Provisions of the 2005/2006 New York State Budget
Mark H. Levin
OCTOBER 2005 - On
March 31, 2005, the New York State Legislature passed the
state budget before the constitutionally mandated April 1
deadline for the first time in 20 years. The changes to the
New York Tax Law contained in the 2005/2006 Budget Act include
changes to corporate taxes, sales taxes, and provisions applying
to tax administration.
Business Franchise Tax
sales. The four-factor formula used in computing
the business allocation percentage was repealed and replaced
with a single-factor sales formula that will be phased in
over a three-year period, beginning with taxable years beginning
on or after January 1, 2006, as follows:
Year Beginning on or After:
base maximum tax. For taxable years beginning
on or after January 1, 2005, the tax-on-capital ceiling
of $350,000 will be raised to $1 million for all taxpayers
except manufacturers, for whom the ceiling remains at $350,000.
For the purposes of the capital base tax, a manufacturer
is defined as a taxpayer principally engaged in the production
of goods by manufacturing, processing, assembling, refining,
mining, extracting, farming, agriculture, horticulture,
floriculture, viticulture, or commercial fishing.
corporate franchise tax rate. For taxable
years beginning on or after January 1, 2005, the 6.85% rate
will apply to business corporations with entire net income
(ENI) of $290,000 or less. For business corporations with
ENI between $290,000 and $390,000, the 6.85% rate is phased
out as follows: The tax will be the sum of $18,850, plus
7.5% of the excess of the ENI base over $290,000, plus 7.25%
of the excess of the ENI base over $300,000 but not over
$390,000. Business corporations whose ENI base exceeds $390,000
will be taxed at the regular rate of 7.5%.
sales factor. The four-factor formula used
in computing the allocation percentage was repealed and
replaced with a single-factor sales formula. The new single-factor
formula will be phased in over a three-year period, beginning
with taxable years beginning on or after January 1, 2006,
Year Beginning on or After:
Deposits In-State Factor
liability companies (LLC) and limited liability partnerships
(LLP). The temporary increase in the LLC/LLP
fee to $100 per member (with a minimum of $500 and a maximum
of $25,000), which had been scheduled to revert to prior
levels for 2005, was extended to tax years 2005 and 2006.
The single-member LLC fee remains at $100. These increased
fees are scheduled to expire for taxable years beginning
on or after January 1, 2007.
additional mortgage recording tax credit.
Effective for eligible mortgages recorded on or after January
1, 2004, this credit [Tax Law section 606(f)] was extended
to allow a personal income tax credit equal to the amount
of the special additional mortgage recording tax paid against
the personal income tax. Formerly this credit was allowed
only to corporations. Individuals that are partners in a
partnership may use their pro rata share of the special
additional mortgage recording tax paid by the partnership
against their personal income tax. This credit will not
be allowed for any special additional mortgage recording
tax paid with respect to a mortgage of real property principally
improved by one or more structures containing in the aggregate
not more than six residential dwelling units, each dwelling
unit having its own separate cooking facilities, where the
property is located in the Metropolitan Commuter Transportation
District or in Erie County.
housing credit. The Commissioner of Housing
and Community Renewal was authorized to allocate an additional
$2 million of low-income housing tax credits. The additional
allocation increased the total allocation to $8 million
Capital Company Program Five. Effective April
12, 2005, and deemed to have been in effect on and after
April 1, 2005, the program that provides insurance franchise
tax credits (Article 33) with respect to investments in
certified capital companies (CAPCO) was expanded through
the creation of Certified Capital Company Program Five.
Under this new program, the aggregate amount of certified
capital for which tax credits are allowed could not exceed
$60 million for 2007. The certified capital could be invested
in CAPCOs beginning in 2005, and credits would be allocated
and vested in certified investors at the time of the investment.
The credits will not be allowed for state tax purposes before
tax years beginning in 2007.
of CAPCO tax credits. A taxpayer allowed a
CAPCO tax credit is permitted to transfer or sell such credits,
in whole or in part, to any affiliate subject to the insurance
franchise tax. An affiliate is defined for these purposes
in IRC section 1504, including insurance companies, but
substituting a 50% voting and value test for the 80% voting
and value test in IRC section 1504(a)(2).
a taxpayer transfers or sells a CAPCO tax credit, it must
notify the New York State Department of Taxation and Finance
and the Insurance Department of the transfer or sale within
45 days. This provision applies to all credits transferred
on or after August 1, 2003.
Zones. The act authorized 12 new Empire Zones,
changed the benefit formulae prospectively, and extended
the Empire Zone program for six years, to June 30, 2011.
