On January 15, 2019 Governor Cuomo released his FY 2019-2020 Executive Budget (the “Budget Bill”). The Budget Bill includes a number of proposed changes to the New York Tax Law, including but not limited to: (i) amendments to the corporate franchise tax in response to the federal Tax Cuts and Jobs Act (“TCJA”); (ii) a requirement for marketplace providers to collect sales tax; and (iii) various extensions of current provisions in the Tax Law relating to tax preparer penalties, sales tax vendor compliance, and personal income tax. The Budget Bill also proposes an entirely new tax regime based on the Governor’s proposal to legalize recreational use of cannabis.
Interestingly, on the same day the Budget Bill was released, the New York State Department of Taxation and Finance (the “Department”) issued its first notice in response to the Supreme Court’s seminal decision in South Dakota v. Wayfair.1 Notice No. N-19-1 requires any business that makes more than $300,000 in sales of tangible personal property into the state and more than 100 separate sales into the state in the immediately preceding four sales tax quarters to register as a sales tax vendor and begin collecting and remitting sales tax. The Department based its authority for the notice on section 1101(b)(8)(i)(E) of the Tax Law, which defines a “vendor” as any person soliciting business in New York so long as the activities satisfy the nexus requirements of the U.S. Constitution. The notice is effective immediately.
While the Budget Bill includes many proposed changes to New York’s tax scheme, we highlight the following provisions as the most significant.
(i) GILTI sourcing rule
The TCJA created a new category of income under Internal Revenue Code (“IRC”) § 951A, known as Global Intangible Low-Taxed Income (“GILTI”). Under the TCJA, certain US shareholders of a controlled foreign corporation (“CFC”) are required to include their share of the CFC’s GILTI in their federal taxable income. IRC Section 250(a)(1)(B)(i) generally permits a deduction equal to 50% of the GILTI inclusion. Both the GILTI inclusion and the 50% GILTI deduction are included in the computation of a US shareholder’s New York taxable income, as a result of New York’s conformity to federal taxable income.
As currently drafted, the Article 9-A statutory apportionment formula does not provide any representation for GILTI in the apportionment fraction.2 The Budget Bill includes a proposal to include the net GILTI amount included in the tax base in the denominator of the apportionment fraction in order to properly reflect taxpayers’ business income and capital in the state. The bill expressly excludes GILTI from the numerator of the apportionment fraction. This provision would take effect immediately and apply to taxable years beginning on or after January 1, 2018.
In early January, the Department provided its first official response to the many questions raised by the state tax community due to the lack of factor representation that resulted from including GILTI in the entire net income tax base, but not including it in the apportionment fraction. The Department issued instructions to Forms CT-3 and CT-3-A on which it instructed taxpayers to include their net GILTI inclusion in the denominator of the apportionment fraction. The Department relied on its authority in Tax Law section 210-A to make discretionary adjustments to a taxpayer’s business allocation percentage as support for this position.
Rather than relying on the Department’s discretionary authority, the Budget Bill seeks to codify the Department’s guidance by expressly including a taxpayer’s net GILTI inclusion in the denominator of the apportionment fraction. Although the Legislature and the Department should be commended for addressing the factor representation issue, questions remain as to whether this methodology provides adequate factor representation.