Tax–Related Issues in TBC Budget Testimony
February 29, 2016
The following provides the tax-related provisions included in The Business Council’s February 2 testimony to the joint Senate Finance/Assembly Ways and Means Committee hearing on the Executive Budget. Importantly, it provides our comments on tax law changes proposed in the Executive Budget, and includes several additional tax reform proposals that have been raised by Business Council members. Our full budget testimony, and other budget related information, is available on our web site.
As always, we appreciate this opportunity to address members of the Senate Finance and Assembly
Taxation and Tax Credits
The Executive Budget contains several important tax reform proposals, and we are recommending a number of additional reform proposals and technical amendments that will address unintended consequences in the state’s tax code and – in general – will have minimum impact on projected state revenues.
Small business tax rate reduction
We support the Executive Budget proposal (S.6409/A.9009, Part R) for small business tax relief under both the corporate franchise tax and the personal income tax. This proposal would:
- reduce the entire net income based tax rate for small business under the corporate franchise tax from 6.5% to 4%, effective for the 2017 tax year. This rate reduction applies to incorporated small businesses with less than 100 employees and less than $1 million in capital, and with a business income base under $290,000. The rate reduction phases out for taxpayers with business income base under $390,000.
- expand the personal income tax business income exclusion from 5% to 15%, makes the exclusion available for members, partners, and shareholders of LLCs, partnerships and sub-S corps in addition to sole proprietors. It is applicable for taxpayers with net business or farm income under $250,000 and where the income is derived from an entity with gross business income under $1.5 million (or $250,000 for a farm business.)
Combined these two components would provide about $300 million in annual tax relief to small business.
We support this approach, and agree with its basic structure. However, we would recommend increasing the income cap under both proposals, to at least $500,000. This proposal is a necessary next step in business tax reform. The 2014 CFR reforms, and the 2015 New York City conformance legislation mostly addressed tax issues affecting public traded corporations. Most small business are set up as pass-through entities that pay the bulk of their business income tax under the personal income tax.
CFR Technical Amendments
The Business Council was a strong supporter of the corporate franchise tax reform and restructuring legislation adopted in 2014. That legislation, when fully implemented in the 2016 tax year, will streamline compliance obligations for business, and lower business taxes by an estimated $600 million per year.
As taxpayers gain experience in filing under the new regime, the need for several technical amendments has been identified. Importantly, for most of these, there is no additional revenue loss for the state, because the provisions of concern are having unintended consequences that were never envisioned to generate revenues for the state.
We support the Executive Budget provision (S.6409/A.9009, Part Y) to amend the definition of “qualified financial instrument,” which excludes stock that generates “other exempt income” and is not market to market. When 2015 Article 9A amendments modified the definition of QFI to include certain stock not marked to market, the amendments excluded stock that qualifies as investment capital but did not include stock that generates other exempt income. This could include stock of a subsidiary that could not be included in a combined report that generates dividend and/or subpart F income. This proposed amendment would assure that such income is treated as exempt investment income rather than taxable business income.
We also urge that several other technical amendments be adopted as part of the final budget.
- Amend the Article 9-A definition of “investment income” that limits investment income to eight percent of a taxpayer’s entire net income. In 2015, the legislature adopted a provision in both Article 9-A and the revamped New York City general corporation tax that limited non-taxed “investment income” to eight percent of “entire net income” as a means to limit potential revenue loss to New York City. While this proposal was expected and intended to apply to a very limited number of taxpayers, its practical impact is far broader, imposing increased liability on taxpayers that were never intended. We have proposed several alternative fixes, including making the cap applicable only to taxpayers meeting the definition of “financial corporation” included in the 2015 New York City conformance legislation (e.g., combined group with total assets over $100 billion with more than 50% of receipts allocated to the [state]). This approach would provide compliance relief to taxpayers hit with unintended restrictions on their treatment of investment capital and investment income, and avoids imposing any adverse tax consequence on other taxpayers.
- Modify or repeal the requirement that, to be considered as “investment capital,” stock must be identified on the day of its purchase as being held for investment purposes consistent with IRC Section 1236(a)(1). This specific provision is unnecessary given other criteria in the definition of investment capital, and repealing it will avoid untended, adverse tax consequences for taxpayers. The 2014 Article 9-A reforms eliminated the state’s unique exemption for subsidiary income, and replaced it with a more typical regime of taxable business income and exempt investment income, with a narrow definition of investment income that limited the exemption to income from stock holdings. This definition applies a five part test, the first four tests being that the stock must meet the IRC definition of capital asset, the stock must be held for more than one year, proceeds from stock sales must be treated as long term gains or losses, and were not held for sale to customers. The fifth prong requires that, for stock purchased after October 1, 2015, the taxpayer identify it as being held for investment purposes by the close of the business day on which the stock was purchased, and is the most problematic. As example, if an taxpayer does not take this step on the date of purchase, that stock is categorically precluded from ever being treated as investment capital regardless of its compliance with the other four criteria, and the statute provides no remedy to address any such oversight. Likewise, if a New York taxpayer purchases a non-New York taxpayer business that owns investment capital, the law provides no mechanism for such investment capital to be recognized as such. Similarly, a business that is not a New York taxpayer on the date of a stock acquisition but becomes a New York taxpayer by moving into or otherwise creating nexus with New York would be unable to take advantage of the investment capital provisions.