The act also reformed the administration of the Empire Zone
buildings. Period 2 of the green buildings
tax credit was created, extending the original green buildings
tax credit passed in the 2000/2001 Budget Act. Initial credit
component certificates for period 2 may be issued in 2005
through 2009. Such certificates for period 2 may not be
issued, in the aggregate, for more than $25 million worth
of credit components. The total amount of the credit component
allowable for the five taxable years for which the credit
components are allowed, as set forth on any one initial
credit component certificate, is limited to $2 million.
A taxpayer that is the owner or tenant of more than one
building that qualifies for the green buildings tax credit,
however, may be issued initial credit component certificates
with respect to each building, with the aggregate amount
of credit components permitted for each such certificate
being $2 million.
that is the owner or tenant of a building for which an initial
credit component certificate was issued for period 1 will
not be issued an initial credit component certificate with
respect to such building for period 2.
changes are effective for years beginning on or after January
1, 2005. Certificates for period 2 shall be limited in their
applicability as follows:
Years Beginning in:
Maximum Credit Components
emerging-technology company facilities, operations, and
training credit. Effective for years beginning
on or after January 1, 2005, the act creates a new refundable
credit for qualified emerging-technology company facilities,
operations, and training. The credit applies to certain
research-and-development property, research expenses, and
high-technology training expenditures. The credit is calculated
for each credit component separately, and aggregated for
application against the tax. Eligible taxpayers may generally
claim the credit for four consecutive years. Taxpayers located
in an academic incubator that relocate to a nonacademic
incubator within New York State are allowed to claim the
credit for one additional year.
eligible taxpayer is defined as a taxpayer that has:
No more than 100 employees, of which at least 75% are
employed in New York State;
A ratio of research-and-development funds to net sales
that equals or exceeds 6% during the taxable year; and
Gross revenues that, along with those of its affiliates
and related members, do not exceed $20 million for the
taxable year immediately preceding the taxable year in
which the taxpayer claims the credit.
rates of credit are as follows:
Research-and-development property: 18% of research-and-development
property as defined for the investment credit.
n Qualified research expenses: 9% of qualified research
expenses, which include expenses associated with in-house
research and processes, and costs associated with the
dissemination of the results of such products of research-and-development
activities (not including advertising or promotion through
the media). In addition, costs associated with the preparation
of patent applications, patent research fees, patent examination
fees, patent post-allowance fees, patent maintenance fees,
and grant application expenses and fees are all considered
eligible expenses. Eligible expenses do not include expenses
involving litigation, the challenge of another entity’s
intellectual property rights, or contract expenses involving
Qualified high-technology training expenditures: up to
$4,000 per eligible employee per taxable year for qualified
high-technology training expenditures paid during the
taxable year. Qualified high-technology training expenditures
include a course or courses taken at an accredited, degree-granting
post-secondary college or university in New York State
that is related to the research-and-development activity
and intended to upgrade, retain, or improve the productivity
or theoretical awareness of eligible employees. Such course
or courses may include, but are not limited to, instruction
or research relating to techniques; macro, metatheoretical,
or practical knowledge bases or frontiers; or ethical
concerns related to eligible activities. Eligible coursework
does not include classes in the disciplines of management,
accounting, or law, or classes designed to fulfill the
discipline-specific requirements of a degree at the associate,
baccalaureate, graduate, or professional level of those
total value of these credits may not exceed $250,000 per
eligible taxpayer per taxable year.
of the temporary rate increase. The temporary
rate increase enacted in 2002 will be allowed to expire
as scheduled for tax years beginning on or after January
care insurance (LTCI) tax credit. Effective
for LTCI premiums paid on or after January 1, 2005, nonresidents
and part-year residents must limit the LTCI tax credit by
multiplying the full 20% credit by the same New York–source
fraction used in reducing the total New York State tax,
computed as if a resident, to the amount attributable to
the New York–source income. Previously, both nonresidents
and part-year residents were able to take the full 20% credit
without limitation based on New York–source income.
and Use Tax
The budget once again postponed the reinstatement
of the sales-and-use-tax exemption for clothing and footwear
costing less than $110 until April 1, 2006.
tax rate. The temporary 0.25% sales tax increase
enacted in 2003 was allowed to expire as originally scheduled.
