2008-09 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 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 and the tax law, in relation to making the lottery game of Quick Draw permanent (Part A); to amend part W3 of chapter 62 of the laws of 2003, amending the alcoholic beverage control law relating to sales for off-premises consumption, in relation to making certain provisions permanent (Part B); to amend the tax law, in relation to taxing flavored malt beverages at the low liquor tax rate (Part C); to amend the environmental conservation law and the tax law, in relation to requests for participation in the brownfield cleanup program and tangible property tax credits for qualified sites; and providing for the repeal of such provisions upon expiration thereof (Part D); to amend the environmental conservation law and the tax law, in relation to the brownfield cleanup program and the brownfield tax credits provided with respect to such program (Part E); to repeal subdivision (e-1) of section 1132 of the tax law, relating to a sales tax bad debt credit or refund for purchases made by private label credit cards (Part F); to amend the tax law, in relation to the imposition of a tax on controlled substances Part G); to amend the tax law, the criminal procedure law, the highway law, the public authorities law, the public service law, the state finance law, and the transportation law, in relation to consolidating and reforming the state and local taxes on automotive and non-automotive fuels; and to amend chapter 109 of the laws of 2006 amending the tax law and other laws relating to providing exemptions, reimbursements and credit from various taxes for certain alternative fuels, in relation to the effectiveness thereof; and to repeal certain provisions of the tax law, the general business law and the administrative code of the city of New York relating thereto (Part H); 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 I); to amend the tax law, in relation to reducing the tax rate of the capital base, eliminating the capital base cap for non-manufacturers and conforming the definition of manufacturing under the capital base to the definition of manufacturing under the entire net income base Part J); to amend the tax law, in relation to changing the tax classification of health maintenance organizations (Part K); to amend the tax law, in relation to requiring not-for-profit organizations to collect sales and use taxes on certain additional property and services they sell (Part L); 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 M); to amend the tax law, in relation to costs or fees imposed by the United States or other states for crediting tax overpayments against outstanding tax debts owed to the state of New York (Part N); to amend the tax law, in relation to clarifying the commissioner of taxation and finance’s powers under the highway use tax (Part O); to amend the tax law and the administrative code of the city of New York, in relation to the definition of presence in New York in determining a taxpayer’s New York residency status (Part P); to amend the tax law, in relation to the tax credit for companies who provide transportation services to individuals with disabilities, and to amend chapter 522 of the laws of 2006 relating to providing a tax credit to companies who provide transportation to handicapped individuals, in relation to extending the effective date of such tax credit (Part Q); to amend the tax law, in relation to extending the temporary metropolitan business tax surcharges (Part R); to amend the tax law, in relation to the maintenance fee on foreign corporations, the limited liability company filing fees, partnership fees, and the fixed dollar minimum tax; and to repeal certain provisions of such law relating thereto (Part S); to amend the tax law, in relation to requiring nonresidents to include the gain or loss from the sale of a partnership, limited liability corporation, S corporation or a non-publicly traded C corporation with one hundred or fewer shareholders to the extent that the gain or loss includes gain or loss from real property located in New York (Part T); to amend the tax law, in relation to the taxation of captive real estate investment trusts and captive regulated investment companies; and to repeal certain provisions of such law relating thereto (Part U); to amend the tax law, in relation to changing the percentage used to compute the mandatory first installment of franchise tax and the metropolitan commuter transportation district business tax surcharge under articles 9, 9-A, 32 and 33 (Part V); to amend the tax law and chapter 60 of the laws of 2004 amending the tax law relating to the empire state film production credit, in relation to aggregate amounts of tax credits(Part W); to amend the tax law, in relation to creating an evidentiary presumption to facilitate the administration of the sales and use tax where a person making sales of taxable property or services in the state uses residents in the state to solicit sales (Part X); to amend the tax law, in relation to making certain banking corporations subject to tax under article 32 thereof (Part Y); to amend the tax law, in relation to enacting the tax enforcement and compliance initiatives; and to repeal certain provisions of the tax law relating thereto (Subpart A); to amend the tax law, in relation to proceedings to review the additions to tax and penalties for fraud and tax preparers (Subpart B); to amend the criminal procedure law, the penal law and the tax law, in relation to creating the offense of “tax fraud act”; to amend the tax law, in relation to simplifying and consolidating the provisions describing the acts that constitute offenses under such law; and 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 making such provisions permanent and to repeal certain provisions of the tax law relating thereto (Subpart C); to amend 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 related to trans- actions that present the potential for tax avoidance (Subpart D); to amend the tax law, in relation to imposing a fee on sales tax registration applications (Subpart E); and to amend the tax law, in relation to requiring the use of electronic documents and payment mechanisms; to repeal paragraph 2 of subsection (d) of section 658 of such law relating to magnetic media filing (Subpart F); to amend the tax law, in relation to the tobacco products and cigarette taxes to remedy various compliance and enforcement problems (Subpart G)(Part Z); to amend the tax law, in relation to providing tax credits for the purchase of bioheat to be used for space heating or hot water production for residential purposes, and to amend chapter 35 of the laws of 2006 amending the tax law relating to a clean heating fuel credit, in relation to applicable taxable years (Part AA); to amend the tax law, the state finance law and the administrative code of the city of New York, in relation to imposing sales and compensating use taxes at the rate of four percent in a city of one million or more upon the expiration of the four percent local sales and compensating use taxes imposed by section 1107 of the tax law in such a city and to conform the base of those taxes to the expiring section 1107 tax; to repeal subdivisions (f) and (g) of section 1212-A of the tax law relating to certain taxes of cities of one million or more administered by the commissioners of taxation and finance; to repeal subchapter 1 of chapter 20 of title 11 of the administrative code of the city of New York relating thereto and; to repeal paragraphs 2 and 3 of subdivision (a) of section 11-2040 of the administrative code of the city of New York relating to sales tax on protective and detective services, and interior cleaning and maintenance services (Part BB); to amend the tax law, the administrative code of the city of New York, and chapter 235 of the laws of 1952 relating to enabling any city of the state having a population of one million or more to adopt, and amend local laws, imposing certain specified types of taxes on cigarettes which the legislature has or would have power and authority to impose, to provide for the review of such taxes, and to limit the application of such local laws, in relation to defining cigarettes to include little cigars (Part CC); to amend the tax law, in relation to the vendor’s fee paid to racetracks with video lottery gaming and authorizing such gaming at the Belmont racetrack (Part DD); and to amend the tax law, in relation to curtailing certain abusive sales and use tax avoidance schemes by narrowing the use tax exemption for certain items of tangible personal property and the sales tax exemption for commercial aircraft (Part EE)

PURPOSE:

This bill contains provisions needed to implement the Revenue portion of the 2008-09 Executive Budget.

This memorandum describes Parts A through EE of the 2008-09 Article VII Revenue bill which are described wholly within the parts listed below.

Part A – Eliminate the sunset of Quick Draw and eliminate certain restrictions on the game.

Purpose:

This bill makes permanent the Division of the Lottery’s authority to operate the Lottery’s Quick Draw game.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 amends Chapter 405 of the Laws of 1999, as amended by Chapter 62 of the Laws of 2007, to extend permanently the authorization to operate Quick Draw.

Section 2 amends Tax Law § 1612(a)(1) to eliminate the current restriction of Quick Draw to no more than 13 hours of daily operations, no more than 8 of which may be consecutive. Also eliminated are the restrictions limiting Quick Draw ticket sales to only on premises licensed for the sale of alcoholic beverages for on-premises consumption where at least 25% of gross sales are sales of food, and the restriction on the minimum size of premises not selling alcoholic beverages of 2,500 square feet. Removal of these restrictions makes it unnecessary to provide exceptions for bowling establishments and pari-mutuel facilities; therefore, those exceptions are also deleted. An obsolete authorization of emergency rulemaking at the time of Quick Draw start-up is also deleted.

Quick Draw was first authorized in 1995 and has been extended in 1999, 2004, 2006 and 2007. It is currently due to expire on May 31, 2008.

Quick Draw sales in SFY 08-09 are expected to total $543 million and revenues are projected to reach $136 million. This game supports education as well as providing commissions for Lottery retailers.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because reauthorization of this game preserves anticipated revenues, and the elimination of restrictions will generate an additional $36 million in 2008-09 and $60 million thereafter to support education.

Effective Date:

This bill would take effect immediately.

Part B – Permanently extend the seven day alcohol license sales law.

Purpose:

This bill makes the seven day alcohol sales license law permanent and removes related reporting requirements that are no longer necessary.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Part W3 of Chapter 62 of the Laws of 2003 increased the number of days that a retail liquor store could open from Monday through Friday, to any six days in a week. This provision will expire on May 15, 2008. Chapter 60 of the Laws of 2004 subsequently increased the number of days per week from six to seven; however, it did not alter the repeal date established by Chapter 62 of the Laws of 2003. Currently, these revisions will expire on May 15, 2008.

This bill amends the effective date of Part W3 of Chapter 62 of the Laws of 2003 to make the seven day sale permanent, and allow for the repeal of State Liquor Authority (SLA) reporting requirements specific to the number of retailers applying for the new six (then seven) day license and SLA’s ability to promulgate rules and regulations to effectuate the new licenses.

For the past four years, retail liquor stores have been authorized to remain open seven days a week. This has become the expected business practice that works for the everyday consumer. This bill permanently authorizes this existing business practice and allows for the sunset of outdated provisions.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it preserves the current license system and its related revenue.

Effective Date:

This act shall take effect immediately.

Part C – Apply the tax on flavored malt beverages at the low liquor tax rate.

This bill would place flavored malt beverages in a new, separate category of alcoholic beverages for purposes of the alcoholic beverage excise tax and impose the excise tax on this category at the low liquor tax rate.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Sections 1 through 6 of the bill would amend the definition and imposition provisions of the alcoholic beverage excise tax in Article 18 of the Tax Law to impose a separate tax on flavored malt beverages. Flavored malt beverages would consist of both malt and liquor with an alcohol content of more than one half percent and no more than twenty-four percent by volume of alcohol. Other definitions in the excise tax would be conformed. Flavored malt beverages would be taxed at the rate of $2.54 per gallon, the equivalent rate in gallons of the low liquor rate of 67 cents per liter.

