Tax Changes in the New York State 2004–2005 Budget

By Mark H. Levin

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Taxpayers Rights to Appeal Certain Notices

Among the various changes enacted in the budget act was an onerous administrative provision that potentially affects virtually all taxpayers. Previously, a taxpayer who received a notice of an additional amount due on a Notice and Demand, or a Notice of Additional Tax Due because of a mathematical or clerical error or failure to pay tax, was entitled to use the administrative appeals procedures, including hearings before the Bureau of Conciliation and Mediation Services (BCMS), the Division of Tax Appeals, and the Tax Appeals Tribunal.

By creating the new Tax Law section 173-A, the 2004 budget act eliminated a taxpayer’s right to a hearing if the taxpayer disagrees with a Notice and Demand or a Notice of Additional Tax Due because of a mathematical or clerical error. A taxpayer who wants to contest a Notice and Demand or a Notice of Additional Tax Due issued because of a mathematical or clerical error must first pay the tax due plus all interest and penalties included on that notice, then file a claim for a refund of the amount paid. When the refund claim is denied, the taxpayer may then proceed to request a hearing before BCMS or the Division of Tax Appeals. This provision creates an undue hardship for most taxpayers, who may have to obtain professional assistance to navigate these administrative appeal procedures.

Corporation Franchise Tax

Metropolitan Commuter Transportation District surcharge. The “temporary” 17% Metropolitan Commuter Transportation District surcharge, first effective for taxable years beginning on or after January 1, 1982, is extended to taxable years ending before December 31, 2009. This surcharge continues to be computed based on
the franchise tax rates in effect on June 30, 1998.

Fixed-dollar minimum tax. The fixed-dollar minimum tax is amended to apply as follows:

Gross payroll $250,000 or less $ 100
Over $250,000 but less 225
than $500,000
Over $500,000 but less than 325
$1 million
Over $1 million but less 425
than $6,250,000
Over $6,250,000 but less 5,000
than $25 million (formerly $ 1,000)
Over $25 million 10,000
(formerly $ 1,000)

The $800 fixed-dollar minimum tax remains in effect for corporations with:

• Gross payroll of $1,000 or less;
• Total receipts within and outside of New York of $1,000 or less; or
• An average value of assets of $1,000 or less.

The new rates are effective for taxable years beginning on or after January 1, 2004, and expire for taxable years beginning on or after January 1, 2006.

Personal Income Tax

Taxation of nonresidents on the gain on the sale of co-op shares. Nonresidents who sold or will sell, convey, or otherwise dispose of shares of stock in a cooperative housing corporation (co-op) in 2004 and thereafter will be subject to personal income taxation on the gain on the sale. This change eliminates the disparity in sales treatment between co-ops and condominiums.

Also, effective November 18, 2004, nonresidents who sell, convey, or otherwise dispose of shares in a co-op located in New York State will be required to pay estimated tax on the gain on the sale, conveyance, or other disposition in the same manner as currently applies to sales of real property.

The tax will be due at the closing, along with Form IT-2664, and will be computed at the highest personal income tax rate in effect at the time of sale.

Long-term care insurance. The credit for long-term care insurance is increased to 20% (formerly 10%) of the premiums paid. This increase is effective for premiums paid in tax years beginning after 2003.

Credits

Clean fuel vehicle credit. Effective for taxable years beginning on or after January 1, 2004, hybrid fuel vehicles will be removed from the definition of clean fuel vehicles eligible for the clean fuel vehicle credit. Hybrid fuel vehicles will remain eligible for the hybrid fuel vehicle credit.
Empire Zones. The qualification of an area as an Empire Zone shall remain in effect until March 31, 2005 (formerly September 13, 2004).

Empire State film production credit. A new 10% credit is available to a “qualified film production company” for “qualified production costs” expended in the production of a “qualified film” at a “qualified film production facility.” This credit is effective for costs paid or incurred in taxable years beginning on or after January 1, 2004, and will expire and be deemed repealed four years after such date.

A qualified film production company is a corporation, partnership, or other entity or individual that is engaged in the production of a qualified film at a qualified film production facility and controls the qualified film during the production. A qualified film production facility is a film production facility in New York State that contains at least one soundstage having a minimum of 7,000 square feet of contiguous production space. Qualified production costs are limited to the extent that such costs are attributable to the use of tangible property or used in the performance of services within New York State directly and predominantly in the production (including preproduction and postproduction) of a qualified film. Production costs generally include technical and crew production costs, such as expenditures for film production facilities or any part thereof, props, makeup, wardrobe, film processing, camera, sound recording, set construction, lighting, shooting, editing, and meals. Production costs do not include costs for a story, script, or scenario to be used for a film; nor do they include wages, salaries, or other compensation for writers, directors, music directors, producers, and performers (other than background actors with no scripted lines).

A qualified film is a feature-length film, television film, television pilot, or television episode, regardless of the medium in which the film, pilot, or episode is created or conveyed. A qualified film does not include a documentary film; news or current affairs program; interview or talk program; instructional program; film or program consisting primarily of stock footage; sporting event or sporting program; game show; award ceremony; film or program intended primarily for industrial, corporate, or institutional end-users; fundraising film or program; daytime drama (i.e., soap opera); commercial; music video; reality program; or a production for which performer records are required under USC 18 section 2257 (reporting with respect to sexually explicit conduct).

