2007-2008 NEW YORK STATE EXECUTIVE BUDGET
REVENUE ARTICLE VII LEGISLATION
MEMORANDUM IN SUPPORT

CONTENTS

MEMORANDUM IN SUPPORT

A BUDGET BILL submitted by the Governor in

Accordance with Article VII of the Constitution

AN ACT to amend the racing, pari-mutuel wagering and breeding law, chapter 281of the laws of 1994 amending the racing, pari-mutuel wagering and breeding law and other laws relating to simulcasting, and chapter 346 of the laws of 1990 amending the racing, pari-mutuel wagering and breeding law and other laws relating to simulcasting and the imposition of certain taxes, in relation to extending certain provisions thereof (Part A); to amend chapter 405 of the laws of 1999, amending the real property tax law relating to improving the administration of the school tax relief (STAR) program in relation to the game of Quick Draw (Part B); to amend chapter 706 of the laws of 1996, amending the social services law and the tax law relating to the enforcement of child support orders, in relation to making permanent the authority of the department of taxation and finance to collect unpaid child support (Part C); to amend the tax law and the administrative code of the city of New York, in relation to ensuring payment of sales tax due on rent for hotel room occupancy by providers of hotel rooms (Part D); to amend chapter 508 of the laws of 1993, amending the tax law and the criminal procedure law relating to enhancing the enforcement of the taxes on alcoholic beverages with respect to liquors, in relation to the effectiveness thereof (Part E); to amend the tax law and chapter 62 of the laws of 2003, amending the vehicle and traffic law and other laws relating to increasing certain motor vehicle transaction fees, in relation to the distribution of moneys collected from the taxes imposed by sections 183 and 184 of the tax law (Part F); to amend the tax law, in relation to replacing the highway use tax permit requirements with a registration requirement (Part G); to amend the tax law and the administrative code of the city of New York, in relation to the determination of entire net income of corporations under articles 9-A, 32 and 33 of the tax law and chapter 6 of title 11 of the administrative code of the city of New York (Part H); to amend the tax law and the administrative code of the city of New York, in relation to establishing conditions under which certain corporations would be subject to tax under the corporation franchise tax or the city of New York general corporation tax, and to defining a banking corporation (Part I); to amend the tax law and the administrative code of the city of New York, in relation to the deduction for bad debts provided to qualifying thrift institutions and commercial banks (Part J); to amend chapter 298 of the laws of 1985, amending the tax law relating to the franchise tax on banking corporations imposed by the tax law, authorized to be imposed by any city having a population of one million or more by chapter 772 of the laws of 1966 and imposed by the administrative code of the city of New York and relating to other provisions of the tax law, chapter 883 of the laws of 1975 and the administrative code of the city of New York which relates to such franchise tax, to amend chapter 817 of the laws of 1987, amending the tax law and the environmental conservation law, constituting the business tax reform and rate reduction act of 1987, and to amend chapter 525 of the laws of 1988, amending the tax law and the administrative code of the city of New York relating to the imposition of taxes in the city of New York, in relation to the effectiveness of certain provisions of such chapters; to amend the tax law, in relation to permitting certain banking corporations otherwise subject to tax under article 32 of the tax law to make an election to be taxed under article 9-A of such law; and to amend the administrative code of the city of New York, in relation to permitting certain banking corporations otherwise subject to tax under subchapter 3 of chapter 6 of title 11 of the administrative code of the city of New York to be taxed under subchapter 2 of such code (Part K); to amend the tax law and the administrative code of the city of New York, in relation to the treatment of expenses that are attributable to certain types of subsidiary capital and government obligations, and the computation of the payroll percentage of the allocation factor by banking corporations (Part L); to amend the tax law, in relation to the exemption from the franchise tax on insurance corporations under article thirty-three of such law for town or county cooperative insurance corporations (Part M); to amend part N of chapter 61 of the laws of 2005, amending the tax law relating to certain transactions and related information, in relation to making permanent the disclosure and penalty provisions relating to transactions that present the potential for tax avoidance (Part N); to amend the tax law and the administrative code of the city of New York, in relation to requiring a combined report to be filed by corporations under state franchise taxes on business corporations and insurance corporations and the New York City general corporation tax, that have substantial intercorporate transactions (Part O); to amend the tax law and the administrative code of the city of New York, in relation to providing for a modification of elementary and secondary school tuition for personal income tax purposes; and repealing certain provisions of such laws relating thereto (Part P); to amend the tax law, in relation to authorizing the commissioner of taxation and finance to disregard a personal service corporation or S corporation if it is determined that such entity was formed or availed of to avoid or evade New York State income tax (Part Q); to amend the tax law, in relation to requiring a corporation that files as a federal S corporation to automatically file as a New York S corporation if certain requirements are met (Part R); to amend the tax law and the administrative code of the city of New York, in relation to modifying the New York itemized deduction (Part S); to amend the tax law, in relation to the limited liability company filing fee (Part T); to amend the public housing law, in relation to providing a credit against income tax for persons or entities investing in low-income housing (Part U); and to amend the tax law and the administrative code of the city of New York, in relation to an addition to federal taxable income and federal adjusted gross income (Part V)

PURPOSE:

This bill contains provisions needed to implement the Revenue portion of the 2007-08 Executive Budget.

SUMMARY OF PROVISIONS, EXISTING LAW, PRIOR LEGISLATIVE HISTORY AND STATEMENT IN SUPPORT:

Part A – Extend for one year the lower tax rates and rules governing simulcasting of out-of-state races

This bill extends various provisions of the Racing, Pari-Mutuel Wagering and Breeding Law which expire during the 2007-08 fiscal year for a period of one year.

Section 1 amends paragraph (a) of subdivision 1 of section 1003 of the Racing, Pari-Mutuel Wagering and Breeding Law to extend in-home simulcasting from June 30, 2007 to June 30, 2008.

Section 2 amends subparagraph (iii) of paragraph d of subdivision 3 of section 1007 of the Racing, Pari-Mutuel Wagering and Breeding Law to extend the current percentage of total pools allocated to purses that a track located in Westchester County receives from a non-profit association, from June 30, 2007 to June 30, 2008.

Section 3 amends the opening paragraph of subdivision 1 of section 1015 of the Racing, Pari-Mutuel Wagering and Breeding Law to continue the provisions allowing simulcasting of out-of-state thoroughbred races on any day the Saratoga thoroughbred track is operating and to delay these provisions from governing the simulcasting of out-of-state thoroughbred races on all days whether or not the Saratoga thoroughbred track is operating, from June 30, 2007 to June 30, 2008.

Section 4 amends subdivision 1 of section 1016 of the Racing, Pari-Mutuel Wagering and Breeding Law to extend the provisions governing the simulcasting of races conducted at out-of-state harness tracks from June 30, 2007 to June 30, 2008.

Section 5 amends the opening paragraph of subdivision 1 of section 1017 of the Racing, Pari-Mutuel Wagering and Breeding Law to extend the provisions governing the simulcasting of out-of-state thoroughbred races on any day the Saratoga thoroughbred track is closed, from June 30, 2007 to June 30, 2008.

Section 6 amends section 32 of chapter 281 of the Laws of 1994 to extend the current amount of off-track betting wagers on NYRA pools dedicated to purse enhancement from June 30, 2007 to June 30, 2008, and to eliminate the reference to the repeal of lower pari-mutuel tax rates on these pools, which was made ineffective by Chapter 59 of the Laws of 2006.

Section 7 amends section 54 of chapter 346 of the Laws of 1990 to extend binding arbitration for disagreements from June 30, 2007 to June 30, 2008 and to delay the activation of section 18 of chapter 346 which requires every non-profit racing association to pay the New York State Capital Investment Fund 50 percent of the commissions that the association receives at the end of each quarter.

Section 8 amends paragraph a of subdivision 1 of section 229 of the Racing, Pari-Mutuel Wagering and Breeding Law to extend the current pari-mutuel tax rates on pari-mutuel pools of a non-profit racing association from December 31, 2007 to December 31, 2008.

Section 9 clarifies that for the purposes of this chapter of the laws of 2007, the term “non-profit racing association” when used in any of the sections amended shall mean any non-profit racing association incorporated under article II of the racing, pari-mutuel wagering and breeding law or any successor corporation thereto, whether or not a non-profit corporation.

The extension of these provisions will maintain the pari-mutuel betting and simulcasting structure that is currently in place in New York State. The provisions extended by sections one through six of this bill were first enacted in 1994 and section seven was enacted in 1990. These provisions were most recently extended in 2002. The tax rates extended in section eight have been in effect since April 1, 2001.

Part B – Extend the sunset of Quick Draw by one year from May 31, 2007 to May 31, 2008

This bill extends the authority to operate the Lottery’s Quick Draw game for one year.

Section 1 amends Chapter 405 of the Laws of 1999 to extend the authorization to operate the Quick Draw game.

Current law includes a sunset provision which automatically repeals the authorization to operate the Quick Draw game on May 31, 2007.

The Quick Draw game was first authorized in 1995 and reauthorized in 1999, 2004 and 2006.

Quick Draw sales for 2006-07 are expected to be $439 million and revenues are projected to reach approximately $134 million. The game supports education as well as providing commissions for Lottery retailers. Extension of the game would preserve revenue as well as aid for education, and would allow retailers who offer Quick Draw at their establishment to continue to provide their customers with the game.