We believe that a four criteria test is sufficient, and the day of purchase identification criteria can be repealed with no loss of intended state revenues and no significant diminution of the Department’s audit authority, and with significant easing of taxpayer compliance hurdles. Note that these same concerns, and same recommendations, apply to a comparable provision in New York City’s revamped general corporation tax.
Allow a taxpayer to elect to compute its base business allocation percentage (“BAP”) for the prior net operating loss conversion subtraction amount (“PNOL”) based on an average BAP over a prior period (ten to fifteen years) ending with the 2014 tax year as an alternative methodology of calculating the PNOL. This is in response to circumstances where a taxpayer’s 2014 business allocation was a significant departure from typical prior years. One of the more complicated provisions of the 2014 reforms was the conversion of pre-2014 net operating losses into post-reform NOL credits, or PNOLs (prior net operating loss conversion subtractions). Some conversion provisions was necessary to allow for the applicability of NOLs created under one tax regime to income generated under a significantly revised regime, and the legislature adopted provisions that used a taxpayer’s “business allocation percentage” or BAP, for the 2014 tax year as the basis for calculating the future credit value of pre-2014 net operating losses. For taxpayers whose 2014 apportionment was not typical of its business presence during the years in which the operating losses were incurred, this calculation results in the unintended loss of value for these deferred tax assets. To address this concern, we recommend the adoption of an election for a taxpayer to apply an alternative BAP based on their average allocation over a multi-year period.
Urban Youth Jobs Tax Credit Program
We support the proposal (S.6406/A.9006, Part L) to increase the credit amount for “urban youth jobs program tax credit”) with an additional $30 million in tax credit authority for both 2016 and 2017, along with authorization that in each year up to $10 million in credits can be applied anywhere in the state. This program has provided valuable support to employer’s efforts to provide job opportunities for at-risk youth. Not only does this proposal increase to total state resources available for the program, but it also makes funding available to areas of the state previously excluded from eligibility.
We support the Executive Budget proposal (S.6409/A.9009, Part Y) that would prohibit the consideration of contributions to New York State charitable organizations in determining domicile under the Estate Tax. A similar prohibition was adopted under the state’s personal income tax law more than twenty years ago. These proposals are intended to eliminate a potential disincentive against continued financial support of New York charities and organizations by New Yorkers’ that have relocated out of state. We have heard from tax practitioner that this issue has come up in estate tax cases, even though consideration of charitable contributions is contrary to Tax Department policy. This statutory amendment would eliminate any ambiguity, and would avoid the chance of unintended disincentives against the support of New York State charities.
Other Tax Reform Proposals
We have several other tax reform recommendations for consideration in the development of the FY 2017 state budget.
- We support a repeal of legislation adopted in 2010 that extends the state’s “false claims act” to certain tax cases (i.e., when the taxpayer has net income of at least $1 million and the alleged violation is valued at $350,000 or more.) The problem with the false claims act is that it allows a private party to pursue a tax claim even in cases where the Department of Taxation and Finance, and the state Attorney General, have not found a reason to pursue a case. As result, a private party has a significant financial interest (up to 30 percent of any recovery) in pursuing a claim. Give the Department of Taxation and Finance’s extensive legal authority and staff resources to conduct audit and enforcement actions, we see no valid reason for this extension of the false claims act into the Tax law.
- We are proposing to repeal language (Tax Law § 1134) that can be the basis for imposing sales tax nexus on a non-New York taxpayer business based solely on their having purchasing agent travel to New York State to purchase products for resale. This provision states that “. . . every person purchasing . . . tangible personal property for resale . . . shall file with the commissioner a certificate of registration [as a sales tax vendor].” As we see other states affirm that purchasing agent presence alone is an insufficient basis for imposing sales tax collection obligations on a business, this provision of New York’s tax law can be a disincentive for an out of state business to purchase goods from New York manufactures.
- Last, but certainly not least, the state should avoid the final $200 million cost on business and residential taxpayers under the “Section 18-A” assessment. We recommend repealing the final .73% assessment for 2016. Repealing this assessment effective January 1, 2016 will avoid the final round of what is, in effect, a gross receipts tax on energy sales and a direct pas through to utility customers.
In addition, we are also opposing the addition energy assessment proposed in S.6408/A.9008, Part J. This would authorize the Public Service Commission to establish an assessment up to $19.7 million on gas and electric customers. The funds collected would be transferred to the New York State Energy Research Development Authority (NYSERDA) for research, development and demonstration, policy, planning and the NY Fuel Program; Department of Environmental Conservation (DEC) climate change program; and the University of Rochester laboratory for laser energetics. This special assessment is in addition to the Section 18-a assessment and others.