Section 7 of the bill would amend the opening paragraph of Tax Law § 424(g)(1) to include references to volume of flavored malt beverages and wine where there is a reference to the gallonage of beer. Section 8 of the bill would make conforming amendments to that same opening paragraph for when its provisions revert back to the default version.

Sections 9 through 12 of the bill would conform various provisions of Article 18 to the addition of the new flavored malt beverages category and would make clear that flavored malt beverages are to be administered under the excise tax like beer and wine, rather than liquor. As a technical matter, references to wine also would be added whenever gallons are the measuring unit since wine is currently taxed on a per gallon basis.

Section 13 of the bill would give a city of a million or more the option to impose a tax on flavored malt beverages. The City tax rate on flavored malt beverages could be imposed at a rate of 39 cents per gallon.

Section 14 of the bill would provide for a state floor tax to be imposed at a rate of $2.43 per gallon on any flavored malt beverages in the possession or control on June 3, 2008 of any manufacturer, wholesaler or retailer, as defined in the Alcoholic Beverage Control Law, including any distributor, as defined in Article 18 of the Tax Law. This floor tax would be imposed on amounts in excess of 50 gallons and generally would be payable in two payments before the end of 2008. If a city imposes a tax on flavored malt beverages to be effective on June 3, 2008, the bill also provides for a city floor tax, identical in operation to the state floor tax, at a rate of 27 cents per gallon at the same time as the floor tax for the state. However, if the city does not exercise this option for June 3, 2008, Tax Law § 445(2) will not apply and there will not be a city floor tax.

Section 15 of the bill provides that the bill would take effect on June 3, 2008, and explains the effect on amendments to provisions that are scheduled to revert or expire under current law. Further, section 8 of the bill, amending the opening paragraph of Tax Law § 424(g), would take effect on the same date that the provisions of that opening paragraph revert as set forth in section 16 of Chapter 508 of the Laws of 1993, as amended.

Currently, flavored malt beverages are classified and taxed as beer at a rate of eleven cents per gallon under Article 18 of the Tax Law and at a rate of twelve cents per gallon under Title 11 of the Administrative Code of the City of New York. Flavored malt beverages are also distributed and regulated like beer.

This bill would create an alcoholic beverage category of flavored malt beverages for tax purposes under Article 18 of the Tax Law and would tax them at the low liquor rate for New York State. This bill would not, however, change how flavored malt beverages are distributed and regulated.

This bill would also give a city of a million or more the option to tax this new category of flavored malt beverages at a higher rate than beer. If a city does not exercise this option, it will no longer be able to tax these products at all, even as beer. The products currently are taxed as beer, yet their flavor predominantly comes from and is intended to resemble that of liquor.

Budget Implications:

This bill would generate approximately $15 million and its enactment is necessary to implement the 2008-2009 Executive Budget.

Effective Date:

This bill would take effect on June 3, 2008 and sets forth certain qualifications pertaining to the effective date of the bill.

Part D – Reform the Brownfields Cleanup Program and limit the amount of certain tax credits provided with respect to such program.

Purpose:

This bill amends the Tax Law to cap the amount of the tangible property tax credit available for participation in the Brownfield Cleanup Program (BCP), and amends the Environmental Conservation Law (ECL) to authorize the Department of Environmental Conservation (DEC) to make certain determinations that will facilitate the administration and enforcement of the new tangible property tax credit cap.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of this bill amends ECL § 27-1407 (1) to require that an applicant to the BCP identify other brownfield sites, if any, that are associated with the reuse or redevelopment of the site which is the subject of the application.

Section 2 of this bill amends ECL § 27-1407(6) to require DEC to determine whether more than one site is associated with a singular reuse or redevelopment project. Where DEC determines that multiple sites are associated in this manner, the project is treated as one reuse or redevelopment project for purposes of determining the amount of eligible tax credits under the Tax Law. In making such a determination, DEC will consider the history of the sites, site ownership, whether verifiable planning purposes justify separate projects, and any apparent intent to evade the tax credit cap established by this bill.

Section 3 of this bill amends ECL § 27-1407(8) to authorize DEC to reject a BCP application if it has determined that reuse or redevelopment of the site would likely occur without tax credits, based factors such as the extent, difficulty and cost of on-site remediation, the anticipated impact of remediation on the value of the property, and local economic circumstances.

Section 4 of this bill amends Tax Law § 21(a) to provide that if a taxpayer was issued a notice of acceptance into the BCP, or if a taxpayer has received a certificate of completion (COC) from another taxpayer on or after July 1, 2007, the tangible property tax credit allowed shall not exceed $10 million.

Section 5 of this bill amends Tax Law § 21(5)(b) to provide that for taxable years beginning on or after January 1, 2008, a COC may be transferred to a taxpayer for purposes of eligibility for the tangible property tax credit only where no taxpayer has previously been eligible for that credit component.

The refundable tax credits currently available for participation in the BCP range from 10% to 22% of eligible cleanup costs and redevelopment costs, and are not capped. This structure has resulted in excessively large tangible property credits for developers who invest relatively little to remediate a site, or would redevelop a site in the absence of tax credits.

This bill will allow the State to better control the costs associated with the tangible property tax credit by excluding projects that would likely be redeveloped in the absence of tax credits, and capping the amount of the tangible property tax credit. Even with these reforms, the State’s BCP will still be among the most generous brownfield remediation programs in the nation.

Budget Implications:

This bill will result in some administrative savings, but will have no impact on tax receipts reflected in the State Financial Plan because of the effective date of the cap. However, substantial savings would accrue to the State Financial Plan in future State Fiscal Years.

Effective Date:

This bill takes effect immediately and is deemed to have been in full force on and after April 1, 2008; except that Section 2 would apply to all pending determinations on BCP applications made on or after April 1, 2008, regardless of when such applications were submitted; the $10 million tangible property credit cap established by Section 4 would apply only if a taxpayer was issued a notice of acceptance into the BCP, or if a taxpayer received a certificate of completion (COC) from another taxpayer, on or after July 1, 2007; Section 5 would apply for taxable years beginning on and after January 1, 2008; and the bill would be deemed repealed in its entirety upon the same date that Part E of the same Chapter of the Laws of 2008 which added this Part takes effect.

Part E – Reform the Brownfields Cleanup Program.

Purpose:

This bill amends the Environmental Conservation Law (ECL) and the Tax Law to: (1) provide additional financial incentives to encourage better cleanups under the Brownfield Cleanup Program (BCP); (2) provide financial incentives to encourage additional brownfield redevelopment based on specific criteria; (3) allow more sites to be eligible for the BCP; (4) separate eligibility for participation in the BCP from eligibility for tax credits, authorizing persons who do not seek tax credits to participate in the BCP; (5) cap the amount of the tangible property tax credit available for participation in the BCP; and (6) require additional disclosures by applicants to facilitate the efficient administration of the BCP.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of this bill amends ECL § 27-1405(2) to redefine “brownfield site.”

Section 2 of this bill amends ECL § 27-1407(1) to require an applicant to disclose whether it is seeking tax credits and, if so, to make certain disclosures.

Section 3 of this bill amends ECL § 27-1407(6) to authorize the Department of Environmental Conservation (DEC) to determine whether an applicant is eligible for tax credits based on whether reuse or redevelopment of the site would be unlikely to occur without tax credits, considering such factors as the extent, difficulty and cost of on-site remediation, the anticipated impact of remediation on the value of the property, and local economic circumstances; and to determine if the site is associated with one or more other sites for purposes of reuse or redevelopment.

Section 4 of this bill amends ECL § 27-1409 to require a Brownfield Cleanup Agreement (BCA) to indicate whether an applicant is eligible to claim tax credits.

Section 5 of this bill amends ECL § 27-1411(2) to require applicants seeking tax credits to make certain disclosures when submitting a remedial work plan.

Section 6 of this bill amends ECL § 27-1419(2) to require applicants seeking tax credits to make certain disclosures when submitting a final engineering report.

Section 7 of this bill amends ECL § 27-1419(3) to require DEC to state in the certificate of completion (COC) whether the reuse or redevelopment would be unlikely to occur without tax credits and, if so, to provide the Department of Taxation and Finance the applicable percentages available for tax credits. In addition, the tax credit structure of the BCP has been modified as follows:

Site preparation credit: 25-75 percent of cleanup costs, depending on the extent of cleanup.

On-site groundwater remediation credit: 50-75 percent of cleanup costs. The baseline 50 percent credit may be increased by 10 percent for cleanups that achieve the best possible remediation for the site, or by 25 percent where groundwater is remediated to unrestricted use standards.

Tangible property credit: 15-50 percent of the development costs, not to exceed $15 million. The baseline 15 percent credit may be increased as follows: 10 percent if the site is in an Environmental Zone; 5 percent if the site is in a qualified census tract; 10 percent if the site is developed in conformance with a Brownfield Opportunity Area plan, a local waterfront revitalization plan, or a comprehensive plan; and up to 10 percent if other “smart growth” criteria are satisfied (2.5 percent for green building construction; 2.5 percent for use of existing water, sewer or energy delivery systems; 2.5 percent for use or generation of renewable energy sources; and 2.5 percent for proximity to public transit).

Section 7 of this bill also authorizes DEC to determine if more than one site is associated with a singular reuse or redevelopment project, based on the history of the site and other sites, site ownership, whether verifiable planning purposes justify treating related projects as separate projects, and any apparent intent to evade the tax credit cap established by the bill. Where such association exists, the project will be treated as one reuse or redevelopment project for purposes of determining the amount of eligible tax credits.

Section 8 of this bill amends ECL § 27-1419(5) to authorize DEC to issue a modified COC relating to the transfer of the site and the COC, and to revoke a COC in certain circumstances, and authorizes certain prospective recalculations of applicable credits based on new information.

Section 9 of this bill adds a new ECL § 27-1432 to require additional disclosures by an applicant.

Section 10 of this bill amends Tax Law § 21(a) to allow a taxpayer who places a property in service prior to the issuance of a COC to claim the tangible property credit for the taxable year in which the COC is issued.

Section 11 of this bill amends Tax Law § 21(a) to change the definition of “applicable percentage” which applies to a taxpayer who has been accepted into the BCP on or after July 1, 2007, or where a COC has been issued or transferred to the taxpayer on or after such date; and imposes a $15 million cap for the tangible property tax credit component for taxpayers who are accepted into the BCP on or after July 1, 2007, or who have been issued or received a COC from another person on or after that date.