Part C – Provide permanent authorization to the Department of Taxation and Finance to collect unpaid child support

This proposal will permanently extend the statutory authorization for improved child support and spousal support arrears collection and enforcement in New York by making permanent the enforcement partnership between the Office of Temporary and Disability Assistance (OTDA) and the Department of Taxation and Finance (DTF).

Section 1 will amend section 5 of Chapter 706 of the Laws of 1996, as amended, to make permanent the authorization for OTDA to refer accounts to DTF for collection of unpaid child support and spousal support arrears.

Section 2 sets forth the effective date of the proposal.

At present, section 5 of Chapter 706 of the Laws of 1996 provides that collection of unpaid child support and spousal support arrears by DTF, on behalf of OTDA, terminates June 30, 2007.

The collaboration between OTDA and DTF to collect unpaid child support and spousal support arrears was initiated by Chapter 706 of the Laws of 1996, which had an original sunset date of June 30, 1999. That date was extended to 2003 by Chapter 68 of the Laws of 2001; again extended to 2005 by Chapter 88 of the Laws of 2003; and finally extended to 2007 by Chapter 116 of the Laws of 2005.

Making permanent the chapter authorizing the child support enforcement partnership between OTDA and DTF would prevent the potential annual loss of significant collections from this successful enforcement program. The partnership was responsible for collections of approximately $55 million in 2005. The failure to continue referral of accounts to DTF for collection of unpaid child support would additionally result in the loss of a powerful deterrent to the non-payment of child support obligations.

Since the inception of this partnership in 1996, approximately $436.2 million has been collected under this program. The loss of this successful enforcement tool would have a considerable impact on child support collections and on families in New York.

Part D – Require travel companies that rent hotel rooms over the Internet to collect the sales tax on the markups and service fees charged to customers

To amend the Tax Law and the Administrative Code of the City of New York to ensure payment of sales tax due on the provision of hotel room occupancies by travel companies.

In recent years a number of travel companies have contracted with New York hotel operators to make these operators’ hotel rooms available to consumers through the travel companies’ websites and toll-free numbers. These travel companies typically pay the operator of the hotel a discounted amount for the hotel room, plus the sales tax on that amount. The travel companies then charge their customers an amount for the hotel room that generally exceeds the hotel’s charge to the travel company, including an amount labeled as a service fee or tax recovery charge. Under current law the travel companies are required to pay tax on the rent they pay the hotel operators but are not required to collect sales tax on their charges to customers because they do not qualify as operators of hotels under the Tax Law. Thus, the travel companies’ markup of the cost of the New York hotel rooms goes untaxed, giving the travel companies an advantage over conventional hotels in booking hotel rooms.

This bill would correct that situation.

Section 1 would clarify that the contractual right of a travel company (referred to as an “occupancy provider” in the bill) to book an operator’s hotel room for consideration constitutes an occupancy of a hotel room and is thus subject to sales tax. Since the hotel tax is imposed on rent for occupancy of a room in the State, the section would make it clear that the total charges of the travel company to its customers are subject to sales tax as rent for a hotel occupancy.

Section 2 would add a new section 1105-D. Paragraph (a) of the new section would define “occupancy provider” as a person that has the contractual authority to provide occupancies and to set the amount of the rent for the occupancy. To ensure that the State receives the sales tax on the occupancy providers’ markup of hotel occupancies, subdivision (b) of the new section would require operators of hotels that sell occupancies to occupancy providers to collect sales tax on a deemed rent equal to 120% of their charges to the occupancy providers. Under that new section, the occupancy provider which is registered and has collected the sales tax on occupancies provided to its customers for a given sales tax quarter would be allowed to take as a credit against the tax it is required to collect and remit with its sales tax return the amount of the sales tax it paid to the operator and to receive a refund for the balance, if any. However, if the occupancy provider is not registered or does not collect sales tax from its customers, the occupancy provider would be entitled to a refund only to the extent that the tax it paid to the operator in respect to its provision of a hotel room in New York under the 120% deemed rent rule exceeded the tax due on its charge for providing that occupancy. The bill also would provide that to the extent that occupancy is bundled with other goods and services and sold for a single price, the entire amount of the price would be treated as rent subject to the 120% deemed rent rule; however, if the portion of the price attributable to rent for the occupancy is separately stated on the invoice or receipt given the customer and the rent is reasonable, then only the separately stated rent charge will be subject to the 120% deemed rent rule.

In sum, this bill would require an occupancy provider to collect sales tax on its total charges to its customers, but even if the occupancy provider fails to do so, the bill’s 120% deemed rent provision would provide a mechanism to ensure that the State will still receive, at least approximately, the sales tax due it on the hotel occupancy sold by the occupancy provider.

Sections 3 and 4 would amend the New York City Administrative Code to conform the city’s hotel room occupancy tax to the bill’s changes in the State’s sales tax on hotel occupancy.

Section 5 will authorize municipalities other than New York City which impose their own locally-administered hotel and motel occupancy taxes to make the provisions of sections 1 and 2 of this act applicable to these local taxes.

Section 6 would require the Commissioner of Taxation and Finance and New York City’s Commissioner of Finance to cooperate in order to achieve consistent and uniform implementation and administration of this act.

Part E – Extend for two years the increased penalties in the Alcoholic Beverage Tax for violations of law including but not limited to: importation without registration, possession without registration, production without registration, removal from a warehouse and failure to pay the tax

This bill extends for two years certain provisions of the Tax Law and the Criminal Procedure Law which provide enhanced enforcement tools for the more efficient collection of the State and New York City alcoholic beverage taxes, particularly with respect to liquor.

Section 1 would amend section 16 of Chapter 508 of the Laws of 1993 to extend the sunset for two years, from October 31, 2007 to October 31, 2009, with respect to the enforcement tools authorized by such chapter. Those tools were enacted to ensure more efficient collection of State and New York City alcoholic beverage taxes, particularly with respect to liquor.

The following provisions of the Tax Law and Criminal Procedure Law were amended by Chapter 508 of the Laws of 1993 and are currently scheduled to sunset on October 31, 2007:

1. Subdivisions 4 and 14 of Section 420 of the Tax Law to provide a clearer definition of the terms “distributor” and “noncommercial” importer.
2. Section 421 of the Tax Law to generally prohibit persons unregistered as distributors from importing liquors into the State. Provisions were included to specify quantities of liquor imported into the State for legally unregistered “personal use” as well as quantities determined to be for the purpose of resale.
3. Section 423 of the Tax Law to provide procedures governing the cancellation of distributors’ registrations, a process similar to that followed for motor fuel distributorship licenses.
4. Subdivision 1 of Section 424 of the Tax Law to clarify that tax-free sales by military exchanges would be allowed only to the extent authorized by Federal regulations or directives. This section was also amended to provide that the possession of more than 90 liters of liquors would be considered possession for resale within the State and that a person in possession of such quantities would be required to possess appropriate documentation to attest to the tax status of the liquors.
5. E.   Section 425 of the Tax Law to provide that in cases where the beverage tax could not be imposed on the distributor, the purchaser from the distributor or the person who purchases from such purchaser would be liable for the tax.
6. Sections 425-a and 427 of the Tax Law to create a presumption of taxability as to alcoholic beverages and provide for methods of evidencing tax payment applicable to sales other than retail sales of wine or beer of 90 liters or less. For liquor sales, the legislation requires specific invoice and tax certification requirements for all sales except retail sales of 360 liters or less.
7. Section 428 of the Tax Law to require transporters of liquor to carry a manifest, invoice or other document indicating certain details of the transportation. If such documentation was not presented, presumptions would be created that the liquors were being imported for sale or use within the State. The burden would then be placed on the transporter to show otherwise.
8. Subdivision 3 of Section 445 of the Tax Law to make the amended Tax Law, Section 421 registration requirements applicable to the New York City tax.
9. Section 1813 of the Tax Law to attach criminal culpability to the illegal importation of liquors into the State or the illegal manufacture of liquors in the State. A third conviction or the importation or manufacture of more than 360 liters would raise criminal culpability from a misdemeanor to a Class E felony. This also applied for purposes of the New York City tax. The willful and knowing possession of untaxed liquors was made a misdemeanor; the willful and knowing possession of more than 360 liters of untaxed liquors was made a Class E felony.
10. Section 1845 of the Tax Law to provide for seizures and forfeiture of liquors and the means of transportation of that liquor where more than 90 liters of liquor were bootlegged into the State or more than 90 liters of untaxed liquors were found being distributed or sold in the State. This also applied for purposes of the New York City tax.
11. Sections 1.20 and 2.10 of the Criminal Procedure Law to grant limited police officer status to certain employees of the Department of Taxation and Finance assigned to the enforcement of the alcoholic beverage tax.

Section 2 of the bill provides that it would take effect immediately.

These provisions have twice been extended for five years previously.

Extending the provisions of the original enforcement legislation and thus continuing the restriction of unregistered importation of liquors through manifest and invoice requirements and providing stricter criminal penalties and enforcement tools for the Department of Taxation and Finance will ensure an improved revenue stream for the State and a more level playing field for legitimate, law-abiding businesses.

Part F – Reallocate the distribution of revenues collected through certain dedicated taxes

To reallocate the distribution of revenue collected from the corporate and utilities taxes imposed under Tax Law sections 183 and 184.