Estate Tax

Part I of the budget legislation amends the estate tax to address a likely unconstitutional calculation for estates with property in states other than New York. Previously, the credit for tax paid to other states was limited to either the share of property in other states or the amount of tax actually paid to other states. Because many states’ estate taxes are now lower than New York’s, this resulted in an inordinately high effective tax on non–New York property in certain cases.

Effective for estates of decedents dying on or after January 1, 2002, the credit for tax paid to other states is not limited to tax actually paid. Instead, the credit will be computed solely by multiplying the federal credit for state death taxes by the ratio of non–New York property to total property. The change will avoid the imposition of a potentially unconstitutional tax on non–New York property located in states with lower estate taxes than New York’s.

In addition, the legislation changes the date when interest begins to run for late payments made with extensions effective for estates of decedents dying on or after February 1, 2000. Interest will no longer accrue from the date of death, but instead will accrue from the date the return is actually filed, which can be extended to up to twelve months from the date of death.

Finally, effective August 20, 2004, the legislation repeals the obsolete former inheritance tax.

Sales Tax

Clothing and footwear exemption. The suspension of the exemption from sales and use tax for clothing and footwear costing less than $110 was again extended to June 1, 2005. At this date, clothing and footwear costing less than $110 will again be exempt from sales and use tax. In addition, the exemption will be suspended for the week of January 31, 2005, through February 6, 2005.

Aircraft maintenance exemption. Effective for sales made, services rendered, and uses occurring on or after December 1, 2004, but before December 1, 2009, certain costs incurred in the maintenance of an aircraft are exempt from sales and use tax. The exempt items include tangible personal property that becomes a component part of the aircraft, lubricant applied to the aircraft, and the cost of storage of an aircraft in conjunction with the servicing of the aircraft.

Refund or credit for certain vessels. Effective for sales made, services rendered, and uses occurring on or after December 1, 2004, parts, equipment, lubricants, diesel motor fuel, maintenance, servicing, and repair of certain vessels shall be eligible for a refund or credit of any sales or use tax paid. To qualify, the vessel must have a seating capacity of more than 20 passengers and be used for transportation on water of passengers for hire within New York State. The refund or credit is based on the percentage of total hours that the vessel is operated in New York State.

Petroleum Business Tax

Effective for fuel sold on or after November 1, 2004, aviation fuel (kero-jet and aviation gas) consumed on overflight miles on intra–New York State flights will be exempt from the petroleum business tax (PBT). While the overflight fuel consumed will be exempt from the PBT, fuel burned on takeoffs and landings on both interstate and intrastate flights from points within New York State remains subject to the PBT. Also exempt from the PBT, effective June 1, 2005, is aviation fuel used by airlines that service four or more cities within New York State with direct nonstop flights between these cities.

Provisions Affecting New York City

Tax debts owed to New York City. Effective August 20, 2004, the Commissioner of the New York State Department of Taxation and Finance is empowered to enter into a written agreement with the New York City Commissioner of Finance that will set forth the procedures for crediting any overpayment by a taxpayer and the interest thereon against City of New York tax warrant judgment debt owed by such taxpayer.

Depreciation on certain sport utility vehicles. Sport utility vehicles (SUV) placed in service in tax years beginning on or after January 1, 2004, weighing in excess of 6,000 pounds, must be depreciated subject to IRC section 280F as it applied on September 10, 2001. Upon the sale or other disposition of such SUV, a disposition adjustment (similar to the ACRS/MACRS disposition adjustment) will be made so that the gain or loss for New York City purposes shall be the same as for federal income tax. Contrast this with the complete disallowance of the IRC section 179 deduction by New York State.

Earned income credit. Effective August 20, 2004, New York City and all cities with a population of over 1 million are authorized to establish an earned income credit equal to 5% of the federal earned income credit against New York City’s and other cities’ resident income tax.

Payment of real property taxes by electronic funds transfer (EFT). Effective August 20, 2004, New York City may require the payment of real property taxes by electronic funds transfer where the annual real property tax liability is equal to or greater than $300,000.

Interest on underpayments. Effective November 18, 2004, a 6% floor is set on the underpayment rate for interest charged for the unincorporated business tax and the tax on foreign and alien insurers. This floor applies to any interest chargeable or due on taxes or any other amounts, or any portion thereof, which are due on or after August 20, 2004.

Real property tax rebates. Effective August 20, 2004, New York City and all cities with a population of over 1 million are authorized to issue a rebate of the residential real property tax in an amount not to exceed $400. This authorization expires for any real property tax fiscal year beginning on or after July 1, 2006.

Mortgage recording tax loophole closed. The 2004 budget amends the definition of a mortgage in New York City to include certain mortgages if the Commissioner of Taxation and Finance finds that transfer of one or both properties in connection with the recording of a spreading agreement or additional mortgage was undertaken to avoid or evade tax rather than for an independent business or financial purpose. Tax has previously been avoided by “spreading” an existing mortgage from one property with a mortgagor (owner) and mortgagee (lender) to another property with a different mortgagor and mortgagee. This change applies to mortgages recorded on or after November 18, 2004.