Section 12 of this bill amends various definitions in Tax Law § 21 that relate to the BCP. In addition, section 12 puts restrictions on the transferability of the COC for tax purposes.

Sections 13 and 14 of this bill amend various definitions in Tax Law §§ 22 and 23, respectively.

Section 15 of the bill adds a new section 171-P to the Tax Law to provide for an annual “Brownfield Credit Report” by the Department of Taxation and Finance setting forth certain information relating to the tax credits available in Tax Law §§ 21, 22 and 23.

Section 16 contains a severability clause.

Currently under the BCP, tax credits are available that range from 10 to 22 percent of eligible cleanup costs and redevelopment costs, and are unlimited in amount. This structure has resulted in the availability of excessively large tangible property credits to developers who invest relatively little to remediate a site, or who would likely redevelop a site in the absence of tax credit incentives.

This bill will allow the State to better control the costs associated with the tax credits available for participation in the BCP by: (1) excluding projects that would likely be redeveloped in the absence of tax credits; and (2) capping the amount of the tangible property tax credit at $15 million. Even with these fiscal reforms, the State’s BCP will remain among the nation’s most generous state brownfield programs.

This bill also promotes better cleanups by providing enhanced tax credits for developers who agree to remediate sites to higher standards. In addition, while the bill provides a basic redevelopment tax credit equal to 15 percent of development costs, it provides a range of enhanced redevelopment credits (2.5 percent to 35 percent) to encourage the redevelopment of sites in areas which may present challenges to redevelopment, and to reward projects that comply with other specific “smart growth” criteria.

Finally, this bill will result in more cleanups. The bill allows applicants that do not want tax credits to participate in the BCP, remediate a site under DEC oversight, and receive liability protection. Current law authorizes DEC to exclude sites from the BCP where the presence or potential presence of contaminants does not complicate reuse or redevelopment of a site. This bill modifies the definition of “brownfield” to include property where a contaminant is known or can reasonably be expected to be present at levels exceeding health or environmental standards, and clarifies DEC’s ongoing authority to exclude certain projects from the BCP that would likely be redeveloped in the absence of the tax credits.

Budget Implications:

This bill will result in some additional administrative costs because more sites will enter the BCP, but it will have no impact on tax receipts reflected in the State Financial Plan because of the effective date of the cap. However, substantial savings will accrue to the State Financial Plan in future State Fiscal Years.

Effective Date:

This bill takes effect April 1, 2008; except that the amendments made by Section 10 of this act to paragraph 3 of Tax Law § 21(a) apply to all taxable years for which the statute of limitations is open on the date this bill becomes a law; and the amendments made to Tax Law § 21(b)(1) by Section 12 of this bill and Sections 13 and 14 of this bill apply only with respect to taxpayers with whom DEC executes a BCA on or after the date this bill becomes a law.

Part F – Repeal private label credit card law.

Purpose:

This bill would repeal Tax Law § 1132(e-1), which allows private label credit card lenders, as well as vendors who use private label credit card lenders to finance their credit card sales, to claim a sales tax credit or refund on accounts assigned to the lender that are written or charged off as uncollectible.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill would repeal Tax Law § 1132(e-1), enacted by Chapter 664 of the Laws of 2006. Section 2 of the bill provides that the bill would be effective on June 1, 2008 and would apply to accounts charged or written off on or after that date.

Prior to the enactment of Tax Law § 1132(e-1), Tax Law § 1132(e) governed vendors’ rights to a credit or refund of the sales tax on bad debts. Tax Law § 1132(e) authorized the Department of Taxation and Finance (“Department”) to exclude certain uncollectible debts from a vendor’s taxable receipts. Such exclusions, however, were not available when an unrelated third party financed or was assigned the sale. See, 20 NYCRR 534.7(b)(3). These Tax Law regulations were upheld by the Court of Appeals in G.E. Capital v. Tax Appeals Tribunal, 2 N.Y.3d 249 (2004).

In response to the G.E. Capital case, the Legislature enacted Chapter 664 of the Laws of 2006. The purpose of this legislation was to expand the potential pool of applicants who could apply for the sales tax bad debt credit or refund to the Department. The legislation expanded the pool of applicants to include vendors who use private label credit card lenders to finance their sales, the lenders, affiliates of those vendors and lenders, and the assignees of the lenders.

The provisions of Chapter 664 of the Laws of 2006 that expand the sales tax bad debt credit or refund to third parties are contrary to the transactional nature of the sales tax. The sales tax is a tax on purchasers that vendors are required to collect. See Tax Law §1132(a)(1). When a vendor self-finances a credit sale and the customer fails to pay the debt, the vendor has paid the tax to the State but has not received any payment for the sale. Thus, under the authority of Tax Law § 1132(e), 20 NYCRR 534.7(b)(3) rightly limits the eligibility for bad debt credits or refunds to sales financed by the vendor itself.

In contrast, when a vendor uses the services of a private label credit card lender to finance its credit sales, the vendor receives payment for the customer’s purchase, including the sales tax owed. If the purchaser subsequently fails to pay the lender, the purchaser has breached the credit card agreement with the lender– a matter separate and apart from the sale upon which the vendor has remitted tax. In such a scenario, the vendor has not been forced to pay any sales tax to the State for which the vendor has not received payment. In addition, when a vendor elects to use an unrelated third party to finance the sale to the purchaser, the third party often pays less than the face value of the accounts receivable to the vendor. The third party makes a lower payment in part to cover the amount of bad debt it anticipates on the accounts.

Finally, Tax Law § 1261(c) requires the Department to verify the transactional details underlying the claims for credits or refunds. Under this section, the Department must certify to the State Comptroller the amounts received with respect to the local jurisdictions that impose local taxes. The Department’s monthly certifications, and therefore the Comptroller’s payments and debits to localities, are based on information collected from returns and the credits or refunds allowed by the Department. The integrity of this system requires that the information provided by the Department be accurate on a transaction-by-transaction basis. The 2006 legislation, however, allows vendors to compute or substantiate their credit or refunds on worthless accounts on a non-transactional basis and thus does not allow for the level of detail required in order to charge back the local portions of the credit or refunds to the appropriate locality.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because State and localities would each save $7 million in 2008-09 and $9 million in 2009-10.

Effective Date:

The bill would be effective on June 1, 2008 and would apply to accounts charged or written off on or after that date.

Part G – Require a tax stamp on illegal drugs.

Purpose:

This bill improves the enforcement and tracking of illegal drug trafficking by requiring all marihuana and controlled substances to have a tax stamp.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

This bill would amend the Tax Law to add a new Article 17-A, requiring a tax stamp on all marihuana and controlled substances acquired or possessed by a dealer in this state. Marihuana and controlled substance are defined in the bill to parallel existing definitions in the Penal Law and Public Health Law. Under the bill, “dealer” encompasses every person who manufactures, produces, acquires, possesses, ships, sells, distributes, transfers or transports in this state, or imports or causes to be imported into the state, marihuana or a controlled substance.

The bill sets a tax stamp rate for marihuana of $3.50 per gram, and of a controlled substance at $200.00 per gram or fraction thereof, whether pure or dilute. The tax is paid by the dealer, in advance of his or her receipt of the marihuana or controlled substance, through the purchase of tax stamps from the Department of Taxation and Finance (“Department”). Upon receipt of the product, the dealer must affix enough stamps to the packages of marihuana or the controlled substance in order to show the tax has been fully paid.

All marihuana and controlled substances within the State are presumed subject to the tax. The bill exempts from the tax, however, all marihuana and controlled substances acquired or possessed by the United States, by the State of New York and its legal subdivisions, or by an employee of a state, local or federal government who legally acquires or possess the product as part of his official duties. In addition, anyone lawfully acquiring or possessing marihuana or a controlled substance, e.g. pursuant to Article 33 of the Public Health Law, is exempt from tax.

The bill requires prompt notification of the Commissioner of Taxation and Finance (“Commissioner”) by all law enforcement agencies and district attorneys who obtain any information that indicates that a dealer has failed to pay the tax due under Article 17-A. This requirement does not apply, however, if providing the information would violate a legal prohibition or would interfere with an ongoing criminal investigation or prosecution.

The bill contains a unique and strict secrecy requirement, preserving the confidentiality of any information obtained from a dealer under Article 17-A. Disclosure of this information is generally prohibited, although it may be disclosed for purposes of a criminal or civil proceeding involving taxes under Article 17-A. However, the bill specifically provides that none of the information may be used against the dealer in any criminal proceeding (other than a tax crime) unless it has been obtained independently.

The bill provides that all moneys received under Article 17-A are to be deposited into the general fund of the state.

A wide array of enforcement provisions is set out in the bill to ensure proper collection of the tax. These provisions include a civil penalty for failure to pay the tax, an authorization of jeopardy tax assessments, and criminal sanctions for various offenses.

Twenty-nine states – Alabama, Arizona, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Montana, Nebraska, Nevada, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Utah, Wisconsin, and Wyoming – have passed tax liability legislation for controlled substances.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-09 Executive Budget because it would increase revenues by $13 million in 2008-09 and $17 million thereafter.

Effective Date:

This bill will take effect 90 days after it becomes law and will apply to marihuana and controlled substances possessed in the state on or after that date.

Part H – Merge motor fuel tax, petroleum business tax, and sales tax on fuel into one petroleum business tax.

Purpose:

This bill consolidates and reforms the state and local taxes on motor fuel, Diesel motor fuel and other petroleum products.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

This bill would consolidate and reform the state and local taxes on motor fuel, Diesel motor fuel and other petroleum products that are currently imposed under Tax Law Article 12-A (the tax on gasoline and motor fuel) and Article 13-A (the tax on petroleum businesses) and the sales and use taxes on those products. In order to do so, Article 12-A would be repealed and amendments would be made to Article 13-A to impose a new excise tax on motor fuel, highway Diesel motor fuel, non-highway Diesel motor fuel, and residual petroleum product. To accomplish this, the bill would make the following amendments.

Sections 1 through 4 of the bill would make conforming changes necessitated by the repeal of Article 12-A and the consolidation of the taxes in Article 13-A.

Section 5 of the bill would repeal Article 12-A of the Tax Law, and Section 6 of the bill would amend the heading of Article 13-A of the Tax Law.