Section 1 will amend subdivision 3 of Tax Law section 205 to provide that, on and after April 1, 2007, after reserving amounts for refunds and reimbursements, 20 percent of the moneys collected from the taxes imposed by Tax Law sections 183 and 184 shall be deposited to the credit of the Dedicated Highway and Bridge Trust Fund created by State Finance Law section 89-b; 53 percent shall be deposited in the Mass Transportation Operating Assistance Fund created by State Finance Law section 88-a to the credit of the Metropolitan Mass Transportation Operating Assistance (MMTOA) account; and 27 percent shall be deposited to such Mass Transportation Operating Assistance Fund to the credit of the Public Transportation Systems Operating Assistance (PTSOA) account. Under existing law, 20 percent of such moneys are deposited in the Dedicated Highway and Bridge Trust Fund and the remainder is deposited in the Mass Transportation Operating Assistance Fund to the credit of the MMTOA account.

Section 2 will amend section 13 of Part U1 of Chapter 62 of the Laws of 2003, which added Tax Law section 205.3, to eliminate the repeal date of such subdivision. Currently, Tax Law section 205.3 expires and is deemed repealed on March 31, 2010.

Section 3 provides that the act will take effect on April 1, 2007, and shall apply to moneys collected on and after such date.

The taxes authorized by section 183 and 184 of the Tax Law (also known as the “transmission” or “long lines” tax) are imposed predominantly on telecommunications companies providing local telephone service in New York. This proposal does not increase the tax rate. It only re-distributes the amount currently deposited in the Mass Transportation Operating Assistance Fund between the two accounts within the Fund, according to a regional split. Since the taxes are collected Statewide, the new distribution is based upon population within the Downstate and Upstate service districts.

The Upstate account, or PTSOA, currently receives only one tax receipt, which is a percentage of the petroleum business tax (PBT). PBT receipts are historically volatile and State fiscal year 2006-07 estimates for the PTSOA account are projected to drop nearly 7 percent from the prior year. This proposal will re-distribute approximately $23 million of the transmission tax, a more stable revenue source, to the PTSOA account. This change will diversify the revenue base that funds Upstate transit systems, while having no meaningful impact on the MMTOA account or Downstate transit systems. More specifically, the amount distributed represents 14.5 percent of all subsidies provided to Upstate transit systems (approximately $159 million), and less than one percent of all subsidies provided to Downstate transit systems (approximately $2.7 billion) under the Executive Budget recommendation.

Part G – Replace the highway use tax permit requirements with a certificate of registration requirement

To replace the permit requirements for motor vehicles subject to the Highway Use Tax (HUT) imposed under Article 21 of the Tax Law with a certificate of registration requirement.

Section 1 would amend section 502 of the Tax Law to remove the requirements to display a decal on every motor vehicle subject to the HUT and to carry a permit in such motor vehicles. Instead, every motor vehicle subject to the HUT would be required to be registered for the HUT and a certificate of registration must be kept at a carrier’s place of business for all such motor vehicles. The special HUT permit and decal provisions with respect to carriers engaged in the business of transporting motor vehicles by saddle or full mount mechanism would be eliminated. Furthermore, the grounds for denial of a certificate of registration for nonpayment of monies due under Article 21 of the Tax Law would be extended to all monies due under the taxes and impositions administered by the Commissioner of Taxation and Finance.

Sections 2 and 3 would make conforming changes to the tax return and record keeping requirements under the HUT. In addition, the aggregation with the fuel use tax under Article 21-A to determine the return filing period will be eliminated.

Sections 4 and 5 would make conforming changes to the provisions regarding suspensions, revocations and renewals and also provide that renewal registrations could be mandated not more than once a year.

Sections 6, 7 and 9 would make conforming changes to the provisions regarding the determination of tax, proceedings to recover tax and secrecy of returns.

Section 8 would add a provision under section 512 of the Tax Law to provide a civil penalty for any person who fails to obtain a certificate of registration under the HUT.

Sections 10 through 12 would make conforming changes to the criminal provisions.

Section 13 would provide that any carrier may, at its option, elect to rely on its outstanding permits and tags, plates or stickers issued under the HUT, in lieu of obtaining a certificate of registration under the provisions of this bill, up until the earlier of the date the carrier obtains a certificate of registration or the next re-registration period (which would coincide with the date that would otherwise have been set for the next repermitting period).

The provisions are needed to comply with the enactment of Federal legislation (Public Law 109-59) and its interpretation by the Federal Motor Carrier Safety Administration that calls into question the requirements to display HUT decals on motor vehicles and to carry HUT permits in such vehicles. In the absence of these requirements, a new mechanism must be provided to ensure compliance with the HUT among carriers subject to the tax. The registration mechanism provided by this bill would ensure a fair playing field among all carriers by providing a means of identifying and verifying all motor vehicles subject to the tax and helping to ensure a consistent and efficient means of enforcing such tax.

Part H – Close a loophole and conform to Federal rules by eliminating the deduction for certain subsidiary dividends received by a parent company from a real estate investment trust (REIT) or regulated investment company (RIC) to ensure that the shareholders of the REIT or RIC pay tax on the income earned by the REIT or RIC

This bill closes a tax loophole by amending the Tax Law and New York City Administrative Code to require a controlled real estate investment trust (REIT) or a regulated investment company (RIC) to file a combined report under the business corporation tax with its controlling corporation, and to disallow the exclusion of dividends and gains from a REIT or a RIC subsidiary under the bank tax and insurance tax.

This bill requires a REIT or a RIC whose stock is substantially owned by one or more other business corporations subject to tax in New York to file a combined report with such other corporation(s) under the corporate franchise tax, Article 9-A of the Tax Law. The entire net income of a REIT or RIC required to file a combined report will be computed without regard to the dividends paid deduction allowed under the Internal Revenue Code. In addition, the combined report will be required to show a combined capital amount that includes the capital of the REIT or RIC and all other combined business corporations.

The bill also disallows the exclusion of all or part of the dividends paid by a REIT or a RIC, or by a subsidiary that owns directly or indirectly over 50 percent of a REIT or RIC (a “REIT holding company” or a “RIC holding company”) under the Article 33 insurance corporation tax. In addition, the bill provides that the 50 percent exclusion for dividends from non-subsidiaries in Article 33 will apply to the dividends from a RIC subsidiary. The bill also excludes the capital of a REIT, RIC, and a REIT or RIC holding company (to the extent the capital of the holding company is attributable to an ownership interest in a REIT or RIC) from the base of the subsidiary capital tax under Article 33.

Similarly, the bill excludes dividends from a REIT, RIC, or a REIT or a RIC holding company (to the extent the dividends are attributable to an ownership interest in a REIT or RIC) from the 60 percent deduction allowed for dividend income from subsidiaries of banking corporations under the bank tax, Article 32 of the Tax Law. Also, the 60 percent deduction for net gains from subsidiary capital in Article 32 will not include the gain or loss on the sale of an ownership interest in such entities (to the extent such gains or losses are attributable to an ownership interest in the REIT or RIC).

Corresponding amendments are also made to New York City’s general corporation tax and bank tax.

Generally, a REIT is taxed on the Federal level (under Internal Revenue Code section 857) upon its real estate investment trust taxable income, but the REIT is allowed to take a deduction for dividends paid to its shareholders. A REIT must distribute at least 90 percent of its dividends to avoid taxation of this income to the REIT. The dividends paid to the shareholders of the REIT are taxable to the shareholder. Dividends received by a corporate shareholder of a REIT, or that are deemed to be received, do not qualify for the dividends-received deduction allowed to corporations under the Internal Revenue Code (the “Code” or “IRC”). A RIC is a domestic corporation that meets the requirements of section 851 of the IRC. Like a REIT, a RIC must distribute at least 90 percent of its annual ordinary income (not including capital gain income) and tax-exempt income to its shareholders. RICS and their shareholders are taxed at the Federal level much the same way as REITS and their shareholders. However, corporate shareholders of RICS are generally allowed a dividends-received deduction for distributions made from a RIC.

REITS and RICS are taxable entities under Article 9-A (corporate franchise tax) of the Tax Law, even if a majority interest in the REIT or RIC is owned by a banking corporation or insurance company. Since they are allowed a deduction for dividends paid to shareholders, which flows through to the determination of taxable income for New York purposes, and they are not taxed based on capital or assets, these entities usually pay the minimum tax under Article 9-A. General business corporations and insurance corporations subject to tax under Article 33 (insurance tax) of the Tax Law are allowed to deduct 100 percent of income, gains or losses from subsidiaries and 50 percent of income, gains or losses from non-subsidiaries. Banking corporations are allowed to deduct 60 percent of the dividend income received from subsidiaries, and 60 percent of net gains from the sale or other disposition of subsidiary capital. A subsidiary can include a REIT or a RIC.

The Federal method of taxation of REITS ensures that either the REIT or its shareholders pay tax on the income earned by the REIT. As at the Federal level, the REIT itself can avoid almost all New York State tax. However, due to the treatment of dividends from subsidiaries in New York State Tax Law, the treatment of a REIT and its corporate shareholder allows a corporate taxpayer to form a REIT, receive through distributions the income earned by the REIT, and avoid the payment of New York tax on this distributed income. Because the REIT itself usually has little New York tax liability, the income is almost entirely untaxed by New York. Corporate taxpayers, particularly banking corporations subject to tax under Article 32 of the Tax Law, have exploited these provisions of the Tax Law by transferring large mortgage loan portfolios or other assets to a controlled REIT so that the income from these assets can be funneled back to the taxpayer in the form of a deductible dividend. This practice converts what would have been ordinary income, fully includible in entire net income, into income from a subsidiary that is subject to a full or partial deduction. Similarly, a RIC avoids almost all taxation by the State under the corporate franchise tax if it distributes its earnings to shareholders.

