This article covers recent updates and developments in the New York State and City tax areas.
There wasn’t much in the way of substantive New York tax changes in the 2017 budget bill that Governor Andrew Cuomo signed in April. Or at least wasn’t much in the way of changes that affect the day-to-day practices of the average practitioner. But one important change relates to personal income tax rates: The budget provided that the rate for married taxpayers in the $40,000 to $150,000 income bracket will drop to 6.33% in 2018, eventually decreasing to 5.5% by tax year 2024. For married taxpayers in the $150,000 to $300,000 income bracket, rates will drop to 6.49% in 2018 and to 6% by 2024. For those taxpayers in the $300,000 to $2,000,000 bracket, the rate will remain the same at 6.85%. The so-called millionaire’s tax rate of 8.82% will, however, sunset after the 2017 tax year, as provided by prior law. But don’t run to your wealthy clients and give them the good news—there’s already speculation that a continuation of the millionaire’s tax rate will be addressed in subsequent litigation.
On the estate tax side, there was an interesting change in the residency area, which many of us who handle these cases found interesting. The budget eliminates charitable giving as a factor for determining domicile under the estate tax. This issue was actually addressed 20 years ago in personal income tax law, after some auditors took the position that a taxpayer’s charitable contributions to New York charities should be a factor weighing against them in a New York residency audit. For obvious policy reasons, the state thought this was a bad idea and—in 1995—enacted New York Tax Law section 605(c) to clarify that charitable contributions should not be factored into a determination of the taxpayer’s domicile.
Over the years, we’ve used this in many cases and have even successfully argued that time spent in New York for charitable purposes should not be counted against the taxpayer for domicile purposes. For whatever reason, no change was made in the estate tax law. I never got the sense in my practice that this was a hot issue on the estate tax side; indeed, there seems to be a lot less auditing on the residency issue for estate tax purposes than for personal income tax purposes. Whatever the case, this year’s budget addressed this issue for estate tax purposes. Charitable contributions should no longer impact domicile determinations in either the personal income tax or estate tax area.
Other than that, there were no other broad-based changes. There were issues related to tax credits for beer production, new refundable farm workforce retention credit, as well as clarifications on filing dates for various New York State and City business taxes. All of these changes are outlined here, in a summary document put together by the Tax Department. The same goes for the sales tax area, where a few particular changes were made related to room remarketers and sales of fuel for use in commercial aircraft as well as commercial fuel electricity generating systems equipment.
We did, however, take a little time at the recent seminar to talk about the implementation of some changes that took place last year, specifically related to sales tax on things like yachts and aircraft. For boats, there were huge changes. Now, any amount over $230,000 for the purchase of a vessel is exempt from tax. In other words, if you buy a boat for $1,000,000, sales tax will be calculated as if you bought the boat for $230,000.
There is also a use tax component. This has been a huge issue in the past, with the Tax Department taking an aggressive approach and seeking use tax against any boat that was in New York waters—even if it was for only a day. There are stories of tax investigators walking around marinas in Long Island and taking copious notes. Under the new law, there is no use tax on vessels unless they are registered in New York or are used in New York for 90 consecutive days. Obviously, these are big changes, and more details about them can be found here. Other significant changes were related to sales of planes: The result is that you can now effectively buy an airplane in New York tax-free under any circumstances. You can find more detail in this post. This is good news—for the next time you are ready to purchase a new plane.
There is also a lot going on the compliance side. As many readers are probably aware, the Tax Department’s driver’s license suspension program is in full force. Any taxpayer with over $10,000 in collectible liabilities is at risk for having his or her driver’s license suspended. The Tax Department has been very aggressive in issuing these notices at very early stages in the collection process. We now have a number of cases where we are both actively working to resolve a collection matter as well as making sure that the taxpayer can keep his or her driver’s license.
There certainly are steps a taxpayer can take to avoid suspension, such as working on an installment payment plan. These issues are discussed in detail in this State Tax Notes article. This is still, however, a hammer that the Tax Department has been dropping very quickly on taxpayers. And why not? According to reports, the program has been extremely successful, already generating $280 million in collections. My only complaint is that the suspension notices come too quickly. In some cases, it would be better if this tool was used as a last resort—not as one of the first steps.
The other interesting development in the compliance area relates to penalties on paid preparers—now I have your attention! Under a law enacted a few years ago, taxpayers can be subject to a $1,000-per-return penalty for each return filed without a reasonable belief that the tax treatment was more likely than not the proper treatment. That can be increased to as much as $5,000 per return if the understatement was due to willful, intentional, or reckless disregard for the rules and regulations. According to reports, penalties in excess of $10,000,000 have already been assessed under these rules, and in a March 2016 ALJ case, a preparer was assessed almost $700,000 in penalties for making the same mistake on 700 tax returns.
