On April 6 & 7, 2021, the New York Assembly and Senate passed Fiscal Year 2022 budget legislation addressing revenues and taxation (the Budget Bill). The Budget Bill is part of a broader deal between Governor Cuomo and both chambers of the Legislature. The Budget Bill is expected to raise $3.5 billion in new tax revenue in FY 2022 and $4.3 billion in new tax revenue in FY 2023. Following is a brief summary of some of the tax provisions contained in (and excluded from) the Budget Bill:
Significant revenue raisers
- Personal income tax rate increases – For tax years beginning in 2021, the Budget Bill will increase the current highest marginal personal income tax rate from 8.82% to 9.65% for single filers reporting over approximately $1.1 million in taxable income, heads of households reporting over approximately $1.6 million in taxable income, and married filers reporting over approximately $2.15 million in taxable income. In addition, the Budget Bill establishes two new tax brackets: 10.30% for taxpayers reporting more than $5 million of taxable income and 10.90% for taxpayers reporting more than $25 million of taxable income. These personal income tax increases are scheduled to sunset after 2027.
- Corporate franchise tax increases – New York law currently requires corporate franchise taxpayers to calculate tax due under alternative methods and pay the highest amount of tax. These alternative methods have included: (1) a tax on business income; (2) a tax on business capital; and (3) a fixed dollar minimum tax.
- Business income rate increase – For tax years beginning on or after January 1, 2021, the Budget Bill will increase the corporate franchise tax rate on business income from 6.50% to 7.25% for taxpayers with business income greater than $5 million. This rate increase is scheduled to sunset after 2023.
- Revival of tax on business capital – The tax on business capital was scheduled to expire for tax years beginning on or after January 1, 2021. The Budget Bill, however, will revive this base for most taxpayers at a rate of 0.1875% (with liability under this method capped at $5 million). The revival of the capital base method is also scheduled to sunset after 2023.
- SALT cap workaround – The Budget Bill includes an optional pass-through entity tax on New York sourced income of partnerships and S corporations. The Governor’s January budget proposal included a similar optional pass-through entity election (see our prior Legal Alert), but the Budget Bill amends that proposal to (among other things) authorize elections by entities that have both individuals and entities as members, and to conform to the personal income tax rate increases included in the Budget Bill. These provisions will be effective for tax years beginning on or after January 1, 2021.
- COVID-19 related adjustments to tax benefit eligibility requirements – The Budget Bill will allow a taxpayer that required employees to work remotely as a result of the COVID-19 outbreak to treat those employees as having worked at the location they were working at prior to the outbreak for purposes of qualifying for tax benefits that are based on maintaining a presence within the state or within specific areas of the state. This provision will be deemed to be in full force and effect on or after March 7, 2020 and will expire on the sooner of (1) December 31, 2021, or (2) the expiration of the state’s declared disaster emergency related to COVID-19.
- Technical correction to sales tax remote vendor registration requirements – The Budget Bill makes technical corrections to the sales volume threshold that triggers New York’s remote vendor sales tax registration and collection, confirming the $500,000 requirement is determined over the previous four sales tax quarters. These corrections will be effective immediately upon enactment.
- Extension and amendments of film tax credit programs – The Empire State Film Production Credit and Post Production Credit will be extended one year to taxable years beginning before January 1, 2027, and eligibility will be expanded to work performed in certain New York counties that had not previously been eligible.
- 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 will 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 will 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 will 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.
Separately, while the Governor had proposed legalizing adult-use cannabis in his January budget proposal, the Legislature passed and the Governor signed a separately negotiated legalization bill last month.
The Budget Bill did not include several items in the Governor’s January budget proposal or in prior proposals from the Legislature.
The Budget Bill omitted the proposal from the Governor’s January budget legislation that would have allowed the New York State Department of Taxation and Finance to appeal Tax Appeals Tribunal decisions to the Appellate Division, Third Department. Under current (and continuing) law, only the taxpayer may appeal a Tax Appeals Tribunal decision. In addition, the Budget Bill does not include proposals that would have: (1) required all federal subchapter S corporations to be treated as subchapter S corporations for State tax purposes; (2) delayed previously approved middle class personal income tax cuts; (3) extended the time in which the Department of Taxation and Finance must issue sales tax refunds from three months to six months; and (4) subjected vacation rentals to sales tax.
Finally, a number of especially troublesome legislative proposals were not included in the Budget Bill, including: (1) the creation of a digital advertising or data tax regime; (2) a revival of the stock transfer tax; (3) a new capital gains tax on high earners; and (4) increases to the estate tax.