It is evident that the current method of taxing REITS and RICS, and their corporate shareholders, can be exploited to shelter all or most of the income earned in New York from taxation. Other states, including California, Connecticut and Massachusetts, have recognized the problems posed by permitting corporate shareholders to exclude REIT or RIC distributions from their income, and have passed legislation requiring such distributions to be included in the taxable income base.

The amendments to Article 9-A in this bill will prevent general business corporations from transferring assets to a REIT or RIC and receiving income from these assets as tax-free distributions from subsidiaries. Under this bill, any investment income earned by the REIT or RIC will continue to be treated as such under Article 9-A, and allocated according to existing Article 9-A rules. The disallowance of the dividend deductions or exclusions in this bill for REIT or RIC distributions under Articles 32 and 33 will also curtail the use of REITS or RICS to avoid tax on income that these corporation tax provisions were intended to cover.

Part I – Close a loophole that allows banks that use subsidiaries to shelter income

The purpose of this bill is to close a tax loophole by establishing conditions under which certain corporations that elected to be taxable under the State corporation franchise tax, or the New York City general corporation tax, or that are required to be taxable under these taxes pursuant to the Gramm-Leach-Bliley transitional provisions, will become taxable under the banking corporation tax, and to provide that an investment subsidiary of a bank or bank holding company shall be included in the definition of a banking corporation.

Section 1 makes taxable under the banking corporation tax (Tax Law Article 32) those corporations that elected to be taxable under the corporate franchise tax (Article 9-A) pursuant to section 1452(d), or under the Gramm-Leach-Bliley transitional provisions in section 1452 (an “electing corporation”) if any of the conditions specified in section 3 of the bill apply for any taxable year beginning on or after January 1, 2007.

Section 1 also makes taxable under Article 32 those corporations that are otherwise required to be taxable under Article 9-A pursuant to the Gramm-Leach-Bliley transitional provisions in section 1452 (a “grandfathered corporation”) if any of the conditions specified in section 3 of the bill apply for any taxable year beginning on or after January 1, 2007.

Lastly, section 1 specifies the conditions that in any taxable year beginning in 2007 would subject a corporation taxable under Article 9-A pursuant to the section 1452(d) election, or the Gramm-Leach-Bliley transitional provisions, to taxation under Article 32. These conditions include: ceasing to be a taxpayer under Article 9-A; becoming subject to the Article 9-A fixed dollar minimum tax; having no wages or receipts allocable to New York; being a party to certain reorganizations; being acquired by a different corporation than the one that owned 65 percent or more of the stock prior to 2007; or acquiring assets in an amount greater than 40 percent of the value (or tax basis, if greater) of the corporation’s total assets before the acquisition.

Section 2 will add to the Administrative Code of the City of New York provisions similar to the Tax Law amendments contained in section 1 of the bill.

Section 3 will amend the definition of a banking corporation in Tax Law section 1452(a)(9) to include a corporation principally engaged in holding and managing investment assets if 65 percent or more of the stock of such a corporation is owned by a bank or bank holding company.

Section 4 adds an amendment to the New York City banking corporation tax that is similar to the amendment to section 1452(a)(9) of the Tax Law that is set forth in section 3 of the bill.

Sections 5 through 14 add exception language to existing Gramm-Leach-Bliley Act (GLBA) provisions in subsections (h), (i), (j), (k) and (l) of Tax Law section 1452. This exception language references new subsection (n) of section 1452 added by bill section 1, and clarifies that these existing GLBA provisions, which contain language stating that they control “notwithstanding” any contrary language in section 1452, do not supersede new subsection (n).

Sections 15 through 24 add similar exception language as contained in bill sections 5 through 14 to the GLBA provisions in the Administrative Code.

Section 25 provides that this bill is effective immediately and applies to taxable years beginning on or after January 1, 2007.

Article 32 of the Tax Law imposes a franchise tax on banking corporations, and defines such corporations in section 1452(a)(9) to include a corporation (i) 65 percent or more of whose stock is owned by a bank or bank holding company, and (ii) that is doing a banking business or a business closely related to banking. Corporations described in section 1452(a)(9) that were in existence in 1984 and which were doing a business closely related to banking in 1984 and subject to the corporation franchise tax, were allowed to make a one-time election to continue to be taxable as business corporations. As provided in section 1452(d), this election had to be made on the return that was filed for the corporation’s taxable year ending in 1985. Corporations that made the election are commonly referred to as “grandfathered 9-A corporations”. Section 1452 also provides transitional provisions related to the Federal Gramm-Leach-Bliley Act, which eliminated many of the prohibitions against the affiliation of banks, insurance companies and securities firms. These transitional provisions generally require corporations described in section 1452(a)(9) that were in existence prior to the effective date of the transitional provisions to remain subject to the same tax (for example, Article 9-A or Article 32) that applied to them prior to the effective date. The transitional provisions also allow certain newly formed corporations described in section 1452(a)(9) to elect to be taxable under Article 9-A or Article 32.

This bill responds to the widespread use by banking corporations of grandfathered 9-A corporations and the GLBA transitional provisions to change the taxation of significant parts of their businesses. The election provisions were intended to ameliorate the potential adverse effect of subjecting corporations that were subject to tax in New York under one article of taxation to a very different scheme of taxation under another article in the Tax Law. Some banking corporations, however, have placed significant banking assets, including large portions of their investment portfolios, in these corporations so that this part of the banking business is subject to the corporation franchise tax. A large number of these asset transfers occur in the context of a merger with another subsidiary owned by the parent bank. In many of these situations, the electing corporation which used to hold such assets was doing a business completely unrelated to investment activities, or was simply an inactive shell corporation. The election provisions in section 1452 were not intended to allow banking corporations to remove significant portions of their banking business from taxation under the banking corporation tax.

This bill specifies several conditions which would either result in revocation of an election to be taxable as a business corporation, or subject a corporation that is taxable under the general business corporation franchise tax pursuant to GLBA provisions to the tax on banking corporations.

This bill also amends the definition of a banking corporation in section 1452 of the Tax Law (and section 11-640 of the Administrative Code of the City of New York) to include a corporation whose stock is 65 percent or more owned by a bank or bank holding company and is principally engaged in holding and managing investment assets. Banking corporations have established these types of corporations to manage their investments (previously held and managed in the bank), but have sought to have these companies taxed as business corporations, instead of banks, to lower the tax on the income earned from these investments. There have been cases where the staff managing these assets are still employed by the bank; only the ownership of the assets has changed. This amendment will require such investment subsidiaries to be taxed under the banking corporation tax and would eliminate the incentive for banks to engage in this tax avoidance scheme.

Part J – Conform to Federal rules and the practices of other states with respect to banking corporations that allow certain taxpayers to deduct only bad debts that have actually been written-off (the “direct write-off method”)

This bill conforms certain provisions of the Bank Tax to the Federal rules which allow certain commercial banks and thrift institutions a bad debt deduction that is calculated by the direct write-off, rather than the current reserve method.

Sections 1 through 11 of the bill will amend various provisions in Article 32, the franchise tax on banking corporations, in order to clarify that for taxable years beginning on or after January 1, 2007, the bad debt reserve method is disallowed for commercial banks and savings institutions subject to tax under Article 32. In addition, bill sections 8 and 11 require that a recapture amount be included in entire net income over a period of 4 years. The recapture amount is equal to (i) the sum of the amounts allowed to be deducted as additions to the reserve for bad debts for the preceding 5 tax years preceding the tax year beginning on or after January 1, 2007, and before January 1, 2008 (excluding tax years of less than 6 months), minus (ii) the sum of the amounts included as additions to New York entire net income for the bad debt deduction allowed under Internal Revenue Code section 166 for such tax years specified in (i). The recapture amount will be apportioned over the 4 year period. Sections 9 through 11 contain similar provisions to amend subdivision (i) of section 1453 for commercial banks. Bill sections 12 through 22 make corresponding amendments to New York City’s bank tax. Section 23 contains the effective date provisions.

Currently, the bank tax permits a deduction for bad debts using the reserve method in the computation of entire net income and alternative entire net income. The Federal Tax Reform Act of 1986 disallowed the use of the reserve method for large banks and requires those banks to use the direct charge-off method, charging off the debts when they are determined to be worthless. If the bank tax had remained coupled with Federal law, this would have resulted in a windfall to the State due to changes at the Federal level. Therefore, New York decoupled from the Federal changes in 1987 and established a New York reserve. (Conforming changes to New York City’s bank tax were made in 1988.) However, the reserve method does not reflect a bank’s experience with losses as accurately as the direct charge-off method. This bill will rectify this inaccuracy.

Eliminating the reserve method for accounting for bad debts in the bank tax will provide the advantage of Federal conformity for commercial banks and thrift institutions. Further, since the State and City deductions require the maintenance of a reserve for bad debts, where no Federal reserve is required, compliance with State and City law has been complex for taxpayers and the Department of Taxation and Finance. This bill will simplify that compliance.

