Tax Committee Update
September 16, 2010
Staff Contact: Ken Pokalsky
- Expense Attribution Update
- Excelsior Tax Credit Regulations / Applications Released
- NYS Senate Sales Tax Report
- State Comptroller's Review of FY 2011 State Budget
The Department's draft Article 9-A/Article 32 bill offers taxpayers an election of either “computing actual interest expense” attributable to exempt investment and dividend income [using existing DT&F guidance] or claiming a 60 percent deduction (and 40 percent expense attribution).
This proposal raises a number of concerns regarding the appropriateness of both the 40 percent default attribution percentage and the Department's existing guidance on attribution of interest expense. The Department has conceded that their proposed 60 percent deduction is not based on any “data,” but is carried over from existing Bank Tax provisions.
Recently, several TBC Tax Committee members met with Department staff to discuss inclusion of what we believe is a more appropriate safe harbor percentage in their draft bill, as well as the interim step of updating TSB-M-88(5)C. The meeting was attended by Rob Plattner, Ron Ginsberg (who announced his retirement from DT&F effective the end of September) and several other Department staff, as well as members of our informal expense attribution work group.
In short, the Department rejected any significant change to the safe harbor percentage in their draft bill, arguing that: (a) any significant reduction (e.g., to 5 percent, a figure used by a number of other states) would have a significant impact on revenues (in the nine figure range); and (b) no one has provided “credible evidence” to justify a lower number. They also oppose the setting of different safe harbor percentages for different industries or sectors, and would not agree to a review of Department data and/or audit outcomes to help illustrate.
They did agreed to move forward with updates to TSB-M-88(5)C regardless of action on their proposed reform legislation, and at minimum said they would reduce their attribution ratio numerator and denominator amounts for directly traced liabilities. While not provided for in the “M,” the Department said that this approach is commonly used in audit. They also asked for input on whether any federal methodology used to compute or determine foreign source net income would be applicable to apply to the state's expense attribution calculation.
We are looking for input from additional Tax Committee members on both proposed changes to TSB-M-88(5)C as well as the possible statutory treatment of expense allocations.
Empire State Development Corporation has issued emergency rules to implement the recently enacted “Excelsior” tax credit program, as well as program application material. Under the state's rulemaking procedures, these Emergency Rules take effect immediately; they will be published in an upcoming State Register, and will be subject to a formal public review and comment period prior to being adopted on a permanent basis.
Most provisions of the emergency rule are drawn directly from the statute (see S.6609-A/A.9709-C, Part MM). Significant new language includes:
- Additional criteria for evaluating program applications, including whether the project uses previously developed property, the energy efficiency of the project, its consistency with “smart growth” principles (the rule contains a new definition of “smart growth”), the likelihood that the project would have been located outside New York without state or local incentives, and others. (Note that the statute gave ESDC general authority to adopt regulations establishing eligibility criteria.)
- A new definition of “significant capital investment,” which will have the effect of imposing additional requirements for qualifying as a “regionally significant project.”
- A new definition of “high value-added products” that will help define assembly operations that meet the Excelsior programs eligibility criteria for “manufacturing.”
ESDC recommends that interested businesses contact the ESD regional office regarding their plans for expansion or growth, and to help determine Excelsior program eligibility and the maximum tax credits that may be available.
The Business Council has a number of concerns with the statute, which carry forward in to the implementation rules. These include unclear eligibility criteria, a poorly designed real property tax credit and others.
The Business Council will be developing comments on these Excelsior program regulations, and welcomes your input. Please feel free to contact me by phone or email to discuss this program and its implementation.
Senator Liz Krueger has issued a new report on reforming the state's sales tax, based in part on input from a roundtable discussion in June sponsored by her Select Committee on Budget and Tax Reform. Its “conclusions” were that New York:
- Needs to simplify its sales tax system, and consider the national “Streamlined Sales and Use Tax Agreement.”
- Should extend the state sales tax to some additional categories of services, at least including those covered by the New York City sales tax (including credit rating/reporting services and a number of personal care services.)
- Makes the state sales tax “more progressive.” While it contains no specific recommendations on how to do so, the report states that recently enacted sale tax exemptions have favored higher income households and “non-core industries.”
Moreover, the report laments the current array of sales tax exemptions, saying that they cost the state $6.5 billion in lost revenues this year. No legislation has yet been introduced to implement the reports' conclusions.
Note that New York was “authorized and directed” to enter into the streamlined sales tax agreement by legislation adopted in 2003 (see Article 28-A of the Tax Law); however, the state has not done so. The Council has not addressed this issue in recent years, and we welcome member input into the streamlined sales tax issue.
State Comptroller Tom DiNapoli has issued his office's Report on the State Fiscal Year 2010-11 Enacted Budget, and it presents a dismal view of the state's financial conditions.
Overall state spending increased by $9 billion or 7.1 percent to $136 billion, driven in part by a $4 billion increase in federal stimulus funds. When adjusted for payments delayed from the prior fiscal years, the spending increase is “just” $4.9 billion or 3.8 percent – still more than three times the current inflation rate.
While the legislature adopted a “balanced” budget for FY 2011, the Comptroller has identified $3.4 billion in revenues and savings that are unlikely to fully materialize. Moreover, the report calculates the current budget includes nearly $17 billion in temporary or nonrecurring resources – the bulk of which are federal stimulus funds ($6.0 billion) and the state's temporary personal income tax increases ($5.7 billion).
Looking forward, the Comptroller is projecting a structural $8.3 billion gap for the Fiscal 2012 budget, and an aggregate budget gap of more than $37 billion over the next three budgets.