Section 7 of the bill would repeal the current Article 13-A definitions and create a new definitions section for Article 13-A.

Section 8 of the bill would repeal the current Article 13-A impositions and create new impositions for motor fuel, highway Diesel motor fuel, non-highway Diesel motor fuel, railroad Diesel and residual petroleum product.

Section 9 of the bill would repeal Tax Law § 301-a, the current imposition section for Article 13-A. A new Tax Law § 301-a would create the local excise tax, the prepaid local excise tax, the metropolitan commuter transportation district tax and related provisions. These taxes on automotive fuel would replace the equivalent sales taxes.

Section 10 of the bill would merge the Articles 12-A and 13-A exemptions and make any necessary conforming changes. It would also create exemptions from the new Article 13-A tax for any international organization of which the United States is a member (e.g., the United Nations), for individuals who manufacture biodiesel for use in their own motor vehicles and for interdistributor sales of dyed Diesel motor fuel and dyed nonroad, locomotive or marine Diesel fuel (NRLM).

Section 11 of the bill would merge the Articles 12-A and 13-A refunds and reimbursements and make any necessary conforming changes. It would also create full reimbursements of the new Article 13-A tax for any international organization of which the United States is a member (e.g., the United Nations), for exempt organizations that qualify under Tax Law § 1116(a)(4)-(9) who purchase certain non-highway products for “first responders” and not-for-profit hospitals, for snowmobile and ATV operators or clubs and for interdistributor sales of dyed Diesel motor fuel and dyed nonroad, locomotive or marine Diesel fuel (NRLM). This section of the bill would also provide a partial reimbursement for Tax Law § 1116(a)(4)-(9) exempt organizations, qualified empire zone enterprises (QEZE), commercial horse boarding operations and film producers who purchase and use automotive fuels.

Section 12 of the bill would repeal Tax Law § 301-d of the Tax Law, which provides a credit or reimbursement to certain electric corporations’ use of unenhanced Diesel motor fuel and residual petroleum product. This section is an anomaly because the corporations that qualify for this credit actually receive a lesser reimbursement than those who do not qualify. This section of the bill would also add a new Tax Law § 301-d, which addresses credits or refunds for credit card purchases by government entities.

Section 13 of the bill would make conforming changes to the Article 13-A tax scheme for aviation fuel businesses.

Section 14 of the bill would repeal Tax Law §§ 301-f, 301-g, 301-h, 301-i, 301-j and 301-l of the Tax Law.

Section 15 of the bill would repeal the current Tax Law § 302 and add a new Tax Law § 302 relating to the registration of distributors.

Section 16 of the bill would add a new Tax Law § 303 to the licensing of importing and exporting transporters.

Section 17 of the bill would add a new Tax Law § 304 relating to the licensing of terminal operators.

Section 18 of the bill would repeal the current Tax Law § 305 and add new Tax Law §§ 305, 305-a, 305-b and 305-c relating to records and reports required to be maintained by distributors and transporters.

Section 19 of the bill would add Tax Law §§ 306, 306-a, 306-b and 306-c relating to procedural requirements for filing returns by distributors and the Department’s ability to recover taxes owed.

Section 20 of the bill would add Tax Law §§ 307 and 307-a relating to penalties and interest and mailing rules.

Section 21 of the bill would repeal the current Tax Law § 308 and add a new Tax Law § 308 relating to special provisions for taxes on certain motor fuels.

Section 22 of the bill would add a new Tax Law § 309 relating to foreign and interstate commerce and the requirement that tax be paid but once on the same quantity of motor fuel, Diesel motor fuel or residual petroleum product.

Section 23 of the bill would repeal Tax Law § 310, which deals with the collection of taxes and penalties from corporate petroleum businesses. This section would also add a new Tax Law § 310 that addresses government entity credit card provisions.

Section 24 of the bill would merge the Articles 12-A and 13-A deposit and disposition of tax revenue provisions.

Sections 25, 26, 28 through 39, 41 through 46, 48 through 58, and 60 through 69 of the bill would make conforming changes to the Tax Law.

Section 27 of the bill would repeal Tax Law § 315.

Section 40 of the bill would suspend the prepaid sales tax on automotive fuels imposed by Tax Law § 1102.

Section 47 of the bill would repeal Tax Law § 1115(a)(42) and add a new paragraph (42) to exempt automotive fuel from the sales tax but only if that fuel is subject to the new Article 13-A tax.

Section 59 of the bill would make conforming changes to the method for calculating the monthly Medicaid intercept for counties which elected the intercept, to maintain the status quo.

Sections 70 through 90 of the bill would make conforming changes to other laws necessitated by the repeal of Article 12-A and the consolidation of the taxes in Article 13-A.

Section 91 of the bill would provide severability for the provisions of the bill where a provision is adjudged unconstitutional by a court of competent jurisdiction.

Section 92 of the bill would provide that the bill takes effect on December 1, 2008, and applies to sales, uses or transfers on or after that date. It also contains transition clauses, special effective date provisions and instructions on amendments to provisions that are expiring under current law.

The current fuel taxation structure presents compliance and administration issues for both industry and the Department of Taxation and Finance by imposing separate fuel and petroleum business taxes on the same gallon of fuel. In addition, localities may choose to impose retail sales tax on fuel sold within their jurisdiction on either a cents-per-gallon or receipts basis. This bill reforms the existing structure by creating a new unified State and local excise tax on fuels. This bill would also generate revenue by annually indexing the tax rates under the unified State and local excise taxes. Currently, only the rates imposed by the petroleum business tax are indexed.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-09 Executive Budget because it would increase revenues by $13.2 million in 2008-09 and $55.9 million in 2009-10.

Effective Date:

This bill takes effect on December 1, 2008, and applies to sales, uses and transfers on or after that date.

Part I – Decouple from the Federal Qualifying Production Activities Income (QPAI) deduction.

Purpose:

This bill would disallow the flow-through of the deduction claimed by taxpayers pursuant to Internal Revenue Code (“IRC”) § 199, in the calculation of income subject to the State corporate franchise tax, unrelated business income tax, personal income tax, banking corporation franchise tax, and insurance corporation franchise tax, as well as the New York City general corporation tax, financial corporation tax, and personal income tax.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 would add new subparagraph (19) to Tax Law § 208.9(b). New subparagraph (19) would require general business corporation taxpayers to add back the amount of the deduction allowed under IRC § 199 for Qualifying Production Activities Income (“QPAI”) when determining entire net income. This addition to the Tax Law would prevent taxpayers who claim the IRC § 199 deduction from allowing those deductions to flow-through 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 2 through 7 would make similar amendments to the unrelated business income tax (Article 13), personal income tax (Article 22), banking corporation franchise tax (Article 32) and insurance corporation franchise tax (Article 33).

Sections 8 through 12 would 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 QPAI. The deduction started at 3 percent of QPAI in 2005 and will rise to 9 percent of QPAI by 2010 when it is fully effective. Unlike other deductions used in the computation of taxable income where 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. This deduction will cause a significant revenue loss to the State with no guaranteed commensurate benefit. As of January 2007, 18 states had decoupled from the deduction^[1].

Under Federal law, qualifying production activities are ill-defined and encompass a broad range of businesses. Although intended to benefit traditional manufacturing activity, the deduction is allowed on a vast array of activities that go beyond the familiar concept of manufacturing. The sheer scope of the deduction, covering profits from manufacturing, food processing, software development, filmmaking, electricity/natural gas production, or construction, threatens corporate tax revenue. Furthermore, the breadth of the deduction does not limit its impact geographically. Industries that use the deduction are located statewide, including in the Metropolitan Commuter Transportation District.

New York uses Federal taxable income as the starting point for New York taxable income. Therefore, the Federal deduction will flow through to New York. A multi-state 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 this scenario, New York loses revenue with no corresponding gain from the production activity.

This proposal was included in the Governor’s proposed 2007-08 Executive Budget.

Budget Implications:

This bill will increase tax receipts reflected in the State Financial Plan an estimated $56 million in each of SFY 2008-09 and SFY 2009-10. Enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

This bill takes effect immediately and applies to taxable years beginning on and after January 1, 2008.

Part J – Reduce the corporation franchise tax capital base rate and eliminate the liability cap under this base.

Purpose:

This bill would amend the business corporation franchise tax, by reducing the tax rate of the capital base, eliminating the cap on that tax base for non-manufacturers, and conforming the definition of “manufacturer” under the capital base to the definition under the entire net income base.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

For tax years beginning on or after January 1, 2008, this bill would reduce the

Article 9-A tax rate on the capital base from 0.178 percent to 0.15 percent, eliminate the cap under that tax base for non-manufacturers, and conform the definition of “manufacturer” under the capital base to the definition under the entire net income base. The conforming amendments would specifically exclude electricity generation from the definition of manufacturing and restrict the benefits under the reduced capital base limitation amount to taxpayers doing manufacturing in New York. Existing law imposes an Article 9-A tax on capital at a rate of 0.178 percent on each dollar of capital, and limits non-manufacturers’ capital base liability to $1 million. Manufacturers are subject to a lower liability cap of $350,000. This bill would provide further tax relief to corporations with capital base liability below $1 million doing business in New York State and increase the tax on those who previously benefited from the $1 million cap.

Budget Implications:

This bill will increase corporate franchise tax receipts reflected in the State Financial Plan an estimated $98 million in SFY 2008-09 and $70 million in SFY 2009-10. Thus, enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

This bill takes effect immediately and applies to taxable years beginning on or after January 1, 2008.

Part K – Include for-profit health maintenance organizations as insurance corporations subject to the premiums tax under Article 33 of the Tax Law.

Purpose:

This bill would reclassify for-profit health maintenance organizations as premiums tax-based Article 33 insurance corporations from their current status as corporate franchise tax profits-based Article 9-A business corporations.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill amends the definition of an “insurance corporation” in Tax Law § 1500(a) to include a health maintenance organization required to obtain a certificate of authority under Article 44 of the Public Health Law.

Section 2 of the bill amends Tax Law § 1502-a, which imposes the premiums tax on all insurance corporations, other than life insurance corporations, to provide that the premiums tax applies to health maintenance organizations required to obtain a certificate of authority under Article 44 of the Public Health Law. This section further amends Tax Law § 1502-a, to provide that health maintenance organizations are taxed on their premiums at the rate that applies to accident and health premiums.