Part K – Extend for two years, the transitional provisions relating to the enactment and implementation of the Federal Gramm-Leach-Bliley Act of 1999 to allow certain corporations that were taxed under the corporate franchise tax or bank tax in 1999 to temporarily maintain that status

This bill extends for two additional years, the provisions of the New York State and New York City bank taxes dealing with the taxation of commercial banks and the transitional provisions concerning the enactment and implementation of the Federal Gramm-Leach-Bliley Act (GLBA).

The bill will extend the provisions concerning the New York State and New York City taxation of commercial banks, which were first added to the bank tax in 1985, for two additional years to taxable years beginning before January 1, 2010. In addition, the bill similarly extends the provisions concerning the allocation of trading and investment activities of banks, which were added in 1987 and 1988.

Further, the bill will extend the transitional provisions in the State and City bank taxes, relating to the enactment and implementation of the Federal GLBA (which eliminated many of the prohibitions against the affiliation of banks, insurance companies and securities firms), for an additional two years, to taxable years beginning before January 1, 2010. The extension is included as a new subsection (m) of Tax Law section 1452, and a new subdivision (l) of Administrative Code section 11-640. These new provisions state, among other things, that a corporation required to be taxable, or electing to be taxable as a banking corporation under the transitional provisions shall continue to be taxable as such for those taxable years in which the corporation meets the definition of a banking corporation, or satisfies the requirements allowing it to elect to be taxed as a banking corporation.

In 1985, significant changes were made to the franchise tax on banking corporations under the Tax Law and the New York City Administrative Code. Many of those amendments, however, were made subject to a sunset provision, which provided that they would no longer be effective as to commercial banks for taxable years beginning on or after January 1, 1990. This sunset provision has been extended numerous times since 1990, and currently these provisions are set to expire for taxable years beginning on or after January 1, 2008.

Starting in 2000, transitional provisions relating to the Federal GLBA, which removed the prohibition against the affiliation of banks, securities firms and insurance companies, were added to both the Tax Law and the New York City Administrative Code. These transitional provisions were intended to provide banks and securities firms with some certainty about their taxable status under the New York State and New York City taxes when the firms exercised the expanded powers provided at the Federal level.

The provisions first enacted in 1985, which relate to the taxation of commercial banks, have been effective in accomplishing their legislative goals. They have been extended many times without change. Therefore, it is appropriate to extend these provisions for an additional two years.

Without the transitional provisions relating to the Federal GLBA, businesses in the financial industry may encounter unexpected tax consequences or uncertainties concerning their tax status, because, in order to affiliate, the banking, securities and insurance industries must do so under the umbrella of a financial holding company. Since most financial holding companies are, by definition, bank holding companies, securities firms making the financial holding company election and their subsidiaries may unwittingly subject themselves to liability under the bank tax. This sudden reclassification of a company from a general business corporation taxpayer to a bank tax taxpayer may cause considerable administrative and compliance burdens. Companies whose financial subsidiaries expand their activities may have a difficult time determining whether or not they should be classified as a taxpayer under the bank tax. Moreover, the ability of such companies to join in the filing of a combined report is left open to question. Thus, it is appropriate to extend the transitional relief for two additional years.

Part L – Conform to treatment under the corporate franchise tax, by requiring the add back of expenses related to subsidiary capital under the bank tax, and eliminating the 20 percent reduction in the wage factor portion of the apportionment formula to ensure the bank tax appropriately reflects a bank’s presence in New York

This bill conforms the treatment of expenses related to certain income exempt from the franchise tax on banks to the same type of treatment used by general business corporations and eliminate the discounting of the payroll percentage of the bank tax allocation factor to ensure the bank tax appropriately reflects a bank’s presence in New York.

Section 1 of the bill adds new paragraph (14) to section 1453(b) of the Tax Law. New paragraph (14) prohibits the deduction of expenses related to items of income made exempt pursuant to paragraphs 1453(e)(11) and (12). Under current law, section 1453(e)(11) provides deductions for 17 percent of interest income from subsidiary capital, 60 percent of dividend income from subsidiary capital and 60 percent of net gains from subsidiary capital and section 1453(e)(12) provides a deduction of 22½ percent of the interest income from certain government obligations. This provision adds to the bank tax provisions of Article 32, the principle that if income is exempt from taxation, the expenses incurred in the production of this exempt income should not be taken as a deduction against other income, thereby preventing a double benefit. Currently, this principle is recognized in Article 9-A (corporate franchise tax) of the Tax Law.

Section 2 amends subdivision (a) of section 1453-A of the Tax Law by incorporating the deductions and exclusions added in section one of the bill that are not taken into account when computing entire net income to be taken into account when computing alternative entire net income. Section 1453-A already backs out deductions for certain income in the computation of alternative entire net income that are allowed in the computation of entire net income. This section disallows the corresponding additions in the computation of alternative net income, thus similarly treating the income and expenses.

Section 3 amends subdivision (a) of section 1454 of the Tax Law by eliminating the discounting of the payroll factor when computing allocation percentages. By allowing for a discounted payroll factor, a bank’s presence in New York is not adequately represented when computing allocation percentages. This provision corrects the inequity.

Section 4 amends subdivision (c) of section 1454 of the Tax Law by removing the references to the discounting of the payroll factor that is being eliminated in section 3 of the bill.

Sections 5 through 8 amend the banking corporation tax provisions of the New York City Administrative Code that are similar to the amendments made to the Tax Law in sections 1 through 4 of the bill.

Section 9 provides that the bill will take effect for taxable years beginning on and after January 1, 2007.

Part M – Eliminate the competitive advantage afforded to certain cooperative insurance companies that have expanded their activities beyond those intended by limiting the applicable exemption for cooperative insurance companies

This bill will prevent unfair competition by limiting the exemption from the franchise tax on insurance corporations for certain town or county cooperative insurance corporations.

Section 1 of the bill amends the exemption for town and county cooperative insurance corporations in section 1512(a)(7) of the Tax Law to provide that the exemption will apply only to corporations which properly reported direct written premiums to the Superintendent of Insurance of $25 million or less for the taxable year. Section 2 provides that this amendment will apply to taxable years beginning on or after January 1, 2007.

Section 1512(a)(7) provides an exemption to a town or county cooperative insurance corporation as heretofore contemplated by section 187 of Tax Law in effect immediately prior to January 1, 1974. This exemption applied only to town and county cooperative insurance companies in existence prior to 1937 (which is when the “heretofore contemplated” language was added to the statute).

This proposal was included in the 2005-06 Executive Budget.

Some of the corporations which come within the language of this exemption have significantly expanded their business beyond what was originally contemplated when the exemption was enacted. These companies are competing with other property/casualty companies doing business in New York State, but they have an unfair advantage because they pay no State franchise tax. This bill is intended to level the playing field between large cooperative insurance corporations and other property/casualty companies, and limit the exemption to those companies whose operations are more closely aligned with the original intent of the exemption.

Part N – Continue to deter the use of tax shelters by making provisions allowing the Department of Taxation and Finance to require the reporting and disclosure of Federal and New York reportable and listed transactions that may be improper tax avoidance practices (the same provisions would apply to the personal income tax)

This bill continues to deter the use of tax shelters by making permanent disclosure and penalty provisions relating to transactions that present the potential for tax avoidance.

This bill amends subdivision (iii) of section 12 of Part N, of Chapter 61 of the Laws of 2005 by extending Part N of Chapter 61 of the Laws of 2005 which is set to expire on July 1, 2007.

In 2005, the Tax Law was amended to provide new reporting requirements with respect to the disclosure of information relating to transactions that present the potential for tax avoidance (a tax shelter). These new reporting requirements are similar to the tax shelter disclosure requirements for Federal income tax purposes. Separate reporting requirements are imposed on those who utilize tax shelters and those who promote the use of tax shelters. The amendments also imposed penalties for nondisclosure and statute of limitations for assessments relating to these transactions, and created a voluntary compliance initiative to allow taxpayers to report and pay underreported tax liabilities and interest attributable to these transactions with a waiver of penalties. The authority for the Department to require the reporting and disclosure of Federal and New York reportable and listed transactions expires on July 1, 2007.

This bill makes permanent the tax shelter provisions scheduled to expire on July 1, 2007. The higher-than-expected Voluntary Compliance Initiative participation from taxpayers acknowledging participation in abusive tax shelters, together with the ongoing Federal discovery of new shelter schemes, shows a clear need to continue requiring disclosure by New York taxpayers of such participation.

Part O – Conform to the practices of 17 other states that require corporations that conduct substantial inter-corporate transactions with one another to file a combined, rather than separate, corporate franchise tax return

This bill requires corporations with substantial intercorporate transactions to file a combined report under the New York State and New York City franchise taxes on general business corporations and the New York State franchise tax on insurance corporations.

Section 1 of the bill amends Tax Law section 211.4(a) to require a taxpayer to file a combined tax report with its related corporations, where there are substantial intercorporate transactions among the corporations, regardless of the transfer price for those intercorporate transactions. Related corporations are those that meet the ownership or control requirements that currently exist in section 211.4(a) of the Tax Law (generally an 80 percent direct or indirect stock ownership test). In determining whether there are substantial intercorporate transactions, the Commissioner of Taxation and Finance shall consider and evaluate all activities and transactions of the taxpayer and its related corporations including, but not limited to: (1) manufacturing, acquiring goods or property, or performing services; (2) selling goods acquired from related corporations; (3) financing sales of related corporations; (4) performing related customer services using common facilities and employees; (5) incurring expenses that benefit, directly or indirectly, one or more related corporations; and (6) transferring assets, including such assets as accounts receivable, patents or trademarks from one or more related corporations.

