New York Governor Andrew Cuomo released his Fiscal Year 2022 budget and accompanying legislation on January 19, 2021 (the Budget Bill). Although the State projects billions of dollars in lost revenue because of the fallout from the COVID-19 pandemic, the Budget Bill does not propose significant new taxes on businesses.

While the Governor stated during his Budget address that he is requesting $15 billion in aid from the federal government, the Budget Bill assumes that the State will only receive $6 billion in new aid—an amount which the Briefing Book summarizing all of the budget legislation claims is at “the lower end of possible outcomes.” If the State instead receives the full $15 billion in requested aid, the Briefing Book claims “the State would be able to reverse or modify” some of the Budget Bill’s most “difficult proposals.”

A brief summary of the most notable proposals follows:

Department appeals of Tax Appeals Tribunal decisions

Appeals related to taxes administered by the New York State Department of Taxation and Finance (Department) are heard by the Division of Tax Appeals (DTA). An appeal before the DTA is first heard by an administrative law judge, who conducts a hearing, establishes the factual record, and issues a determination.

An ALJ’s determination is appealable by either the taxpayer or the Department to the Tax Appeals Tribunal (Tribunal), a body consisting of three commissioners who are appointed by the governor with the advice and consent of the New York State Senate. The Tribunal reviews ALJ determinations for both factual mistakes and erroneous legal conclusions. Under current law, only a taxpayer may appeal a Tribunal decision to the Appellate Division of the New York Supreme Court. Tribunal decisions are final and binding on the Department, meaning that if a taxpayer is satisfied with the outcome of a case at the Tribunal, its case is over.

The Budget Bill proposes to allow the Department to seek judicial review of Tribunal decisions. This proposal is similar to failed proposals from past years (such as a proposal included in Governor Cuomo’s Fiscal Year 2019 budget bill). While the Governor’s “Memorandum in Support” connected with the Budget Bill claims that the Department’s inability to appeal Tribunal decisions is a “flaw” in current law, a change will substantially increase litigation burdens on New York taxpayers.

Personal income tax proposals

• “High income surcharge” – The Budget Bill would impose a temporary income tax surcharge on high-income taxpayers for tax years 2021 through 2023. The surcharge rate would vary from 0.5% of taxable income for taxpayers earning between $5,000,001 and $10,000,000, to 2% of taxable income for taxpayers earning over $100,000,000. Interestingly, the Budget Bill would allow taxpayers to pre-pay their tax year 2022 and 2023 surcharge liabilities in tax year 2021 and would allow a deduction beginning in tax year 2024 corresponding to the amount of any prepayment.
• One year delay of middle class tax cuts – The Budget Bill would also delay by one year an ongoing phasing in of tax rate cuts targeting the middle class. The delay would require New York taxpayers to use the personal income tax rate schedules applicable in 2020 again in 2021, and the rate schedules currently applicable for tax years 2021 through 2024 would each be delayed by one year.

SALT cap workaround

The Budget Bill would create a new Article 24-A of the New York Tax Law, enacting an optional pass-through entity tax on the New York sourced income of partnerships and S corporations that are comprised solely of individual partners or shareholders. Electing entities would pay a 6.85 percent tax on their New York sourced ordinary income (and guaranteed payments for partnerships).

The proposal includes amendments to the personal income tax laws to provide partners, members, and shareholders of electing entities with a refundable tax credit equal to 92 percent of his or her proportionate or pro rata share of taxes the electing entity paid under Article 24-A. Further, the proposal provides a resident tax credit for substantially similar taxes paid to other states.

This proposal is intended to partially work around the SALT cap – the federal $10,000 limitation on the deduction of an individual’s state and local income taxes, as enacted in the Tax Cuts and Jobs Act of 2017.

Other tax proposals

The Budget Bill includes a variety of other proposals, including:

• Treating federal S corporations as S corporations for franchise tax purposes – The Budget Bill proposes revisions to New York Tax Law requiring all federal subchapter S corporations to be treated as subchapter S corporations for State tax purposes.
• Subject vacation rentals to New York sales tax – The Budget Bill proposes subjecting “vacation rentals” (defined as any “building or portion of it that is used for the lodging of guests”) to New York’s sales and use taxes and New York City’s hotel unit fee. The Budget Bill would also require “vacation rental marketplace providers” to collect sales tax on the vacation rentals that they facilitate.
• Extension and amendments of film tax credit programs – The Budget Bill proposes extending the Empire State Film Production Credit and Post Production Credit one year to taxable years beginning before January 1, 2027, and also proposes expanding the eligibility of certain credits for work performed in certain New York counties.
• Legalization of adult-use cannabis – For the third consecutive year, the Budget Bill proposes authorizing and taxing adult-use cannabis.
• Increase of time for Department to issue sales tax refunds – Under current law, the State must pay interest on any sales tax refund that is not paid within three months. The Budget Bill would extend the Department’s time, from three months to six months, to process sales tax refund claims of $100,000 or more before interest must be paid.
• Technical correction to sales tax remote vendor registration requirements – The Budget Bill proposes technical corrections to confirm the sales volume threshold that triggers New York’s remote vendor sales tax registration and collection requirements from $300,000 to $500,000 over the previous four sales tax quarters.
• Extend alternative fuels tax exemptions – Currently E-85, CNG, and hydrogen are fully exempt and B20 is partially exempt from motor fuel taxes, petroleum business taxes, fuel use taxes and sales and use taxes. The Budget Bill would extend the sunset date for these exemptions from September 1, 2021 to September 1, 2026.
• Extend and enhance musical and theatrical production credit – The Budget Bill would extend the sunset date of the musical and theatrical production tax credit for four additional years (to January 1, 2026) and increase the annual tax credit cap from $4 million to $8 million.
• Sales tax exemption under Dodd-Frank – The Budget Bill proposes to extend for three years the exemption from sales and use tax for some transactions between certain financial institutions and their subsidiaries pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Next steps

New York’s budget process is extensive. The Governor is responsible for preparing a comprehensive budget proposal that the Legislature modifies and ultimately enacts into law. The Governor coordinates requests from agencies and submits a budget to the Legislature, along with appropriation bills and other related legislation. The Legislature analyzes the Governor’s budget, holds public hearings, and seeks further information from agencies. Following that review, both houses of the Legislature reach agreement on spending and revenue recommendations that may amend the Governor’s proposed appropriation bills and related legislation. It is possible that we may see some significant tax proposals arise during the process. The State’s fiscal year begins April 1, so the timeline for the Legislature to review the Budget Bill is compressed.

Decreases in revenue caused by the COVID-19 pandemic, coupled with the new Democratic supermajorities in both the New York State Senate and Assembly, may complicate negotatiations over budget legislation this year.

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