Section 3 of the bill amends Tax Law § 1510(c)(1) to provide that the term “premium” includes all amounts received as consideration for contracts with health maintenance organizations for health services.

Section 4 of the bill adds a new paragraph (10) to Tax Law § 1512(a) to exempt nonprofit health maintenance organizations from Article 33.

Section 5 of the bill provides that the bill is effective immediately and applies to taxable years beginning on or after January 1, 2008.

Article 33 of the Tax Law imposes a franchise tax on every insurance corporation for the privilege of exercising its corporate franchise, doing business, employing capital, owning or leasing property, or maintaining an office in New York State. An insurance corporation is defined generally as a corporation doing an insurance business in the State. The Department of Taxation and Finance (“Department”) looks to the Insurance Law to determine whether a corporation is doing an insurance business for purposes of Article 33. Generally, a corporation that is required to be licensed under the Insurance Law as an insurer will be considered an insurance corporation under Article 33. Tax Law § 1512(a), however, describes numerous insurance corporations that are exempt from the provisions of Article 33.

Life insurance corporations are subject to a 0.7 percent premiums tax under Tax Law § 1510(b). They are also subject to a tax under Tax Law §§ 1501 and 1502 on the highest of three bases: entire net income, capital or a fixed dollar minimum. However, the total amount of tax imposed on a life insurance corporation may not exceed the limitation amount specified in Tax Law § 1505. Non-life insurance corporations are subject only to a premiums tax under Article 33 for taxable years beginning on or after January 1, 2003. The rate of the premiums tax varies for non-life companies depending on the type of insurance. Premiums for accident and health insurance contracts are currently taxed at the rate of 1.75 percent of premiums.

Although health maintenance organizations function in many ways as traditional indemnity health insurers, they are not required to be licensed under the Insurance Law. Rather, they are licensed under Article 44 of the Public Health Law. Therefore, they are generally not considered insurance corporations under Article 33, and instead are taxable as business corporations under Article 9-A of the Tax Law.

This bill would amend the definition of an insurance corporation under Article 33 of the Tax Law to include health maintenance organizations, excluding those incorporated as nonprofits. As a result, a health maintenance organization, licensed under Article 44 of the Public Health Law (other than a nonprofit one), would be subject to the premiums tax of Tax Law § 1502-a instead of the business corporation tax of Article 9-A. This would ensure fairness of treatment for tax purposes since health maintenance organizations are similar in operation to traditional health insurers and compete with these businesses.

Budget Implications:

This bill will increase insurance tax receipts reflected in the State Financial Plan by an estimated $269 million in SFY 2008-09 and $310 million in SFY 2009-10. In addition, the State Financial Plan reflects decreases in corporate franchise tax receipts by an estimated $22 million annually beginning in SFY 2008-09. Thus, enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

This bill takes effect immediately and applies to taxable years beginning on or after January 1, 2008.

Part L – Require non-profit tax-exempt organizations to collect sales tax on additional retail sales including online, mail-order catalogue, and auction sales, and rentals or leases of tangible personal property.

Purpose:

This bill amends the sales and use tax “shop or store” rule to include certain services sold by an exempt organization (“EO”), as well as the EO’s remote sales (telephone, Internet, mail order) and auction sales of tangible personal property (“TPP”) and certain other services. This closes a loophole that allows non-profits to compete on an unfair basis with vendors required to collect tax on activities not directly related to their non-profit status.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

This bill would amend Tax Law § 1116(b) to provide that the following EO sales are subject to state and local sales and compensating use taxes by virtue of the general exemption provided in Tax Law § 1116(a): (1) Tax Law §1105(b) and 1105(c)(5) services, whether or not sold from the EO’s shop or store; (2) TPP and Tax Law § 1105(b) and 1105(c)(5) services sold remotely (such as via telephone, the Internet, or mail order), or at an auction conducted by the EO or its agent; and (3) TPP leased or rented by an EO to another person. The bill would not do anything to make an EO’s purchases taxable. Services described in Tax Law § 1105(b) are commonly known as consumer utility services. Tax Law § 1105(c)(5) services consist of maintaining, servicing and repairing real property.

Generally, EOs described in Tax Law §1116(a)(4), (5) and (6) do not have to collect tax on their sales of TPP or enumerated taxable services. But under Tax Law § 1116(b)(1), if that EO sells TPP from its shop or store, it must collect tax. This is known as the “shop or store” rule. Sales and Use Tax Regulations § 529.7(i)(2) provides that a shop or store includes any place or establishment where goods are sold from display with a degree of regularity, frequency and continuity, as well as any place where sales are made through a temporary shop or store located on the same premises as persons required to collect tax. Likewise, if that EO sells food and drink from a restaurant, tavern or other establishment that it operates, or if the EO provides motor vehicle parking services at a lot or garage it operates, the EO must collect tax on those sales (Tax Law § 1116(b)(2) and (3)). The “shop or store” rule, the food/drink rule, and the parking rule generally express the legislative intent that, if an EO is in competition with private vendors because the EO is operating a shop or store, a restaurant, or a parking lot or garage, then it must likewise collect tax, so that it does not have a competitive advantage over private vendors.

Over time, EOs have been selling otherwise taxable services from their stores or other fixed locations. They may also deliver those services at the purchaser’s location. These sales are as much in competition with private vendors’ sales of services as are the EO’s sales of TPP from its shop or store. EOs also sell these services and TPP by remote means, such as by telephone, the Internet or mail order. The EO’s online or mail order “virtual store” may be just as effective a means to make sales and is equally in competition with private businesses. However, some Tax Department advisory opinions have suggested that a web site does not constitute a shop or store. Also, some EOs regularly and frequently conduct auctions, or have an auctioneer conduct an auction on the EO’s premises. If the auctioneer were conducting the auction for itself or a private person or business, the auctioneer would have to collect tax on these sales.

EOs likewise routinely make service sales. Hospital EOs sell Tax Law § 1105(b) telecommunications services and telephone answering services to physicians. Church landlords sell utility services to commercial tenants. EOs also lease TPP as a lessor without having to collect tax, even though the item leased is of a type ordinarily sold by private persons. That lease is not currently taxable, since the lease is not made from a shop or store.

In order to level the playing field with private vendors, and to conform to existing policy regarding sales of TPP from a shop or store, this bill would make an EO’s sales of these services from its shop or store taxable, as well as make the EO’s sales of TPP or services taxable if the sales are made by remote means or at an auction.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it would increase revenues by $7.5 million in 2008-09 and $15 million in 2009-10.

Effective Date:

This bill takes effect September 1, 2008, and applies to sales made, uses occurring and services rendered on or after that date.

Part M – Authorize an additional $4 million of annual low-income housing credits for ten years.

Purpose:

This bill would allow the Commissioner of Housing and Community Renewal to allocate an additional $4 million of State low-income housing credits, which receiving taxpayers may claim each year for 10 years.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

This bill would amend Public Housing Law § 22 by increasing the aggregate amount of annual low-income housing tax credit the Commissioner may allocate from $16 million to $20 million.

Budget Implications:

This bill will decrease annual tax receipts by an estimated $4 million beginning with SFY 2008-09 and ending with SFY 2017-18. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2008-09 Executive Budget.

Effective Date:

The bill would take effect immediately.

Part N – Require taxpayers to pay the fee charged by the Federal government and other states for offsetting tax refunds to pay for the New York State income tax debts owed by those taxpayers.

Purpose:

This bill would allow the State to recover fees and charges imposed by the federal government and other states for remitting tax overpayments to the State in satisfaction of tax debts owed to the State.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill would add a new Tax Law § 171-p to authorize the Commissioner of Taxation and Finance to implement a process to recover any cost or fee imposed by the federal government, or any other state, for paying a tax debtor’s refund to New York to satisfy that taxpayer’s tax debt. The cost or fee would be deemed part of the taxpayer’s tax debt and would be eligible for offset against the refund to the extent permitted by law. The definitions in the proposed Tax Law § 171-p(1) are derived from Internal Revenue Code (“IRC”) § 6402(e) and Tax Law § 171-n.

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

Federal law and regulations allow past-due, legally enforceable income tax obligations owed to states by taxpayers, to be offset by federal tax refunds owed to the taxpayers. See IRC § 6402[e]; 31 C.F.R. § 285.8. These offsets are processed through the Treasury Offset Program (“TOP”), which is administered by the Financial Management Service (“FMS”), a bureau of the United States Department of the Treasury. Federal regulations allow the FMS to charge states fees for refund offsets which are completed. See 31 C.F.R. § 285.8[h]. The fee is currently $22 per completed offset. Fees are deducted by the FMS before monies are transmitted to the states.

Tax Law § 171-n authorizes the Commissioner of Taxation and Finance to remit overpayments of New York taxes to other states that have reciprocal offset agreements with New York State. There are a number of states that have statutory provisions similar to section 171-n. At present, the Department of Taxation and Finance (“Department”) has reciprocal offset agreements pertaining to income tax debts with Connecticut, Delaware, and Maryland.

A substantially identical bill (S. 8085) passed the Senate in 2006, but did not pass the Assembly. Substantially identical “same as” bills were also introduced in 2007 (S. 4240 and A. 8013) but no action was taken on either bill.

It is equitable for taxpayer-debtors to bear the costs of fees imposed by the federal government and other states when it becomes necessary for the Department to collect tax debts by means such as refund offsets, since neither the State nor the Department has control over the existence or amount of the fee being charged. In the absence of statutory authority to do otherwise, the Department must credit tax debts without allowing for deduction of the fees imposed on the state (See, e.g., People v. Three Barrels Full, 236 N.Y.175; CPLR §§ 8101, 8301(a)(8), 8303(b)). This bill would allow the State to recover fees and charges imposed by the federal government and other states for remitting tax overpayments to the State in satisfaction of tax debts owed to the State by taxpayers. This is analogous to the situation where sheriff’s fees would be charged to the debtor if the Department were to use a sheriff to collect on a tax warrant. Many states, including California, Connecticut, Illinois, Massachusetts, New Jersey and Pennsylvania, already recoup the federal offset fee from taxpayers.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it will increase revenues by $1.3 million annually beginning in SFY 2008-09.

Effective Date:

This bill will take effect immediately.

Part O – Clarify the Commissioner of Taxation and Finance’s powers under Article 21 of the Highway Use Tax.