Section 2 amends Tax Law section 211.4(a)(4) to provide that a combined report covering any corporation which does not have substantial intercorporate transactions with the taxpayer or with one or more related corporations shall not be permitted or required unless the Commissioner deems a combined report necessary because of inter-company transactions or some agreement, understanding, arrangement or transaction to properly reflect the tax liability under the corporate franchise tax (Article 9-A).

Section 3 deletes the provisions in Tax Law section 211.4(a)(5) which excluded Federal domestic corporations doing business in Puerto Rico that made an election under Internal Revenue Code (IRC) section 936 from being included in a combined report. That IRC provision has been repealed. Also, section 3 adds provisions to section 211.4(a)(5) to make clear that a corporation organized under the laws of a country other than the United States cannot be included in a combined report.

Section 4 provides that where a taxpayer is included in a combined report with a related member, the taxpayer will not be required to add back royalty payments to that related member that are deductible in calculating Federal taxable income.

Sections 5 and 6 make similar amendments to the royalty add-back provisions in the bank franchise tax and insurance franchise tax provisions.

Section 7 amends Tax Law section 1515(f), relating to the Article 33 insurance franchise tax, to make amendments similar to those concerning combined reports in sections 1 and 2 of the bill. This section also provides that, for purposes of determining whether there are substantial intercorporate transactions of an insurance franchise taxpayer and its related corporations, the following activities will be considered: (1) selling policies or contracts of insurance for related corporations; (2) reinsuring risks for related corporations; and (3) collecting premiums or other consideration for any policy or contract of insurance for related corporations. Also, this section provides that non-life insurance corporations are not allowed to be included in a combined report to reflect recent legislative changes, which now compute the tax on non-life insurance corporations based solely on premiums.

Sections 8 through 10 make similar amendments to those in sections 1, 2 and 4 of the bill to the Administrative Code of the City of New York.

Section 11 provides that the bill takes effect immediately and applies to taxable years beginning on or after January 1, 2007.

In general, under current law, every corporation taxable under the business corporation franchise tax, the insurance franchise tax and the New York City general corporation tax, is a separate taxable entity and is required to file a tax return. However, a group of corporations may be permitted or required to file a combined report where three requirements are met: (1) stock ownership or control, (2) the existence of a unitary business, and (3) the “other requirement” commonly called the “distortion requirement.” These requirements are set forth in Article 9-A regulations (Subpart 6-2 of 20 NYCRR). The stock ownership requirement and “other requirement” implement the statutory requirements of section 211.4. The unitary business requirement is based on U.S. Supreme Court case law. For a group of taxpayers, the “other requirement” is met if reporting on a separate basis distorts the taxpayer’s activities, business, income or capital in New York if the taxpayer reports its income on a separate return basis. Distortion is presumed if, when the taxpayer reports on a separate basis, there are substantial intercorporate transactions among the corporations. In the case of combined reports that include a corporation that is not a New York taxpayer, the “other requirement” is met if it is determined that inclusion of the nontaxpayer corporation is necessary in order to properly reflect the tax liability of one or more taxpayers included in the group. Evidence of this can be shown by substantial intercorporate transactions or by an agreement, understanding, arrangement or transaction between the non-taxpayer and the taxpayer that results in the activity, business, income or capital of the taxpayer to be improperly or inaccurately reflected. Whether or not the group contains only taxpayers or it includes a corporation that is not a taxpayer, if substantial intercorporate transactions are present, the presumption of combination is rebuttable and may be refuted upon a showing that the transactions were conducted at arm’s length pricing. Article 33 has similar statutory requirements for combined returns for life insurance companies and the New York City Administrative Code has similar statutory and regulatory requirements for combined reports under the City general corporation tax.

This bill still maintains the three requirements that now exist for filing a combined report: (1) ownership and control; (2) a unitary business; and (3) the “other requirement”. However, where the “other requirement” is met because there are substantial intercorporate transactions, combination will be required. The requirement to file a combined report with corporations that have substantial intercorporate transactions addresses those situations in which New York corporate taxpayers place parts of their corporate business in out-of-State subsidiaries without any real change in operations and activities of the corporation except for a large reduction in State taxes. These subsidiaries are set up primarily for the purpose of providing to the parent corporation, goods or services that were previously acquired, produced or developed directly by the parent, and on terms that often are designed to leave little income or profit in the parent corporation that is subject to State tax. Since these subsidiaries continue to have substantial intercorporate transactions with their parent company, it is appropriate to include them in a combined return. This bill provides that the parent would still be required to file a combined return where there are substantial intercorporate transactions among the corporations, whether or not those transactions are arm’s length transactions.

As stated above, under current law, if substantial intercorporate transactions are present, the presumption of combination is rebuttable and may be refuted upon a showing that the transactions were conducted at arm’s length pricing. The ability to rebut the presumption of distortion by providing arm’s length pricing is derived from several Tax Appeals Tribunal decisions. Since the bill eliminates transfer pricing as a factor, the bill also eliminates the necessity for a corporation or the Department to hire expensive experts to endlessly litigate the arm’s length pricing issue.

Finally, this approach preserves New York’s traditional separate filing presumption by not requiring combination in all situations in which related corporations are unitary. Several states’ approach toward taxing related entities is through a unitary tax structure. Currently, seventeen states use this approach: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Illinois, Kansas, Maine, Minnesota, Montana, Nebraska, New Hampshire, North Dakota, Oregon, Utah, and Vermont. Such a structure does not contain an intercorporate transactions test, disallows separate filing, and requires all corporations with a unitary business relationship to file a combined return. This structure is commonly known as water’s edge unitary combination or California unitary. Essentially, the corporation and its affiliates file as if one company. Generally, in the case of affiliated corporations that met the ownership and control standards, in order to avoid combination it would be necessary for the corporations to affirmatively demonstrate the lack of a unitary relationship.

By requiring combination of related corporations only in the presence of substantial intercorporate transactions, New York law remains distinctly non-unitary; that is, it will remain a separate reporting state that permits or requires combination. While the presumption of separate reporting for related entities will prevail, the requirement of combination in the instance of substantial intercorporate transactions will put an end to abuse and litigation concerning whether or not transfer prices were at arm’s length.

Part P – Provide a new personal income tax deduction of up to $1,000 per child for education tuition for kindergarten through twelfth grade

This bill provides a tuition tax deduction to taxpayers for tuition paid for their dependents who attend public or nonpublic schools.

This bill provides a tax deduction for the amount of tuition paid by the taxpayer to a public or nonpublic elementary or secondary school for the education of the taxpayer’s dependents. The amount that can be deducted from Federal adjusted gross income is the actual amount of tuition paid up to a cap of $1,000 per dependent for taxpayers whose Federal adjusted gross income is $116,000 or less. The amount of the cap on the deduction decreases by $100 for each $1,000 that the taxpayer’s Federal adjusted gross income exceeds $116,000. Taxpayers whose Federal adjusted gross income is $125,000 or more are not eligible for the deduction. The bill makes corresponding changes to section 11-1712(j) of the Administrative Code of the City of New York, which is identical to Tax Law section 612(j).

Part Q – Provide the Commissioner of Taxation and Finance with authority to end practices used by New York partnerships to avoid paying personal income

This bill closes a tax loophole and conform to Federal provisions by allowing the Commissioner of Taxation and Finance to disregard a personal service corporation or S corporation if it is determined that such entity was formed or availed of to avoid or evade New York State personal income tax.

Section 1 of the bill will add a new section 632-A to the Tax Law. This section will grant the Commissioner the authority to allocate all income, expenses, deductions, credits, exclusions or other allowances of a personal service corporation or S corporation between a personal service corporation or S corporation and its employee owner(s) if such allocation is necessary to prevent avoidance or evasion of New York income or clearly reflect the source of the income.

Nonresident partners of New York partnerships are forming either personal service corporations or S corporations in order to avoid personal income taxation on their partnership distributions. As nonresident individuals generally working outside New York, they would normally be taxed on their partnership distributions apportioned to New York. By forming a corporation, a nonresident is able to avoid personal income taxation by having his or her partnership distribution paid to the corporation which in turn creates an expense when it pays a salary to the individual shareholder. The corporation then files and generally pays the minimum franchise tax in New York.

Currently there is no provision in the Tax Law that prevents nonresidents from availing themselves of this loophole. This provision is modeled on section 269A of the Internal Revenue Code.

Part R – Require certain corporations that are Federal S Corporations to also be New York S corporations to close a loophole that allows resident individuals to place assets into New York C Corporations and avoid paying New York tax

This bill closes a tax loophole that allows resident individuals to avoid New York State personal income taxes by placing assets into a Federal S corporation/New York C corporation capital by requiring certain New York corporations that are Federal S corporations to also be New York S corporations.

This bill will add a new subsection (i) to §660 of the Tax Law. New subsection (i) will mandate that a New York corporation file as a New York S corporation for the taxable year if the entity is a Federal S corporation but has not made the S corporation election for New York State and more than 25% of the corporation’s Federal gross income is derived from investment income. This subsection would also require that the corporation or its shareholders pay estimated tax based upon the corporation’s filing status in the prior taxable year. However, if during the taxable year the corporation’s status changes from a New York C corporation to a New York S corporation or New York S corporation to a New York C corporation, the estimated taxes paid under the incorrect article of the Tax Law would be refunded and any estimated taxes that would have been required to be made by the corporation or the shareholders during the taxable year can be caught up by January 15, without a penalty.

