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The New York State 2009-10 budget package includes a number of provisions that were recently enacted by the legislature. These provisions will affect personal and business income, as well as sales tax for New York State taxpayers. A summary of the most relevant tax changes is as follows:
Business Tax Provisions
New Partnership Filing Fee
The annual filing fee previously imposed on limited liability companies and limited liability partnerships will now apply to both general and limited partnerships. Partnerships with New York source gross income under $1 million are exempt from the fee. The new fee is based on gross income from New York sources, and ranges from $500 to $4,500 depending on gross income.
Mandatory First Installment of Estimated Tax
Effective January 1, 2010, the mandatory first installment of estimated tax will increase from 30% to 40% of the prior year's tax. This will apply to businesses with tax of $100,000 or more in the previous year.
Changes to the Empire Zone Program
Under the new law, businesses participating in the Empire Zone (EZ) Program will become decertified if it is determined that:
- They have received greater tax benefits than was invested in employment and facilities within the Empire Zone (the one-to-one test), or
- Its employment and investment gains are merely transfers from other related New York entities (applicable to businesses certified before August 1, 2002), or
- It moved out of the Empire Zone or changed ownership
Empire State Development will review all certified businesses to confirm that they pass the one-to-one test. New applicants for certification must now provide projections showing that they meet a new twenty-to-one test over their first three years of certification – i.e., they expect to make capital investments of at least twenty times the benefits they will receive (ten times for manufacturers). Other changes limit EZ real estate tax and sales tax benefits for certain businesses.
New MCTD Payroll Tax
In March 2009, the new Metropolitan Commuter Transportation Mobility Tax became effective for both employers and self-employed individuals working in the 12-county downstate Metropolitan Commuter Transportation District (MCTD). Employers paying a minimum of $2,500 of wages in any quarter and self-employed individuals with income in excess of $10,000 are subject to this tax. The tax rate is 0.34%. Self-employed individuals include partners and limited liability company members that receive self-employment income from their entities under federal rules. The tax is imposed on the full wages of employees who work predominantly in the MCTD, and cannot be withheld from wages. Self-employed taxpayers who work both within and outside of the MCTD will pay the tax on the portion of their income allocated to the MCTD. The first estimated payments for both employers and individuals are due on November 2, 2009.
Personal Tax Provisions
Increased Personal Income Tax Rates
For tax years beginning after 2008 and before 2012, the top personal income tax rate is increased from 6.85% to 8.97%. This applies to filers with taxable income in excess of $500,000. A 7.85% bracket is added for filers with taxable incomes less than $500,000 but above:
$300,000 – for joint filers
$250,000 – for heads of household
$200,000 – for single filers
The benefits of the lower brackets continue to be phased out. Taxpayers who are subject to the phaseout will pay a flat 8.97% on all their taxable income.
Additional Reduction in Itemized Deduction of High Income Filers
For tax years beginning after 2008, the legislation limits the use of itemized deductions by individuals having NYS adjusted gross income over $1 million. The amount of itemized deductions that can be claimed is limited to 50% of their charitable contributions. All other deductions are lost.
Estimated Taxes
Taxpayers can avoid 2009 estimated tax penalties by recalculating their 2008 tax using the new tax rates and reduction in itemized deductions. This is known as a "protect" estimate.
Expanded Definition of Resident Individuals
For tax years beginning on or after January 1, 2009, an individual is defined as a NYS resident for certain taxpayers who are present in a foreign country and his/her spouse or minor children are present anywhere in NYS for more than 90 days, not just at the taxpayer’s permanent place of abode.
Sale of Entity Interest & Expanded Definition of Real Property
Gains from sale of an interest in certain partnerships and other entities are included in a nonresidents’ NYS source income. It is included to the extent attributable to the entity’s ownership of NYS real property. According to the new law, “real property located in the state” includes an interest in a partnership, LLC, S-Corporation, or C-Corporation with 100 or fewer shareholders that owns real property located in NYS. Additionally, the fair market value of that real property must be more than 50% of all of the entity’s assets on the date of the sale of the interest. Only those assets that the entity owned for at least 2 years before the date of the sale or exchange are used in determining the fair market value of all of the entity’s assets on that date.
Middle Class STAR
The Middle Class STAR rebate program is repealed.
Sales and Use Tax Provisions
Expanded Definition of Vendor
The new law expands the definition of “vendor” to include an entity affiliated with a vendor and either: (1) uses the trademarks, service marks, or trade names in NY that are the same as those used by the seller; or (2) engages in activities that are advantageous to the benefit of the seller, then he is a vendor.
Transportation Services
A new sales tax is imposed on personal transportation services provided by a limousine, “black car” or similar vehicle with a driver. Medallion taxi cabs, buses, scheduled public transport services, and transportation in connection with funerals are excluded. Special rules apply when the vehicle is leased from its owner by an unrelated party (generally the driver), providing that the owner (not the driver) is considered to have provided the transportation services at a fee deemed to be two times the amount he was paid to lease the vehicle. If a trip crosses from one sales tax jurisdiction to another, the applicable sales tax rate is the one in effect where the trip begins.
Commercial Aircraft Exemption
Commercial aircraft are no longer exempt from sales tax if they are primarily used to transport persons related to entities that are affiliated with more than a 5% common ownership with the aircraft company.
New Compliance Provisions
The New York State Tax Commissioner can now compel taxpayers to make electronic records available (if they exist), whether or not they were required to keep those records electronically. Even if taxpayers make hard copy records available to the state, a penalty of up to $5,000 can be imposed if the taxpayer maintains electronic records and does not allow the state access to them. Failing to maintain required sales tax records can also subject taxpayers are subject to new penalties of up to $5,000. A penalty of $1,000 per quarterly return period will be levied on persons required to make or maintain sales tax records but fail to present such records.
Other provisions include:
- Interest rates applicable to underpayments of tax have been increased by 1.5%, with most changing from 6% to 7.5%.
- The deadline for filing the annual quarterly combined withholding, wage reporting and unemployment insurance return has been moved from February 28th to January 31st.
- The Commissioner can now share with the IRS any information received as a result of the Voluntary Disclosure and Compliance Program.
- Regarding sales tax refunds and credits, the State is permitted to avoid payment of any interest, if the payment of the refund is made within 3 months after the return on which the refund claim was filed.
- Any person aiding or assisting in the giving of fraudulent sales tax returns or other documents with the intent to evade tax will now be subject to a civil penalty not to exceed $5,000.
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