Legislative Developments
Recent Tax Law Changes
Illinois
On January 13, 2011, the Illinois Governor signed legislation which temporarily increases the corporate income tax rate to 7% for taxable years beginning on or after January 1, 2011 and ending prior to January 1, 2015. The tax rate is set to gradually decrease thereafter. In addition, the legislation suspends the net loss carryover deduction for tax years ending after December 31, 2010 and prior to December 31, 2014.
New York State/City 2010-2011 Budget Legislation
Sales Tax
Changes to the Definition of "Vendor" - New York retroactively amended its sales and use tax law to narrow its previous expansion of the definition a vendor. Under the new legislation, applicable to sales and uses occurring on or after June 1, 2009, the following activities, when performed by an in-state affiliate, will not make the out-of-state seller a vendor for sales tax purposes:
-Providing accounting or legal services or advice; and
-Directing the activities of the seller (including, but not limited to, making decisions about strategic planning, marketing, inventory, staffing, distribution or cash management).
Imposition of Sales Tax on Hotel Room Remarketers - New York has also imposed sales tax on commissions earned by on-line travel companies who provide discounted hotel rooms. Effective September 1, 2010, state and local sales tax applies to commissions earned by "room remarketers" (i.e., on-line travel companies). Generally, on-line travel companies purchase rooms from a hotel at a discounted rate, and resell those rooms to its customers at higher price. Historically, sales tax was charged only on the discounted hotel rate received by the on-line travel company, and not on the price charged by the travel company to the ultimate user of the room. The new law requires on-line travel companies to charge sales tax on the full price of the room offered to its customers. In addition, New York City recently amended legislation requiring that Occupancy Tax similarly be charged on the on-line travel companies' commissions.
Income Tax
New York State's Treatment of Gain to Nonresident Shareholders of S Corporations from Sec. 338(h)(10) Transactions - New York Tax Law Sec. 632(a)(2) has been amended to reverse the Tribunal's decision in Matter of Gabriel S. and Frances B. Baum (Tax Appeals Tribunal, Feb. 12, 2009). The new rules provide that nonresident shareholders of an S corporation that made an IRC Sec. 338(h)(10) are required to treat any gain derived from the deemed asset sale as New York source income. Such income is attributable to New York sources based on the allocation methods prescribed in either Articles 9-A or 32 (as applicable) in effect for the year when the federal election is made. In addition, when the nonresident shareholder exchanges S corporation stock in the deemed liquidation resulting from such election, any gain or loss is treated as the disposition of an intangible asset, and may not increase or offset any gain recognized on the deemed asset sale.
The legislation applies retroactively to taxable years beginning on or after January 1, 2007. In addition, the Department has indicated that the new rules will also apply to any other year where the statute of limitations for issuing an assessment remains open because the taxpayer did any of the following:
- Failed to file a return;
- Failed to report federal changes;
- Filed a false or fraudulent return; or
- Substantially omitted income under Tax Law 683(d).
Taxpayers affected by these amendments are required to file an amended return. However, such taxpayers will not be assessed penalties for any underpayment of tax attributable to such amendments. It remains to be seen whether the retroactive portion of the legislation will withstand judicial scrutiny.
NYS REIT Legislation - The new legislation also made permanent the provisions requiring captive real estate investment trusts (REIT) to file a combined return with the closest corporation that directly or indirectly owns the captive. Such provisions were set to expire for taxable years beginning on or after January 1, 2011. In addition, the legislation also revised the definition of captive REIT, and now provides that a captive REIT is a REIT (i) that is not regularly traded on an established securities market; and (ii) more than fifty percent of the voting stock of which is owned by a single entity treated as an association taxable as a corporation for federal income tax purposes that is not an exempt entity or another REIT. In addition, the following two types of entities will not be treated as "an association taxable as a corporation" for this purpose: (i) entities treated as Australian Property Trusts (as defined); (ii) certain qualified foreign entities.
NYS Temporary Deferral of Certain Credits - For tax years beginning on or after January 1, 2010 and before January 1, 2013, only $2M in tax credits may be claimed per year. This amount is prorated based on the types of credits involved. The excess credits may be carried over and used beginning in 2013. In addition, the legislation replaces the Empire Zone Program with the Excelsior Jobs Program Act (EJPA) as the primary economic development program in New York State.