Under the current law, a New York corporation that makes an S election for Federal tax purposes is not automatically deemed a New York S corporation. Rather, the corporation must make an affirmative election to be regarded as a New York S corporation.

This bill would close a loophole and impact a small number of Federal S corporations that have chosen to remain New York C corporations primarily to avoid New York State personal income tax liability. Some New York residents are taking advantage of the favorable treatment of investment capital and investment income under the Article 9-A franchise tax on general business corporations by placing their stocks, bonds and other investment assets into a corporation. That New York corporation will elect to be a Federal S corporation, but choose not to make the New York S corporation election. As a Federal S corporation, the income is passed through to the shareholders. As a New York C corporation, the corporation is taxed as a business corporation under Article 9-A and the investment income is not passed through to the shareholder but instead is taxed at the corporation level at a much more favorable rate.

In other cases, shareholders who anticipate moving out of the State avoid tax on the gain from the sale of an asset by transferring it to the New York corporation while they are a New York resident; the corporation then sells the asset and the gain is taxed under the corporation’s presumably low investment allocation percentage. The distribution of the gain to the shareholder is then delayed until the resident shareholders have moved out of state. At that time, the distribution will not be subject to tax by New York. This type of behavior is concentrated among a small number of affluent taxpayers who can avail themselves of this type of arrangement.

This bill would correct this loophole by mandating that this group of Federal S corporations file as a New York S corporation, rather than a New York C corporation. As a result, individual shareholder(s) would be taxed on the income and gain from the investment assets under New York’s personal income tax.

Part S – Conform the treatment of taxpayers that itemize State and local sales and compensating use tax to taxpayers that itemize State and local income taxes

This bill conforms the treatment of taxpayers that itemize State and local sales taxes to taxpayers that itemize State and local income taxes by disallowing the flow through from the Federal return of the itemized deduction for New York State and local sales and compensating use taxes paid by the taxpayer.

The bill will amend paragraph (1) of subdivision (c) of section 615 of the Tax Law. The amendment would require taxpayers who claim the itemized deduction for New York State and local sales and compensating use taxes on their Federal return to add back the amount claimed to Federal adjusted gross income on their New York return.

This amendment to the Tax Law would provide the same tax treatment to taxpayers who elect to deduct sales taxes as taxpayers who elect to deduct income taxes. Section two of the bill makes a corresponding amendment to paragraph (1) of subdivision (c) of section 11-1715 of the Administrative Code of the city of New York.

Part T – Restructure the fees imposed on Limited Liability Companies from a per member fee to one that is based on income to more clearly reflect an LLC’s level of New York activity while generating the same amount of revenue as the LLC fees that are in effect through tax year 2006

This bill changes the computation of the filing fees for every subchapter K limited liability company (LLC), every LLC which is a disregarded entity for Federal income tax purposes, every limited liability partnership (LLP) under Article 8-B of the Partnership Law, and every foreign LLP to reflect more clearly the LLC’s or LLP’s level of New York activity.

The current LLC fee is based solely on the number of members in the LLC. This bill changes the method of computation of the LLC fee so that it is based on New York source income. This change results in a fee which more clearly reflects the partnership/LLC’s level of New York activity. This bill also reduces the minimum fee from $325 to $100 while, in the aggregate, retaining the same level of revenue that the fee generated last year. Chapter 61 of the Laws of 2005 created the requirement that single member limited liability companies that are disregarded for Federal purposes pay a fee of $100. This provision expired on December 31, 2006. Thus, this bill includes language that continues the fee for single member limited liability companies that are disregarded entities for Federal purposes. As the minimum fee has been lowered to $100 for the other entities, which was the amount that these LLCs paid in 2005 and 2006, the bill provides that these LLCs shall pay the minimum fee. Additionally, no credits will be allowed to be taken against the fee and net operating losses cannot be carried over and applied against New York source income for the purposes of determining the filing fee. The fees will be reduced in 2012.

Part U – Increase the aggregate amount of low income housing tax credits the Commissioner of Housing and Community Renewal may allocate by $4 million and make the annual increase permanent

This bill Increases the aggregate amount of low-income housing tax credit that the Commissioner of Housing and Community Renewal may allocate by $4 million in annual increments.

The bill amends section 22 of the Public Housing Law by increasing the aggregate amount of low-income housing tax credit the Commissioner of Housing and Community Renewal may allocate in $4 million increments commencing in 2007 and in each year thereafter. Current State law provides for total allocation authority of $12 million. Any amounts unallocated by the Commissioner each year shall be allowed to be allocated in future years.

Part V – Conform to the practices of 18 other states that have decoupled from the Federal deduction related to qualified production activities and require taxpayers to add back income from this deduction for New York tax purposes

This bill conforms to the practices of other states by disallowing the flow through of the deduction claimed by taxpayers pursuant to Internal Revenue Code section 199 in the calculation of income subject to tax under the State corporate franchise tax, tax on unrelated business income, personal income tax, bank tax, and insurance tax and the New York City general corporation, financial corporation, and personal income taxes.

Section one will add new subparagraph (19) to section 208.9(b) of the Tax Law. New subparagraph (19) will require general business corporation taxpayers to add back the amount of the deduction pursuant to Internal Revenue Code section 199 for qualifying production activities income allowed to Federal taxable income when determining entire net income. This addition to the Tax Law will prevent taxpayers who claim the Internal Revenue Code section 199 deduction flow through from having the benefits of the deduction to their New York tax calculations. Disallowing this flow through will increase the base upon which the tax due to New York is computed and will place all businesses, domestic and foreign, on an even playing field in New York.

Sections two through six will make similar amendments to the unrelated business tax (Article 13), personal income tax (Article 22), banking corporation franchise tax (Article 32) and insurance corporation franchise tax (Article 33).

Sections seven through ten will make similar amendments to Chapter 6 (general corporation tax and financial corporation tax) and Chapter 17 (personal income tax) of Title 11 of the New York City Administrative Code.

The American Jobs Creation Act of 2004 created a tax deduction for Qualifying Production Activities Income (QPAI). The deduction started at 3 percent of QPAI in 2005 and rises to 9 percent of QPAI by 2010 when it is fully effective. Although intended to benefit traditional manufacturing activity, under current law, qualifying production activities are ill-defined and encompass a broad range of businesses. The deduction is allowed on a vast array of activities which go beyond the familiar conception of manufacturing. The sheer scope of the deduction, covering profits from manufacturing, food processing, software development, filmmaking, electricity and natural gas production, and construction, threatens corporate tax revenue. Unlike other deductions used in the computation of taxable income wherein there is an actual expenditure of money, time, labor, or resources matched or charged against revenue, this Federal deduction is a deduction of income itself, a deduction that excludes a percentage of income from taxation. Furthermore, the breadth of the deduction does not limit its impact geographically. Industries that will use the deduction are located statewide, including the Metropolitan Commuter Transportation District and New York City. Thus, the deduction causes a significant revenue loss to the State with no guaranteed commensurate benefit. As of September 2005, 18 states had already decoupled from the deduction^[1].

New York uses Federal taxable income as the starting point for New York taxable income. Therefore, the Federal deduction flows through to New York taxable income. A multistate firm could use the deduction to reduce its New York taxes without having a single production employee in the State. The deduction was originally intended to provide a tax incentive to manufacturers by preserving and promoting domestic manufacturing jobs and domestic production. However, the deduction is unlikely to protect or create State jobs since corporations can claim the deduction for production activity occurring out-of-State as well as in-State. As a state that conforms to the deduction, New York has no guarantee that the deduction claimed has generated activity or jobs here. Under current law, New York loses revenue with no corresponding gain from the production activity.

BUDGET IMPLICATIONS:

Part A – Extend for one year the lower tax rates and rules governing simulcasting of out-of-state races

Enactment of this bill is necessary to implement the 2007-08 Executive Budget because it maintains the current pari-mutuel betting structure in New York State. The extension of these provisions will reduce pari-mutuel tax receipts by $5 million in 2007-08.

Part B – Extend the sunset of Quick Draw by one year from May 31, 2007 to May 31, 2008

Enactment of this bill is necessary to implement the 2007-08 Executive Budget because it will preserve the flow of an estimated $109 million which is currently included in the Financial Plan.

Part C – Provide permanent authorization to the Department of Taxation and Finance to collect unpaid child support

Enactment of this bill is necessary to implement the 2007-08 Executive Budget because it preserves collections from this enforcement program.

Part D – Require travel companies that rent hotel rooms over the Internet to collect the sales tax on the markups and service fees charged to customers

Enactment of this bill is necessary to implement the 2007-08 Executive Budget. This bill is expected to generate $15 million in 2007-08.

Part E – Extend for two years the increased penalties in the Alcoholic Beverage Tax for violations of law including but not limited to: importation without registration, possession without registration, production without registration, removal from a warehouse and failure to pay the tax

Enactment of this bill is necessary to implement the 2007-08 Executive Budget because, in SFY 2007-08, this proposal will prevent the loss of an estimated $2 million in State revenue. This proposal also will prevent the loss of $4 million in annual State revenue in SFY 2008-09, its first full year in effect.