Effective June 1, 2005, however, the Metropolitan Commuter
Transportation District (MCTD) surcharge will increase by
0.125%, causing the MCTD surcharge to rise from 0.25% to
legislation provides that, effective September 1, 2005,
all clothing and footwear, and items to make or repair clothing,
costing less than $110 per item, will be exempt from the
4% New York City sales and use taxes.
and gasoline sold by Native Americans. Effective
for sales made on or after March 1, 2006, Native Americans
will be required to collect sales taxes on the sale of cigarettes
and gasoline to non–Native Americans, with the caveat
that a tribe can reach an agreement with the state that
may supercede this requirement. Such an agreement must be
ratified by the legislature.
electronic filing. Tax-return preparers that
prepared more than 200 original personal income tax returns
during 2005 must, if they are preparing one or more original
returns using tax software for the 2005 tax year, file all
authorized returns electronically for the 2006 tax year
and thereafter. The 200-return threshold will be lowered
to 100 original returns for calendar years beginning after
2005. The number of returns is calculated at the entity
level. Thus, if an entity has multiple employees working
on returns at several locations, the total number of returns
prepared by all employees at all locations determines whether
the entity is required to file electronically. Preparers
that do not use tax software to prepare any New York State
personal income tax returns are not required to file electronically.
original return is defined as any personal income tax return
that is filed, without regard to extensions, during the
calendar year for which that return is required to be filed.
An authorized return is defined as any personal income tax
return that the Commissioner of the Department of Taxation
and Finance has authorized to be filed electronically.
of this writing, Department of Taxation and Finance spokespersons
have indicated that the mandatory electronic filing requirement
will apply to all personal income tax returns, both resident
income tax returns (Form IT-201) and nonresident/part-year
income tax returns (Form IT-203). In addition, as a transitional
rule for tax year 2005 only, any personal income tax return
filed by mail that contains the 2D-bar code cover sheet
will be considered electronically filed.
an electronically filed return cannot contain a manual signature,
the Department of Taxation and Finance is developing an
authorization form that the taxpayer must sign before the
electronic return may be transmitted. This authorization
form will constitute a digital signature and is to be retained
by the preparer. Taxpayers will have the option of electing
not to have their return filed electronically. A new opt-out
form is being developed that must be signed by the taxpayer
and retained by the preparer as proof of the opt-out election.
the Department of Taxation and Finance is currently requiring
the electronic filing of only resident and nonresident/part-year
income tax returns, the Budget Act authorizes it to ultimately
require the filing of all returns required under Tax Law
Article 22. This would also include returns for partnerships
(Form IT-204) and for trusts and estates (Form IT-205).
required to file electronically that use tax software packages
that will not support electronic filing must switch to a
software package that supports electronic filing.
disclosure. The budget now requires tax preparers
of returns under Articles 9, 9-A, 22, 320, and 33 to report
to the New York State Department of Taxation and Finance
any reportable transactions that are required to be reported
to the IRS. A copy of the federal Form 8886 must be sent
to the New York State Department of Taxation and Finance
for each taxpayer involved in any federal reportable transaction
during the year. The six categories of federal reportable
Transactions with contractual protection;
Transactions with a significant book-tax difference; and
Transactions involving a brief asset-holding period.
act also permits the Commissioner of the Department of Taxation
and Finance to prescribe by regulation New York reportable
transactions. New York reportable transactions are to be
reported on a form to be provided by the Department of Taxation
and Finance. It imposes the same tax-shelter recordkeeping
requirements on material advisors and tax-shelter promoters
as required by the IRS for both federal and New York State
act also provides penalties for noncompliance for both preparers
and taxpayers for reportable transaction understatements
and nondisclosure. The commissioner has the power to rescind
all or any portion of any penalty for reportable transaction
or recordkeeping requirements if the violation is for a
reportable transaction other than a listed transaction,
and if rescinding the penalty would promote compliance with
the tax-shelter reporting and recordkeeping requirements.
addition, the act provides for an extended statute of limitations
for assessments related to tax-avoidance transactions.
Department of Taxation and Finance will prepare a written
report showing the effect of the tax-shelter provisions,
to be delivered to both the President of the New York State
Senate and the Speaker of the Assembly no later than April
tax-shelter disclosure provisions are effective April 13,
2005, for listed transactions that a taxpayer participated
in at any time that were required to be reported to the
IRS. However, the act applies only to those reportable transactions
other than listed transactions in which a taxpayer participated
during any taxable year for which the statute of limitations
for assessment has not expired as of April 13, 2005. It
is effective for all other items on June 12, 2005.
above tax-shelter reporting provisions will be deemed repealed
on July 1, 2007.
April 12, 2005, the Commissioner of the Department of Taxation
and Finance is authorized to enter into reciprocal tax offset
agreements with the City of New York and with other states.
act makes permanent the reporting requirements of Manhattan
parking vendors. These requirements expired on November
The act extends the authorization of the Division of the
Lottery to operate Quick Draw for one year, until May 31,
2006. It also alters the distribution of revenues from video
H. Levin, CPA, is manager, state and local taxes,
at H.J. Behrman & Company, LLP, New York, N.Y.