In that case, the tax preparer took deductions for residential rent paid by the taxpayer on the basis that this qualified as an “expense associated with the rental of tangible property.” In upholding the penalties, the judge noted that although the tax preparer herself also rented her residence, she did not take the same position on her own tax return. Whatever the case, the remedy seemed drastic, especially given the fact that the Tax Department presumably had already contacted each one of these 700 taxpayers and issued an assessment for additional tax penalties and interest for the mistaken deduction. Moreover, although not discussed in the case, it’s unlikely that the errors themselves caused the taxpayers to pay anything close to less than $1,000 on taxes on the specific return. This blunt force enforcement technique probably has its intended effect, causing tax preparers to pause before taking an uncertain position. At the same time, because the Tax Department does not have regulations or guidelines for tax preparers, it does become hard to complain that the tax preparer’s actions were not up to a reasonable standard when standards are not explicitly defined.
Personal Income Tax and Residency
Finally, no discussion of New York tax updates can be complete without discussing my favorite topic: residency. Not surprisingly, the New York Tax Department continues to focus on the issue, with 4,000 to 5,000 related audits happening each year. So what’s been happening?
First, there’s been a lot of chatter about the 2015 U.S. Supreme Court decision in Wynne v. Maryland. There, the Court held that Maryland’s resident credit scheme was unconstitutional as it applied to a taxpayer who was partially denied a resident credit for income taxes paid to other states—for more detail, please refer to my TaxStringer article from last year. The update relates to how this decision affects the double taxation that sometimes arises under the New York statutory residency scheme, where a resident domiciliary of a state like Connecticut is subject to double taxation on income—such as intangible income—as a result of also qualifying as a statutory resident of New York State. As outlined in our prior article, this could be a problem, and we are currently working through some related litigation. Stay tuned for upcoming updates.
Matter of Sobotka was another interesting residency case that came out of New York’s Division of Tax Appeals late last year. In that case, an ALJ in the New York Division of Tax Appeals concluded that although the test of domicile and statutory residency are not mutually exclusive (i.e., a taxpayer can be both during the same tax year), a taxpayer can only be a statutory resident of New York during any non-domiciliary period if he meets both the abode and day-count tests during the non-domiciliary period. In other words, when the non-domiciliary period at issue covers only part of a tax year, the taxpayer must exceed the 183-day limit during the non-domiciliary part of that tax year in order to be a statutory resident. Please refer to this blog post and this article for a fuller explanation. The bottom line, however, is that a taxpayer who moves to New York or out of New York during a tax year might not have to worry about the 183-day statutory residency rule in the year of the move. Just be careful: The Tax Department is not happy about the case and might be taking a different position in the future, despite the loss in this case.
Finally, the debate continues to rage about the Gaied v. New York decision in 2014, in which the New York Court of Appeals held that in order to be subject to New York’s statutory residency test (183 days in New York plus a permanent place of abode), there must be some evidence to conclude that the taxpayer used his or her abode in New York as a residence during the tax year. If the taxpayer didn’t use the abode as a residence, then merely owning or maintaining a place and having access to it isn’t enough to create residency. The Tax Department, however, has taken a pretty narrow view of the case, as discussed in some detail in this article. The Tax Department’s view is that a place will not constitute a permanent place of abode only if the taxpayer doesn’t use the place and somebody else is living in the place. Absent that, the Tax Department believes that the Gaied decision is limited. We of course, take a different view—one that really is more consistent with the language of the court’s 2014 decision. Whatever the case, look out for this issue as it will likely be a source of continuing debate in New York residency audits and investigations.
Timothy P. Noonan, JD, is the practice group leader of Hodgson Russ LLP’s New York Residency Practice, and he is one of the leading practitioners in this area of the law. He has handled some of the most high-profile residency cases in New York over the past decade, including the Gaied case discussed here, one of the first New York residency cases to ever reach New York’s highest court. He also co-authored the 2014 edition of the CCH Residency and Allocation Audit Handbook, and he is often quoted by media outlets, including the Wall Street Journal, New York Times, and Forbes, on residency and other state tax issues. As the “Noonan” in “Noonan’s Notes,” a monthly column in Tax Analysts’ State Tax Notes, Tim is also a nationally recognized author and speaker on state tax issues. He can be reached at 716-848-1265 or email@example.com.