Purpose:

This bill amends Tax Law § 509 to clarify that the Commissioner of Taxation and Finance (“Commissioner”) has the power to use certain technologies to enforce the Highway Use Tax and to make certain technical clarifications and corrections.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill would amend Tax Law § 509(1) to provide that the Commissioner may utilize license plate recognition software and related visual detection equipment as a method to check, verify and ascertain the number of miles traveled by, and the weight of, each vehicular unit on the public highways in this state. Section 1 of the bill would also amend Tax Law § 509(5) to expressly include the Department of Motor Vehicles, the Department of Environmental Conservation, the Port Authority of New York and New Jersey, the Thruway Authority, the New York State Bridge Authority as entities from whom the Commissioner may request cooperation to enforce the Highway Use Tax. In addition, section 1 of the bill would also authorize the Commissioner to enter into agreements with the above-named entities and other public officials to aid in enforcing the provisions of this tax.

This proposal would clarify the powers of the Commissioner to use new technologies to help combat bootlegging of fuels into the state and provide a level playing field in the fuel industry. This bill would also clarify that entities whose cooperation may be needed to achieve these measures can enter into agreements with the Commissioner.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it would increase revenues by $7.5 million in 2008-09 and $15 million thereafter.

Effective Date:

The bill would be effective immediately.

Part P – Amend definitions in the Tax Law and the New York City Administrative Code pertaining to the determination of residency status of taxpayers.

Purpose:

This bill would amend certain provisions of the Tax Law and the Administrative Code of the City of New York to redefine terms used to determine taxpayer residency status.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of this bill would amend Tax Law § 605(b) to tax as a New York resident, a taxpayer who is out of the country for at least 450 of any 548 consecutive days, but whose spouse and minor children are in New York for more than 90 days of that period, regardless of whether the spouse and children spend any of their time at the taxpayer’s principal place of abode in New York. Sections 2, 3, 4 and 5 of the bill would make similar changes to Tax Law § 1305(a), Administrative Code of the City of New York § 11-1705(b), Tax Law § 1325(a), and Tax Law §1340(f) relating to the New York City and Yonkers personal income taxes. Section 6 of the bill provides that the bill would take effect immediately and apply to taxable years beginning on or after January 1, 2008.

Under the current law, a taxpayer domiciled in New York is not taxed as a resident if, within any 548 consecutive day period, (1) the taxpayer is present in a foreign county for at least 450 days, (2) the taxpayer is not present in the state for more than 90 days, and (3) his or her spouse and minor children do not reside at the taxpayer’s permanent place of abode in New York for more than ninety days. Taxpayers have exploited the plain language of the law by having their spouses and minor children avoid using their permanent places of abode in New York, and instead do such things as stay with relatives in New York or temporarily rent a hotel room in New York. In these cases, the spouse and minor children spend more than 90 days in New York, but not at the taxpayer’s permanent place of abode. This bill would close this loophole by providing that the taxpayer will still be taxed as a resident in New York unless the taxpayer’s spouse and minor children are not present in New York for more than 90 days.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget. It would increase personal income tax revenues by $5 million annually beginning in State fiscal year 2009-10.

Effective Date:

This bill takes effect immediately and applies to taxable years beginning on or after January 1, 2008.

Part Q – Extend for two years the credit for taxicabs and livery service vehicles that are accessible by individuals with disabilities.

Purpose:

This bill would: (1) extend for two more years the tax credit for taxi and livery companies that upgrade their vehicles to make them accessible to individuals with disabilities; and (2) update the terminology in the Tax Law pertaining to the tax credit.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 amends subdivision 40 of section 210 of the Tax Law to update the language of the credit for companies that provide transportation services to individuals with disabilities by changing the phrase “handicapped individuals” to “individuals with disabilities” and the phrase “handicapped accessible” to “accessible by individuals with disabilities”. These amendments are intended to comply with the purpose of Chapter 455 of the Laws of 2007, which provides that new and revised statutes or regulations should avoid using language that is disrespectful to persons with disabilities.

Sections 2 and 3 make similar amendments to the personal income tax provisions concerning this credit.

Section 4 amends Chapter 522 of the Laws of 2006 to extend the repeal date of this credit from December 31, 2008, to December 31, 2010.

Both the corporate franchise tax and the personal income tax laws provide a credit of up to $10,000 per vehicle to taxi and livery companies for expenses to upgrade their vehicles to make them accessible by individuals with disabilities.

This bill extends for two years the incentive for taxicab and livery companies to make vehicles in their fleets accessible by individuals with disabilities. In many rural and suburban areas of the State, public transportation, while improving, remains less than optimal for most people, and is far worse for people with a disability. Additionally, even in urban areas, public transportation can be difficult to use. This credit is intended to provide an incentive to existing private transportation companies and should ease the burden of finding independent and accessible transportation for many people with disabilities.

Budget Implications:

This bill will reduce tax receipts reflected in the State Financial Plan an estimated $3 million in SFY 2009-10 and SFY 2010-11. Enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

This bill will take effect immediately.

Part R – Extend the MTA surcharges on business taxes for four years.

Purpose:

This bill extends for four more years, the temporary MTA business tax surcharges currently scheduled to sunset in taxable years ending before December 31, 2009.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Sections 1 through 6 extend the temporary MTA business tax surcharges in Tax Law Articles 9 (relating to transmission, transportation, utility and telecommunications businesses), 9-A (relating to general corporations), 32 (relating to banking corporations) and 33 (relating to insurance companies) for four years. As extended, the surcharge provisions apply to taxable years ending before December 31, 2013. Section 7 provides that the amendments made by the bill take effect immediately.

In 1982, the Legislature enacted the MTA business tax surcharge. See Chapter 931 of the Laws of 1982. Since its enactment, the surcharge has been extended ten times. The surcharge is imposed on corporations, banks and insurers and is calculated as a percentage of the entity’s state tax liability attributable to the Metropolitan Commuter Transportation District.

Budget Implications:

The current Financial Plan assumes extension of the surcharges. Enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

The bill will take effect immediately.

Part S – Restructure and reform the fees and minimum taxes imposed on limited liability companies, partnerships, corporations and Internal Revenue Code §761(f)(2) joint ventures.

Purpose:

This bill would amend the Tax Law to: (1) repeal the organization tax and license fee; (2) amend the maintenance fee on foreign corporations; (3) amend Limited Liability Company (“LLC”) filing fees; (4) impose filing fees on partnerships, LLCs that are disregarded entities for federal income tax purposes, and Internal Revenue Code (“IRC”) § 761(f)(2) joint ventures; and (5) amend the fixed dollar minimum tax under the general business corporation franchise tax.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill repeals the organization tax and tax on changes of capital under Tax Law § 180. Section 2 of the bill repeals the license fees on foreign corporations under Tax Law § 181(1). Section 3 of the bill reduces the annual maintenance fee imposed on foreign corporations from $300 dollars to $50 dollars.

Section 4 of the bill changes the filing fees imposed on LLCs classified as partnerships for federal income tax purposes, limited liability partnerships, and foreign limited liability partnerships, and imposes filing fees on LLCs that are disregarded entities for federal income tax purposes, partnerships, and qualified joint ventures as defined in IRC § 761(f)(2). The fee imposed ranges from $50 to $2,500 depending on the taxpayer’s New York source gross income for the year immediately preceding the taxable year for which the fee is due. If the LLC, joint venture or partnership does not have New York source gross income for the taxable year immediately preceding the taxable year for which the fee is due, it will pay a minimum filing fee.

Sections 5, 6 and 7 of the bill amend the Article 9-A fixed dollar minimum tax in Tax Law § 210(1). These sections change the computation of the fixed dollar minimum tax from amounts based on a taxpayer’s payroll during the taxable year to amounts that range from $50 to $2,500 depending on the taxpayer’s New York receipts. Section 8 of the bill amends Tax Law §1304-C to authorize the City of New York to adopt and amend local laws to impose filing fees that are consistent with state filing fees on partnerships, LLCs classified as partnerships for federal income tax purposes, LLCs that are disregarded entities for federal income tax purposes, limited liability partnerships, and qualified joint ventures under IRC § 761(f)(2).

Section 9 of the bill provides that the bill would take effect immediately and apply to taxable years beginning on or after January 1, 2008.

The current LLC fee is a per-person fee based solely on the number of members in the LLC. This bill would instead base the fee on New York gross income. This change would result in a fee that more accurately reflects the LLC’s New York activity. Also, partnerships, single member LLCs that are disregarded entities for federal income tax purposes, and qualified joint ventures under IRC § 761(f)(2) would be required to pay the minimum fee in accordance with the principles above. The current fixed dollar minimum tax is based on a taxpayer’s total wages, salaries and other personal service compensation of all the taxpayer’s employees, within and without the state. This bill would change the method of computing the fixed dollar minimum tax to base it on New York receipts. This change would result in a fixed dollar minimum tax that more accurately reflects the corporation’s level of New York activity and is similar to the fee imposed on partnerships, LLCs taxed as partnerships or disregarded entities for federal income tax purposes, and qualified joint ventures.

Budget Implications:

This bill will increase tax receipts by $75 million annually beginning in SFY 2008-09, which is reflected in the State Financial Plan. Thus, enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

This bill would take effect immediately and apply to taxable years beginning on or after January 1, 2008.

Part T – Include gain from the sale of partnership and other similar entity interests as NY-source income to nonresidents to the extent the gain includes gain from sales of real property located in New York.

Purpose:

This bill would amend Article 22 of the Tax Law to include the gain from the sale of interests in partnerships and other entities as New York source income to nonresidents, to the extent that the gain is attributable to the sale of the entity’s ownership of real property in New York.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill would amend the definition of “New York source income” for nonresident individuals in Tax Law § 631 to include the sale of an interest in a partnership, limited liability corporation, S corporation, or a non-publicly traded C corporation with one hundred or fewer shareholders (hereinafter the “entity”) that has real property located in New York. A nonresident would be required to include a portion of the gain or loss from the sale of his or her interest in an entity if fifty percent or more of the entity’s assets consist of real property located in New York. This percentage is a figure the numerator of which is the fair market valuation of all the entity’s real property located in New York and the denominator of which is the fair market value of all the assets of the entity that the entity has held for at least two years on the date of the sale. If it is determined that the entity’s New York real property equals or exceeds the fifty percent threshold, the taxpayer must allocate to New York the gain or loss from the sale of the interest in the entity.

