Trials and Tribulations in New York State

By: Thomas R. Tartaglia, CPA (Aug, 2011)

Several months ago New York State passed its fiscal year 2011/2012 budget which is expected to close an estimated $9 billion spending gap. From that budget several revenue raising and tax saving initiatives were born.

The budget strengthens the Excelsior Jobs Program, which was created in 2010 to replace the problematic Empire Zone Program which expired on June 30, 2010. The new program is designed to stimulate job creation and provide investment tax credit incentives for businesses in targeted industries.

To participate in the program, a business entity must create new jobs (or meet certain other requirements), meet specific benefit-cost ratio's and operate in one of the following industries: financial services, manufacturing, software development and new media, scientific research and development, agriculture, back office operations, distribution centers, or an industry with significant potential for private-sector economic growth. Eligible entities may claim tax benefits beginning in the first taxable year that the entity applies for and receives a certificate of tax credit from the Department of Taxation and Finance. Tax benefits include: (1) a tax credit for each new job created in New York State, up to $5,000 per job; (2) an investment tax credit for qualified investments in certain depreciable assets, equal to 2% of the cost or other basis used for federal income tax purposes; (3) a research and development tax credit equal to 10% of the entity's corresponding federal research and development tax credit; and (4) a real property tax credit, equal to 50% of eligible real property taxes.

The Excelsior Jobs Program is enhanced, effective March 31, 2011, by the new budget as follows:

Administrative changes:

  • The law has been amended to provide that the determination of whether a business is operating predominantly in a named industry will be made solely on the activity at the project location without regard to operations at other locations in New York State.
  • A business that is certified to receive Empire Zone credits will only be required to give up its Empire Zone certification at the location where it will claim Excelsior benefits rather than at all its locations.
  • A participant in the Excelsior Jobs Program will be allowed to receive tax credits based on interim job, investment, or research and development milestones, provided that the other criteria in the Tax Law are met.
  • The tax credit recapture provision is now limited to instances where the Empire State Development Corporation revokes a taxpayer's certification for violating worker protection or environmental laws or for failing to pay state and local taxes.
  • Utilities are authorized to offer discounted gas or electric rates to Excelsior participants under section 66.12-d of the Public Service Law.

Changes to the calculation of the credit:

  • The jobs tax credit component formula was revised to be the product of the gross wages paid and 6.85% for each net new job created.
  • The research and development (R&D) credit component was increased from 10% to 50% of the taxpayer's federal R&D credit that relates to the participant's New York R&D expenditures. A limit was added to provide that the amount of the credit may not exceed 3% of the qualified New York expenditures.
  • Costs and expenses included in the basis of the Excelsior R&D credit component are allowed to be used for the qualified emerging technology company facilities, operations, and training credit.
  • A participant in the Excelsior Jobs Program may claim both the Excelsior investment tax credit component and the investment tax credit for research and development property, based on expenditures on the same property.
  • The real property tax credit (RPTC) component schedule was amended to phase down from 50% to 5% over 10 years (5% each year) instead of five years (10% each year), reflecting the lengthening of the benefit period.
  • Property improvements that increase the value of real property will be factored into the amount of the RPTC component. Before this change, the credit base was fixed at the amount of taxes assessed and paid in the year prior to application.
  • The credit was extended to eligible agricultural cooperatives subject to tax under Article 9, Section 185 of the Tax Law.

The budget also created the "Economic Transformation and Facility Redevelopment Program". This new program provides tax credits to businesses that locate near targeted communities where certain correctional or juvenile facilities are closed (economic transformation areas). If admitted into the Economic Transformation and Facility Redevelopment Program, the business must create at least 5 new, full-time jobs with credits available for a five year period. Any participant will no longer be eligible for the Excelsior Jobs Program, the Empire Zones Program, or any tax credits under the Brownfield Cleanup Program with regard to a business or facility located in an economic transformation area.

Other changes for 2011:

Effective April 1, 2011, through March 31, 2012, sales of clothing and footwear costing less than $55 per item or pair are exempt from the state's 4% sales tax. Sales may also be exempt from local sales tax in some localities. As you may recall, after October 1, 2010 the state decided to temporarily suspend the state sales tax exemption for clothing and footwear costing under $110.

Finally, on and after April 1, 2012, the original less-than-$110-per-item clothing and footwear 4% sales tax exemption will be restored.

Lottery prizes that exceed $600 can be applied against tax liabilities owed to New York State. Chapter 61 of the Laws of 2011 added section 1613-c to the Tax Law to allow the Director of Lottery and the Commissioner of Taxation and Finance to enter into an agreement to permit a match of the names of those owing tax liabilities to New York against the names of those winning lottery prizes in excess of $600. This new law takes effect on August 1, 2011.

The new budget also makes changes to the tax return e-file and e-pay mandates. Under these new provisions any individual, corporation, partnership or fiduciary taxpayer that files their own return (does not use a paid tax preparer) and uses tax software will be required to e-file and e-pay its New York tax return. This mandate takes effect on September 15, 2011 only if the tax department reports that the 2010 e-filing level is below 85%.

All types of returns or other authorized tax documents are included in this mandate. Failure to comply with the e-file/e-pay mandate carries a $25 penalty for each occurrence.

Also, in June the sales and use tax department expanded their Sales Tax Web File Mandate to include quarterly sales tax filers. This requires businesses, individuals and tax professionals to create an online sales tax account with the Department that will allow them to file and make payments electronically.

Due to the current fiscal situation the state has also increased its audits of sales and use tax vendors both within and outside the State. Also, the state is aggressively enforcing its residency laws as seen in a recent case involving a New Jersey resident who maintained a New York home for his elderly parents. In this case the individual from New Jersey was found to be a New York resident for tax purposes.

As we navigate through these difficult and constantly changing times, the professionals at Dermody, Burke and Brown are available to assist you with all your needs.

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