Part F – Reallocate the distribution of revenues collected through certain dedicated taxes

Enactment of this bill is necessary to implement the 2007-08 Executive Budget. Redistributing receipts from the taxes imposed under sections 183 and 184 between PTSOA and MMTOA will effectively serve as a substitute for $23 million in annual transfers from the General Fund which support appropriations to Upstate transit systems. As a result, this proposal will provide the PTSOA account with additional tax receipts and generate $23 million in savings to the General Fund. Moreover, this proposal supports the Executive Budget recommendations to develop a more rational approach to funding Upstate transit systems by stabilizing the revenue base and focusing on a multi-year plan to improve the efficiency and effectiveness of their operating budgets.

Part G – Replace the highway use tax permit requirements with a certificate of registration requirement

Enactment of this bill is necessary to implement the 2007-08 Executive Budget because it protects the current highway use tax revenue.

Part H – Close a loophole and conform to Federal rules by eliminating the deduction for certain subsidiary dividends received by a parent company from a real estate investment trust (REIT) or regulated investment company (RIC) to ensure that the shareholders of the REIT or RIC pay tax on the income earned by the REIT or RIC

This bill will increase business tax receipts reflected in the State Financial Plan by an estimated $104 million in 2007-08 and $83 million annually thereafter. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part I – Close a loophole that allows banks that use subsidiaries to shelter income

This bill will increase tax receipts as reflected in the State Financial Plan by an estimated $22 million in 2007-08 and $18 million annually thereafter. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part J – Conform to Federal rules and the practices of other states with respect to banking corporations that allow certain taxpayers to deduct only bad debts that have actually been written-off (the “direct write-off method”)

This bill will increase business tax receipts as reflected in the State Financial Plan by an estimated $15 million in 2007-08 and $12 million annually thereafter. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part K – Extend for two years, the transitional provisions relating to the enactment and implementation of the Federal Gramm-Leach-Bliley Act of 1999 to allow certain corporations that were taxed under the corporate franchise tax or bank tax in 1999 to temporarily maintain that status

Enactment of this bill will preserve Financial Plan receipts and thus is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part L – Conform to treatment under the corporate franchise tax, by requiring the add back of expenses related to subsidiary capital under the bank tax, and eliminating the 20 percent reduction in the wage factor portion of the apportionment formula to ensure the bank tax appropriately reflects a bank’s presence in New York

This bill will increase business tax receipts reflected in the State Financial Plan by an estimated $40 million in 2007-08 and $32 million annually thereafter. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part M – Eliminate the competitive advantage afforded to certain cooperative insurance companies that have expanded their activities beyond those intended by limiting the applicable exemption for cooperative insurance companies

This bill will increase State insurance tax receipts reflected in the State Financial Plan by an estimated $23 million in 2007-08 and $18 million annually thereafter. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part N – Continue to deter the use of tax shelters by making provisions allowing the Department of Taxation and Finance to require the reporting and disclosure of Federal and New York reportable and listed transactions that may be improper tax avoidance practices (the same provisions would apply to the personal income tax)

This bill will increase corporate franchise and personal income tax receipts as reflected in the State Financial Plan by an estimated $17 million annually beginning in 2007-08. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part O – Conform to the practices of 17 other states that require corporations that conduct substantial inter-corporate transactions with one another to file a combined, rather than separate, corporate franchise tax return

This bill will increase tax receipts as reflected in the State Financial Plan by an estimated $215 million annually beginning in State fiscal year 2007-08. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part P – Provide a new personal income tax deduction of up to $1,000 per child for education tuition for kindergarten through twelfth grade

The provisions of this bill would decrease personal income tax receipts as reflected in the State Financial Plan by $25 million annually beginning in 2008-09. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part Q – Provide the Commissioner of Taxation and Finance with authority to end practices used by New York partnerships to avoid paying personal income

The provisions of this bill would increase personal income tax receipts as reflected in the State Financial Plan by $15 million annually beginning in 2008-09. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part R – Require certain corporations that are Federal S Corporations to also be New York S corporations to close a loophole that allows resident individuals to place assets into New York C Corporations and avoid paying New York tax

The provisions of this bill would increase State Financial Plan receipts by $100 million annually beginning in 2008-09. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part S – Conform the treatment of taxpayers that itemize State and local sales and compensating use tax to taxpayers that itemize State and local income taxes

The provisions of this bill will increase personal income tax receipts as reflected in the State Financial Plan receipts by $30 million in 2008-09. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part T – Restructure the fees imposed on Limited Liability Companies from a per member fee to one that is based on income to more clearly reflect an LLC’s level of New York activity while generating the same amount of revenue as the LLC fees that are in effect through tax year 2006

The restructured fees will increase personal income tax receipts as reflected in the State Financial Plan by $30 million annually from 2007-08 through 2011-12. The receipts generated by the restructured fee are equivalent to those that would have been generated by the 2006 fee structure. Beginning in 2012-13, the restructured fees will generate revenues equivalent to the 2002 fee structure. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part U – Increase the aggregate amount of low income housing tax credits the Commissioner of Housing and Community Renewal may allocate by $4 million and make the annual increase permanent

This bill will decrease tax receipts as reflected in the State Financial Plan by an estimated $4 million in 2007-08 and $8 million in 2008-09. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

Part V – Conform to the practices of 18 other states that have decoupled from the Federal deduction related to qualified production activities and require taxpayers to add back income from this deduction for New York tax purposes

This bill will increase tax receipts as reflected in the State Financial Plan by an estimated $29 million in 2007-08 and $35 million annually in succeeding years. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2007-08 Executive Budget.

EFFECTIVE DATE:

Part A – Extend for one year the lower tax rates and rules governing simulcasting of out-of-state races

This bill will take effect immediately.

Part B – Extend the sunset of Quick Draw by one year from May 31, 2007 to May 31, 2008

This bill will take effect immediately.

Part C – Provide permanent authorization to the Department of Taxation and Finance to collect unpaid child support

This bill will take effect immediately.

Part D – Require travel companies that rent hotel rooms over the Internet to collect the sales tax on the markups and service fees charged to customers

This bill will become effective on the first day of the sales tax quarterly period next commencing at least 30 days after the date the bill shall have become a law and it will apply in accordance with the applicable transitional provisions in Tax Law sections 1106 and 1217.

Part E – Extend for two years the increased penalties in the Alcoholic Beverage Tax for violations of law including but not limited to: importation without registration, possession without registration, production without registration, removal from a warehouse and failure to pay the tax

This bill will take effect immediately.

Part F – Reallocate the distribution of revenues collected through certain dedicated taxes

This bill will be effective on April 1, 2007, and will apply to receipts collected on and after such date.

Part G – Replace the highway use tax permit requirements with a certificate of registration requirement

This bill will take effect on the first day of the calendar quarterly period, next commencing at least 60 days after the date it becomes law.

Part H – Close a loophole and conform to Federal rules by eliminating the deduction for certain subsidiary dividends received by a parent company from a real estate investment trust (REIT) or regulated investment company (RIC) to ensure that the shareholders of the REIT or RIC pay tax on the income earned by the REIT or RIC

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part I – Close a loophole that allows banks that use subsidiaries to shelter income

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part J – Conform to Federal rules and the practices of other states with respect to banking corporations that allow certain taxpayers to deduct only bad debts that have actually been written-off (the “direct write-off method”)

This bill will take effect immediately.

Part K – Extend for two years, the transitional provisions relating to the enactment and implementation of the Federal Gramm-Leach-Bliley Act of 1999 to allow certain corporations that were taxed under the corporate franchise tax or bank tax in 1999 to temporarily maintain that status

This bill will take effect immediately.

Part L – Conform to treatment under the corporate franchise tax, by requiring the add back of expenses related to subsidiary capital under the bank tax, and eliminating the 20 percent reduction in the wage factor portion of the apportionment formula to ensure the bank tax appropriately reflects a bank’s presence in New York

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part M – Eliminate the competitive advantage afforded to certain cooperative insurance companies that have expanded their activities beyond those intended by limiting the applicable exemption for cooperative insurance companies

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part N – Continue to deter the use of tax shelters by making provisions allowing the Department of Taxation and Finance to require the reporting and disclosure of Federal and New York reportable and listed transactions that may be improper tax avoidance practices (the same provisions would apply to the personal income tax)

This bill will take effect immediately.

Part O – Conform to the practices of 17 other states that require corporations that conduct substantial inter-corporate transactions with one another to file a combined, rather than separate, corporate franchise tax return

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part P – Provide a new personal income tax deduction of up to $1,000 per child for education tuition for kindergarten through twelfth grade

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part Q – Provide the Commissioner of Taxation and Finance with authority to end practices used by New York partnerships to avoid paying personal income

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part R – Require certain corporations that are Federal S Corporations to also be New York S corporations to close a loophole that allows resident individuals to place assets into New York C Corporations and avoid paying New York tax

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part S – Conform the treatment of taxpayers that itemize State and local sales and compensating use tax to taxpayers that itemize State and local income taxes

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part T – Restructure the fees imposed on Limited Liability Companies from a per member fee to one that is based on income to more clearly reflect an LLC’s level of New York activity while generating the same amount of revenue as the LLC fees that are in effect through tax year 2006

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.

Part U – Increase the aggregate amount of low income housing tax credits the Commissioner of Housing and Community Renewal may allocate by $4 million and make the annual increase permanent

This bill will take effect immediately.

Part V – Conform to the practices of 18 other states that have decoupled from the Federal deduction related to qualified production activities and require taxpayers to add back income from this deduction for New York tax purposes

This bill will take effect immediately and apply to taxable years beginning on or after January 1, 2007.