30, 2024 to June 30, 2027.
Compromised: Personal Income Tax— High Income Surcharge
The Governor’s bill would have imposed a temporary personal income tax surcharge on high-income taxpayers for tax years 2021 through 2023. The surcharge rate ranged from 0.50% to 2.00% and only applied to taxpayers with income above $5 million.
The Enacted Budget omits the Governor’s proposed high income surcharge, but expands the marginal tax brackets instead. New York’s current top tax rate is 8.82% on income over $2,155,350. The Enacted Budget increases this rate to 9.65% and then creates two new brackets for income over $5,000,000, maxing out at a rate of 10.90% on income over $25,000,000. When combined with the New York City tax rate, residents in the highest income bracket would be subject to a total tax of 14.776%. Note, however, that these rates were slightly reduced from the original Senate and Assembly proposals which increased the current top tax rate to 9.85% and maxed out at 11.85%, signaling a modest win for the Governor.
Under the Enacted Budget, the new tax rate schedule begins this year and is set to revert back to the 2020 tax rate schedule in 2027. Again, this is a win for the Governor since neither the Senate proposal nor the Assembly proposal contained an automatic expiration date for the higher tax rates.
We also note that Governor Cuomo’s budget bill proposed legalizing and taxing adult-use cannabis sales. While removed from the Enacted Budget, this was separately and successfully passed as S.854 and signed by the Governor on March 31, 2021. Finally, neither Governor Cuomo’s proposal nor the Enacted Budget include digital advertising tax proposals or other taxes imposed on the collection of consumer data. Digital advertising tax and consumer data tax proposals have been separately introduced in the New York Legislature, as we have discussed in our previous blog posts discussing New York’s 2021 data tax proposal and the latest digital and data tax proposals across the U.S. from this legislative season.