New York Legislature Enacts Major Tax Overhaul

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By Gerald B. Silverman

New York state lawmakers have approved the most significant overhaul of the state tax code in decades in response to federal changes that limited deductions for state and local taxes.

Both houses of the Legislature approved an omnibus budget bill ( S. 7509) March 30 that creates a voluntary payroll tax to shift tax liability away from the personal income tax. The measure also creates two statewide charitable funds to support health care and education programs, and allows local governments to create their own funds to shift liability away from the property tax.

The changes are in response to the 2017 federal tax act’s (Pub. L. No. 115-97) $10,000 cap on the state and local tax (SALT) deduction.

The bill will be signed by Gov. Andrew M. Cuomo (D), who has made the SALT workarounds one of his signature issues. The new $10,000 federal limit on the SALT deduction would have cost state taxpayers an estimated $14 billion, according to Cuomo.

The budget bill, which is for the fiscal year that began April 1, also decouples the state personal income tax from the federal tax code to address tax conformity issues that would have raised state taxes by $1.5 billion.

While approval of the tax bill was a big victory for Cuomo, the Legislature rejected a number of his other tax proposals. The budget approved by lawmakers didn’t include Cuomo’s proposal to close the carried interest “loophole,” nor did it include Cuomo’s plan to tax online marketplaces.

SALT Workarounds

Cuomo’s SALT workarounds will put the state in uncharted territory and will be closely watched by businesses, budget watchdogs, and tax practitioners.

“We will maintain our wait-and-see approach to the state’s SALT-mitigation plan,” Heather C. Briccetti, president and CEO of the Business Council of New York State, said in an April 2 statement.

“In our own discussions with employers, we did not receive positive feedback on the payroll tax proposal, although we do appreciate that the final language made it optional,” she said. “The effect of the charitable giving gambit is ultimately dependent on IRS determination as to its deductibility.”

Kenneth Pokalsky, vice president of the Business Council, told Bloomberg Tax that businesses would be pushing lawmakers over the next several weeks to decouple provisions of the state code for businesses from the federal code. He said the budget only partially decoupled provisions regarding transition income and the cap for interest expenses.

Among the key business tax issues that businesses want addressed during the remaining 2018 legislative session is creation of an unincorporated business tax to preserve deductibility for pass-through businesses and global intangible low taxed income (GILTI), according to Pokalsky.

Online Marketplace Tax

Online retailers like Amazon.com Inc. fought off Cuomo’s third attempt to require online marketplace providers collect and remit sales tax when they facilitate a third-party sale to New York residents. Similar efforts by Cuomo failed to pass the Legislature in 2016 and 2017.

John Olsen, director of northeast states for the Internet Association, said Cuomo’s plan would have made it “harder for the most innovative companies to grow and succeed in the Empire State.” He urged the governor and Legislature to wait until the U.S. Supreme Court decides the South Dakota v. Wayfair case—a challenge to the federal case law that bars states from imposing sales tax collection duties on companies without an in-state physical presence.

Good government and budget watchdog groups criticized the budget for failing to provide greater transparency for state tax breaks and other economic development incentives. They called for a “database of deals” modeled after laws in Florida, Maryland, and Indiana that provide detailed information on incentives, jobs created, and costs per job.

To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y., at gsilverman@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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