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Amendments to New York State 2003 Budget Legislation

By Henry Goldwasser

Gov. George Pataki recently signed legislation amending the 2003 New York state budget legislation. A summary of the changes follows.

Royalty Payments

Applicable to taxable years beginning after 2002, for the purpose of computing a taxpayer’s entire net income or other applicable taxable basis, the 2003 budget legislation provides that royalty payments made to a related member of a controlled group during the taxable year must be added back, to the extent deducted in calculating federal taxable income.

For purposes of these provisions, the definition of “royalty payments” is expanded to include payments directly connected to the acquisition, use, maintenance or management, ownership, sale, exchange or any other disposition of licenses, trademarks, copyrights, trade names, trade dress, service marks, mask works, trade secrets, patents and any other similar types of intangible assets as determined by the New York State Department of Taxation and Finance Commissioner. Further, the definition is amended to include amounts allowable as interest deductions under IRC §163 to the extent these amounts are directly or indirectly for, related to or in connection with the acquisition, use, maintenance or management, ownership, sale, exchange or disposition of these intangible assets. The legislation removes an add-back requirement that had applied generally to interest payments made to a related member.

For tax years beginning after 2002, a new exception to the requirement that royalty payments be added back is enacted. The add back is not required if the royalty payments are paid or incurred to a related member organized under the laws of a country other than the United States, are subject to a comprehensive income tax treaty between the other country and the United States, and are taxed in the other country at a rate at least equal to that imposed by New York. However, the exception for payments made pursuant to a contract that reflects an arm’s-length rate of interest and made primarily for a valid business purpose is eliminated.

The remaining exception from the requirement that royalty payments be added back is amended to provide an exclusion for transactions if the related member, during the same tax year, directly or indirectly paid or incurred the amount to a person or entity that is not a related member, and such transaction was done for a valid business purpose, and the payments are made at arm’s length. Also, the definition of “valid business purpose” is amended. These same amendments apply to royalty payments made under New York City law.

Estimated Tax Payments for Partnerships

For taxable years ending after 2002, the provision requiring partnerships, LLCs and S corporations to pay estimated tax for nonresident partners, members and shareholders is amended to exclude publicly traded partnerships as defined in IRC §7704.

Also, the Commissioner may issue waivers for partners, members or shareholders who are not subject to New York income tax or who have established that they are filing New York income tax returns and paying estimated taxes when due. Further, the Commissioner may issue a waiver in other circumstances in which he or she determines that withholding is not necessary to ensure collection of income tax on New York source income allocable to the nonresident or C corporation.

A Department of Taxation and Finance notice (Notice N-03-30) states that effective with the Jan. 15, 2004, payment (Dec. 15, 2003, for partnerships who have corporate partners and elect to make the Jan. 15 payment on Dec. 15, 2003), C corporation partners and individual nonresident partners and shareholders may, if they qualify, claim exemption from the estimated tax provisions by filing Form CT-2658-E, “Certificate of Exemption from Partnership Estimated Tax Paid on Behalf of Corporate Partners,” or Form IT-2658-E, “Certificate of Exemption from Partnership Estimated Tax Paid on Behalf of Nonresident Individual Partners and Shareholders,” with the partnership or New York S corporation. Once the partnership or New York S corporation receives the signed certificate, the partnership or New York S corporation may rely on that certificate and is not required to make any further estimated tax payments on behalf of that partner or shareholder. The partnership or New York S corporation is not required to send a copy of the exemption certificate to the tax department.

A C corporation qualifies for the exemption and may file Form CT-2658-E if it meets either of the following conditions:

A nonresident individual qualifies for the exemption and may file Form IT-2658-E if he or she certifies that he or she will comply, in his or her individual capacity, with all the New York personal income tax estimated tax payment provisions and tax return filing requirements.

Exemption certificates will cover the estimated tax payments due for a two-year cycle, except for the initial certificate, which will cover the last payment due for tax year 2003 and the payments due for tax years 2004 and 2005. At the end of the two-year cycle all certificates will expire on the same day, regardless of when partners submitted the certificate (e.g., all of the initial certificates will expire on Feb. 1, 2006). All partners and shareholders who will continue to qualify for the exemption after that date must file a new certificate to keep the exemption in effect.

Any payments of estimated tax made on Sept. 15, 2003, on behalf of a C corporation or nonresident individual who now qualifies for exemption from the estimated tax provisions, will not be refunded at this time. The partner or shareholder will claim credit for those payments when the partner or shareholder files his or her New York income tax returns.

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Henry Goldwasser, CPA, a partner with Weiser LLP, is a member of the Society’s New York, Multistate and Local Taxation Committee.