Section 2 of the bill provides that it would take effect immediately and apply to sales of entity interests that occur thirty or more days after the effective date.

Under current law, nonresidents are taxed on income attributable to an ownership interest in real or tangible property located in New York. A nonresident can escape taxation by placing the New York real property in an entity and then selling his or her interest in the entity. New York has traditionally treated the sale of an interest in these entities as a sale of an intangible asset that is not taxable to a nonresident. This bill would prevent nonresidents from using this loophole to avoid paying New York personal income tax on the sale of real property located in New York. The direct sale of New York real property by a nonresident is subject to New York income tax, as is the sale of New York real property by an entity. This bill ensures that the gain or loss on the direct or indirect sale of New York real property by a nonresident accomplished through the sale of an interest in an entity is subject to New York personal income tax.

This treatment is consistent with federal law. Under Internal Revenue Code (“IRC”) § 897(c)(1)(A)(ii), a nonresident alien is taxed on the sale of his or her interest in a domestic corporation if the fair market value of the real property in the United States equals or exceeds fifty percent of the total assets of the corporation. Similarly, IRC § 897(g) taxes a nonresident alien on the sale of a partnership interest to the extent attributable to real property located in the United States.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it will increase revenues by $10 million annually beginning in SFY 2009-10.

Effective Date:

This bill takes effect immediately and applies to sales of entity interests that occur thirty or more days after the effective date.

Part U – Make statutory technical corrections and structural alterations necessary to eliminate remaining Real Estate Investment Trust (“REIT”) and Regulated Investment Company (“RIC”) loopholes.

Purpose:

This bill would require all captive REITs and captive RICs to file a combined return with the closest corporation that directly or indirectly owns or controls them.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1of the bill would add the definitions of a “REIT,” “RIC,” “captive REIT,” and “captive RIC” to Tax Law § 2.

Section 2 of the bill would amend subdivisions 4, 5 and 7 of Tax Law § 209. The amendment to subdivision 4 provides that a captive REIT or captive RIC that is required to file a combined return under Article 32 or Article 33 of the Tax Law is not subject to tax under Article 9-A. The amendment to subdivision 5 provides that a REIT is subject to tax under Article 32 if it is a captive REIT required to file a combined return under Tax Law § 1462(f). Subdivision 5 is further amended by removing language added by Chapter 60 of the Laws of 2007 concerning the requirement for certain REITs to file a combined return under Article 9-A. The amendments to subdivision 7 make similar amendments for captive RICs.

Section 3 of the bill would add a new subparagraph (6) to Tax Law § 211.4(a) to require a captive REIT or captive RIC to file a combined report under Article 9-A with the corporation that directly owns or controls over 50 percent of the voting stock of the captive, if that corporation is either an Article 9-A taxpayer or a corporation required to file a combined report under Article 9-A. This new subparagraph also requires a captive REIT or captive RIC, more than 50 percent of whose voting stock is not directly owned or controlled by a taxpayer or by a corporation required to file an Article 9-A combined report, to file a combined return with the closest controlling stockholder of the captive if the closest controlling stockholder is subject to tax under Articles 9-A, 32 or 33, or is required to file a combined return under any of those articles. The closest controlling stockholder is the corporation that indirectly owns or controls over 50 percent of the voting stock of the captive REIT or captive RIC and is the fewest tiers of corporations away from the captive. Section 3 of the bill also provides rules for the application to captive REITs or captive RICS of the other combined reporting provisions of Tax Law § 211.4, including the requirement for a qualified REIT subsidiary to join the combined report of its captive parent.

Section 4 of the bill would amend Tax Law § 211.4(b) relating to the computation of the tax bases under a combined report. The amendments provide that, in the case of a captive REIT or captive RIC included in a combined report, the entire net income of the captive REIT or captive RIC is determined in accordance with the provisions concerning non-captive REITs or RICs in Tax Law §§ 209.5 and 209.7, except that the deduction allowed by the Internal Revenue Code (“IRC”) for dividends paid by the REIT or RIC to any member of the affiliated group that includes the captive is limited to a percentage of such deduction. Fifty percent of the dividends paid deduction is allowed for the 2008 taxable year, twenty-five percent is allowed for 2009 and 2010, and no dividends paid deduction is allowed for taxable years beginning on or after January 1, 2011. For purposes of this paragraph, the term “affiliated group” means the affiliated group as defined in IRC § 1504 without the exceptions contained in subdivision (b) of that section.

Section 5 of the bill would amend Tax Law § 1452(d) to provide that the banking corporation tax of Article 32 applies to any captive REIT or captive RIC required to file a combined return under that article.

Section 6 of the bill would amend the Gramm-Leach-Bliley (GLBA”) transitional provision in Tax Law § 1452(m) to state that the transitional provision does not apply to a captive REIT or captive RIC. Thus, a captive REIT or captive RIC that was subject to tax under Article 9-A in 2007 would not be deemed an Article 9-A taxpayer under the GLBA provisions in 2008.

Section 7 of the bill would amend Tax Law § 1453(e)(11)(ii) and (iii) relating to the 60 percent exclusions to banking corporations for subsidiary dividends, and for net gains and losses from subsidiaries in the computation of entire net income. The amendments in this section would eliminate the provisions in these subparagraphs relating to disallowed investment proceeds. The amendment to subparagraph (ii) would also add a reference to new paragraph (18) of Tax Law § 1453(e) (see section 8 of the bill) to remove from the 60 percent exclusion those subsidiary dividends attributable to a dividend paid by a captive REIT or captive RIC included in a combined return under the Tax Law.

Section 8 of the bill would add a new paragraph (18) to Tax Law § 1453(e) to provide a 100 percent exclusion from entire net income for any dividend income from a subsidiary if that income is directly attributable to a dividend from a captive REIT or captive RIC included in a combined return filed under the Tax Law.

Section 9 of the bill would repeal Tax Law § 1453(u) relating to disallowed investment proceeds of a banking corporation.

Section 10 of the bill would add a new subparagraph (v) to Tax Law § 1462(f)(2) concerning the requirement for a captive REIT or captive RIC to be included in a combined report. This new subparagraph (v) contains provisions that parallel the Article 9-A combined reporting provisions added by section 3 of the bill.

Section 11 of the bill would make amendments to Tax Law § 1462(f)(3) relating to combined reporting for banking corporations that are similar to the amendments made in section 4 of the bill to Tax Law § 211.4(b).

Section 12 of the bill would amend Tax Law § 1503(b)(1)(A) and (B) relating to the deduction by insurance corporations of the income, gains and losses from subsidiaries, and the dividends from non-subsidiaries. The amendments would remove the exceptions therein for disallowed investment proceeds which were added by Chapter 60 of the Laws of 2007.

Section 13 of the bill would amend Tax Law § 1503(b)(2)(H) regarding the add back of interest attributable to subsidiary capital by eliminating the exception therein for amounts attributable to income, gains or losses that were not excluded from entire net income.

Section 14 of the bill would repeal Tax Law § 1503(b)(17) relating to disallowed investment proceeds of an insurance corporation.

Section 15 of the bill would amend Tax Law §1504(c)(2) relating to the allocation of subsidiary capital for purposes of the Article 33 subsidiary capital tax. The amendment would remove the exception in that paragraph for subsidiary capital the income, gains or losses from which are included in entire net income.

Section 16 of the bill would amend Tax Law § 1515(f) to add combined reporting provisions for captive REITs and captive RICs to Article 33 that are similar to those added to Tax Law Article 9-A in section 3 of the bill.

Section 17 of the bill provides that the bill will take effect immediately and apply to taxable years beginning on or after January 1, 2008.

A REIT is an entity taxable as a domestic corporation that meets the requirements of IRC§ 865. It is taxed at the Federal level (under IRC § 857) upon its REIT taxable income, but is allowed to take a deduction for dividends paid to its shareholders. Generally, a REIT must distribute at least 90 percent of its income to its shareholders to qualify as a REIT. The dividends paid to the shareholders of the REIT are taxable to the shareholder under the IRC. Dividends received or deemed received by a corporate shareholder of a REIT do not qualify for the dividends-received deduction allowed under the IRC and so are taxable to a corporate shareholder.

A RIC is a domestic corporation that meets the requirements of IRC § 851. Much like a REIT, a RIC must also distribute at least 90 percent of its annual ordinary income (not including capital gain income) and tax-exempt income to its shareholders. A RIC and its shareholders are also taxed at the Federal level like a REIT and its shareholders. However, a corporate shareholder of a RIC is 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 the deduction for dividends paid to shareholders often completely eliminates their entire net income, 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 of the Tax Law are allowed to deduct 100 percent of income, gains or losses from subsidiaries and 50 percent of dividends from non-subsidiaries. Banking corporations subject to tax under Article 32 of the Tax Law 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.

Under Article 9-A, certain corporations, 80 percent or more of whose stock is owned or controlled, directly or indirectly by another corporation (or corporations) can be required to file a combined return with its controlling corporation(s). In computing the entire net income of the combined group, dividends received by one group member from another group member generally are eliminated. Thus, the income of REITs and RICs has for the most part not been subject to taxation by New York.

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 under New York State Tax Law, a corporation that forms a captive REIT avoids the payment of New York tax on the distributed income. Thus, the REIT 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 captive 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. Corporations subject to tax under Article 9-A have also used captive REITs to hold real property leased to the controlling shareholder or its affiliates and thus generate substantial rent deductions without the subsequent taxation of the rent paid to the REIT. Similarly, a RIC avoids almost all taxation by the State under the corporate franchise tax if it distributes its earnings to shareholders. RICs too can be used by corporate shareholders to avoid taxation of income earned by the RIC.

