United States: New York State Tax Reform And Fairness Commission Proposes Extensive Revamp Of Tax Law

In its November 11, 2013 final report, the New York State Tax Reform and Fairness Commission has proposed five revenue-neutral tax reform packages that are intended to overhaul the New York State tax law by decreasing complexity in the tax administration process, providing tax relief to low-income families, and modernizing the tax law to better align with current federal tax law and market trends.1 The proposed reform packages focus on the following five categories: corporate tax; sales tax; estate and gift tax; real property tax administration; and tax simplification. The main recommendations put forth by the Commission are outlined below.

Corporate Tax Reform

Noting that New York State's method of corporate taxation dates back to the 1940's and has not been restructured in more than a quarter century, the Commission proposes several reforms addressing what is perceived to be a negative tax environment for businesses. The Commission's recommendations include the following key elements:

  • Merge the bank tax (Article 32) into the corporate franchise tax (Article 9-A);
  • Adopt a single receipts factor apportionment formula using customer-based sourcing rules;
  • Adopt full water's-edge unitary combined filing with a more than 50 percent ownership test (with the ability to make a binding seven-year election to establish the composition of the combined group);
  • Expand the application of economic nexus requirements in determining whether corporations are subject to tax;
  • Increase the effectiveness of exemptions for subsidiary and investment income;
  • Eliminate certain special deductions and exemptions;
  • Use "effectively connected" income as the basis for corporate tax base calculations for foreign corporations;
  • Require combined reporting for captive insurance companies;
  • Repeal the "tax treaty" exception to the royalty add-back provision;
  • Require attribution of interest expenses to exempt income with expanded direct tracing of interest expense in certain situations;
  • Revise the alternative tax bases to create a credit for tax paid to other states to address possible constitutional challenges;
  • Reform the Investment Tax Credit (ITC) and the Brownfield Credit;
  • Repeal the Financial Services ITC;
  • Reduce the Empire State Film Production Tax Credit allocation;
  • Evaluate and increase the effectiveness of business tax incentives;
  • Streamline the corporate audit process; and
  • Accelerate the phase-out of the Article 18-A Surcharge on utilities.2 At this time, reforms to corporate tax law would be implemented at a state-wide level only, but the Commission recommends that New York City conform its corporate tax laws to those adopted by the state.

Sales Tax Reform

In its effort to address what is characterized by the Report as a regressive sales tax system despite numerous exemptions designed to eliminate such regressivity, the Commission proposes four alternative options for reforming sales tax.

  • The first option requires repealing the current sales tax exemption for items of clothing and footwear costing less than $110. The Commission recommends enhancing the Household Credit or Earned Income Tax Credit, creating a standalone sales tax relief credit, or providing real property tax relief to mitigate the burden that repealing the clothing and footwear exemption would cause on low- and middle-income taxpayers.
  • The second option expands the tax base to include digital products, such as iTunes, eBooks, and Video-on-Demand services, all of which are currently excluded from sales tax in New York. The second option also requires the elimination of special exemptions for industries that no longer need the competitive edge originally intended, such as energy service companies and self-storage facilities.
  • The third option suggests further alignment of the sales tax base with current consumption trends as well as better uniformity between state and local tax bases, including the potential elimination of the "gas cap" at $2 per gallon, and a potential tax on personal services.
  • In the event that the sales tax base is broadened under one or more of the first three options, the fourth option proposes that the additional sales tax revenue generated flow to a Tax Reduction Reserve Fund for financing future real property and personal income tax relief.

Estate and Gift Tax Reform

In recognition of what is characterized by the Report as an outdated estate and gift tax regime in New York State, the Commission recommends the following reforms:

  • Increase the estate tax exemption from $1 million to $3 million, effectively eliminating approximately three-quarters of all estates from the estate tax;
  • Eliminate the generation-skipping tax (GST);
  • Reinstate New York State's gift tax or add-back of gifts over a certain threshold amount to the estate in order to better align the state's estate and gift taxes with the $5.25 million federal estate and gift tax exemptions; and
  • Close the resident trust loophole by decoupling from the federal treatment of Delaware Incomplete Gift Trusts and treating these trusts as grantor trusts for New York State income tax purposes. This would result in trust income being taxed to the grantor of the trust.

Real Property Tax Administration

Recognizing that the Council on State Taxation (COST) ranked New York's system of property tax administration the worst in the nation in 2011, the Commission recommends establishing a state-wide statutory standard of assessment, regular updating of assessments at periodic intervals no less than five years apart, increased use of state aid to encourage shared assessment services, and state performance of valuation assessments of complex commercial, industrial, and utility properties.

Tax Simplification

The Commission concludes its report with a list of options aimed solely at increasing efficiencies and simplifying the complexities of the tax law. Among its many recommendations, the Commission suggests combining the Metropolitan Transportation Authority (MTA) surcharge with the corporate tax return, repealing several taxes characterized in the Report as "nuisance taxes" that bring in minimal revenue to the state, increasing the income level trigger for filing personal income tax returns, establishing a 14- day threshold trigger for non-residents who perform work in New York State prior to which personal income tax would not be due to the state (in contrast to a 30-day threshold currently being proposed on a nationwide basis in Congress for substantially all non-resident employees),3 simplifying the filing of amended returns, and providing for greater coordination between New York State and New York City.


While the extent of the tax reforms that actually will be implemented in New York remains uncertain, the release of this report and the urgent call for tax reform by Governor Andrew Cuomo means taxpayers should be very mindful of potential changes to the tax law in the coming year, especially within the five categories outlined above. Taxpayers should also remain aware of potential changes to both telecommunication taxes and utility taxes as these were both listed as areas for future study by the Commission.

The Report's mention of a 14-day exemption for non-resident employees performing work functions in New York is intriguing in that historically, New York has been opposed to the Congressional legislation on this subject because of the adverse revenue effect to the state. While the Report noted the revenue effect of having a 14-day exemption at $50 million annually, the Report characterized such rule as having a "modest fiscal impact"), increasing the possibility that the state could actually enact such change if other revenue-enhancing reforms are undertaken.


1. Final Report, New York State Tax Reform and Fairness Commission, Nov. 11, 2013. The full text of the report is available at http://www.governor.ny.gov/assets/documents/greenislandandreportandappendicies.pdf.

2. This is a two percent temporary assessment on electric, gas, water and steam utilities. This surcharge currently is scheduled to be phased out over a three and one-half year period beginning in 2014-15.

3. H.R. 1129, introduced on March 13, 2013; S. 1645, introduced on Nov. 5, 2013. A similar bill, H.R. 1864, was passed by the House of Representatives on May 15, 2012.

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