New York enacted legislation in 2007 that sought to fully address tax avoidance through the use of captive REITs and RICs by corporate taxpayers. This legislation, in Part F of Chapter 60 of the Laws of 2007, required a REIT or RIC, 80 percent or more of whose voting stock was owned by a corporation that was subject to tax under Article 9-A or included in a combined return under that article, to file a combined return under Article 9-A with its parent corporation. The legislation took a different approach to captive REITs and RICs that were directly or indirectly owned by banking corporations taxable under Tax Law Article 32. Distributions from these REIT or RIC subsidiaries directly to their banking corporation shareholder, or from a holding company shareholder of the REIT or RIC to its banking corporation parent, were considered “disallowed investment proceeds.” These disallowed investment proceeds were subject to a phased-in disqualification from the 60 percent exclusion from entire net income for dividends from subsidiaries. Similarly, gains or losses realized from the disposition of a REIT or RIC subsidiary of a banking corporation were considered disallowed investment proceeds that were subject to a similar disqualification from the 60 percent exclusion for net gains from subsidiaries. The REIT and RIC provisions for insurance corporations contained in Chapter 60 also disallowed (over a phase-in period) any deduction of dividends paid by a REIT or RIC (or a holding company that controlled these entities) or gains or losses from the disposition of a REIT or RIC subsidiary.

The legislation in Part F of Chapter 60 does not sufficiently prevent the use of captive REITs and RICs to avoid New York tax. The combined reporting requirement in Article 9-A still allows these entities to avoid combination when the parent company is not subject to tax or otherwise required to file a combined return with other affiliates. The REIT and RIC provisions in Article 32 still allow the parent banking corporation to avoid taxation of the income earned by a REIT or RIC by forming an out-of-state subsidiary holding company to own the stock of the REIT or RIC and to accumulate the distributions from the REIT or RIC. Since the Article 32 provisions dealing with REITs and RICs disallow the deduction of dividends from these entities, the accumulation of the dividends in an out-of-state holding company, without any subsequent payment to the parent banking corporation, avoids any taxation of the REIT or RIC earnings by New York. The same avoidance of taxation through the use of non-taxpayer holding companies occurs under the Article 33 provisions for insurance company-controlled REITs and RICs.

The amendments in this bill address the loopholes that remain under the earlier legislation in Part F of Chapter 60. These amendments also simplify the approach to captive REITs and RICs by eliminating the dividend disallowance provisions in Article 32 and 33 and adopting a combined reporting requirement for all the corporation tax articles (9-A, 32 and 33).

Budget Implications:

Enactment of this bill is necessary to preserve tax receipts currently included in the Financial Plan, and to implement the 2008-09 Executive Budget.

Effective Date:

This bill would take effect immediately for taxable years beginning on and after January 1, 2008.

Part V – Change the mandatory first estimated tax installment payment for all business taxes from 25 percent to 30 percent.

Purpose:

This bill would require certain business taxpayers to use an increased percentage to compute the first installment of their business tax payment and Metropolitan Commuter Transportation District (“MCTD”) surcharge under the State corporation tax, corporate franchise tax, banking corporation franchise tax, and insurance corporation franchise tax.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill would amend Tax Law § 197-b(1)(a) to require every corporation taxpayer whose tax or MCTD surcharge for the preceding year was in excess of $100,000 to remit 30 percent (instead of 25 percent) of its preceding year’s corporation tax or surcharge as its mandatory first installment.

Sections 2 through 4 of the bill would make similar amendments to the corporate franchise tax (Article 9-A), banking corporation franchise tax (Article 32), and insurance corporation franchise tax (Article 33).

Part L of Chapter 85 of the Laws of 2002, which initially provided for these increases to the first installment, expired on January 1, 2007. This bill will reinstate the increases provided for in the 2002 legislation.

Budget Implications:

This bill will increase tax receipts by an estimated $100 million in SFY 2008-09, which is reflected in the State Financial Plan. There is no out-year Financial Plan impact. Thus, enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

This bill takes effect immediately and applies to taxable years beginning on and after January 1, 2009.

Part W – Increase the percent, annual credit cap and refundable portion of the empire state film production tax credits allowed, and amend the definition of production costs.

Purpose:

This bill would: (1) increase the percentage of qualified production costs allowed to be claimed under the empire state film production credit from 10 percent to 15 percent; (2) increase the aggregate amount of tax credits allowed annually from $60 million to $75 million over a three-year period; (3) make the credit fully refundable in the first tax year earned; and (4) amend the definition of “production costs” to include a greater amount of a production’s budget.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill increases from 10 percent to 15 percent, the amount of qualified production costs allowed to be claimed under the empire state film production credit.

Section 2 of the bill amends the definition of “production costs” to include total budget costs, with several limited exceptions.

Sections 3 and 4 of the bill amend the amount of credit that is allowed to be treated as an overpayment and eligible for a cash refund from 50 percent to 100 percent.

Section 5 of the bill increases the annual cap of aggregate empire state film production tax credits allowed to be authorized by the Governor’s Office of Motion Picture and Television Development from $60 million to $65 million in 2008, $70 million in 2009, and $75 million in 2010 and 2011.

Section 6 of the bill provides the effective date of the bill.

The current empire state film production credit is equal to 10 percent of the qualified production costs paid or incurred in the production of certain qualified films and television shows. If the amount of the credit exceeds the taxpayer’s tax for the year, 50 percent of the excess is treated as an overpayment of tax to be credited or refunded (without interest) and the balance not credited or refunded is carried over to the next succeeding tax year. Qualified production costs are production costs only to the extent such costs are attributable to the use of tangible property and services performed in the production of a qualified film in New York. Production costs exclude by definition: (1) costs for a story, script or scenario to be used for a qualified film; and (2) wages or salaries or other compensation for writers, directors, including music directors, producers and performers (other than background actors with no scripted lines). The annual cap is currently $60 million for calendar years through 2011.

This bill would increase the percentage of the qualified production costs that qualify for the credit to 15 percent, raise the annual cap to $65 million in 2008, $70 million in 2009, and $75 million in 2010 and 2011, and increase the amount of credit that can be treated as an overpayment of tax to 100 percent. This bill would also amend the definition of “production costs” to include those costs that were previously excluded above, and add several limited exceptions, including deferred profit arrangements, royalty arrangements, and bank fees and finance charges.

Budget Implications:

This bill will decrease annual tax receipts by $5 million in SFY 2008-09, $10 million in SFY 2009-10 and $15 million in SFY 2010-11 and 2011-12. Enactment of this bill is necessary to implement the Financial Plan submitted with the 2008-09 Executive Budget.

Effective Date:

This bill would take effect immediately and apply to taxable years beginning on or after January 1, 2008.

Part X – Establish an evidentiary presumption that certain sellers using New York residents to solicit sales in the State are “vendors” required to collect sales and use tax.

Purpose:

This bill would create an evidentiary presumption that certain sellers are “vendors” pursuant to Tax Law Articles 28 and 29, if the sellers enter into agreements with New York residents under which the residents are compensated for referring customers to the sellers and the gross receipts from such sales are more than $10,000.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Sellers are increasingly utilizing marketing programs that depend on the efforts of New York residents to make sales in New York. Sellers often enter into agreements with residents under which the residents are compensated for the number of successful referrals of customers they make to sellers. For example, many internet retailers enter into agreements with organizations under which the organization receives a commission if it includes a link on its website that connects users to the internet retailer’s website. If the customer makes a purchase, the organization receives a commission from the retailer. When the resident engages in solicitation activities in the State, such as distributing advertising fliers or newsletters in order to refer potential customers to the seller and maximize his or her commission income, the resident is acting as a “representative” and the seller is acting as a “vendor.” See Tax Law § 1101(b)(8)(i)(C)(I)).

The extent of these local solicitation activities is easier to ascertain for the sellers than it is for the Department of Taxation and Finance (“Department”). Thus, to facilitate the administration of the sales tax and establish a clearer standard for sellers, section 1 of the bill amends the definition of “vendor” in Tax Law § 1101(b)(8) to include a presumption that sellers that use New York residents to solicit sales are “vendors” for purposes of collecting New York sales and use tax, if their aggregate gross receipts during the preceding four quarterly periods from sales attributable to customers referred by the New York residents are in excess of $10,000.

Section 1 of the bill further provides that the presumption would be satisfied even if the resident indirectly refers potential customers to the seller. This language in the bill would allow the presumption to be satisfied if, for example, a resident organization encouraged others, such as its members, to refer potential customers to the seller, thereby earning the resident organization a commission, provided that the $10,000 sales threshold is reached. The presumption can be rebutted by proof that the residents did not engage in any solicitation activities in the State on behalf of the seller that would satisfy the constitutional nexus requirement. The term “resident” is defined in the Department’s regulations and it includes, for example, corporations organized under the laws of this State, persons carrying on business in the State and persons with a permanent place of abode in the State. See 20 NYCRR § 526.15. This bill is not meant to change the burden of proof in cases where the presumption in Section 1 of the bill does not apply.

Section 2 of the bill provides a limited amnesty for specified businesses covered by this bill that come forward and register by June 1, 2008. Specifically, this section precludes the Commissioner of Taxation and Finance from assessing tax, penalties, and interest against businesses for failure to collect sales tax from their customers for periods before June 1, 2008 if the businesses are covered by the presumption described in Section 1 of the bill and meet certain other conditions, including that they register as sales tax vendors by June 1, 2008.

Section 3 of the bill provides that the bill takes effect immediately and applies to sales made and uses occurring on or after the date the act becomes a law in accordance with the transitional provisions in Tax Law §§ 1106 and 1217, without regard to the date of the agreement between the vendor and the resident. Furthermore, sales tax quarterly periods commencing before the effective date of this bill are relevant to determining whether the seller has achieved the threshold level of gross receipts described in section 1 of the bill.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it would increase revenues by $43 million in 2008-09 and $73 million in 2009-10.

Effective Date:

This bill takes effect immediately and applies to sales made and uses occurring on or after the date the bill becomes a law in accordance with the applicable transition provisions in Tax Law §§ 1106 and 1217.

Part Y – Classify credit card companies doing a specified level of business in the State as taxpayers under Article 32 of the Tax Law.

Purpose:

This bill would ensure that banking corporations involved in the credit card business are subject to taxation in New York when their operations in New York meet certain customer and/or revenue thresholds.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill amends Tax Law § 1451 to provide that a banking corporation will be deemed to be doing business in New York if it meets any of the following criteria: (1) it has issued credit cards to 1,000 or more customers with mailing addresses in New York State as of the last day of its taxable year; (2) it has 1,000 or more merchant customers located in New York State to whom the banking corporation remitted payments for credit card transactions during the taxable year; (3) it has receipts of $1,000,000 or more during the taxable year from customers who have been issued credit cards by the banking corporation and have mailing addresses within New York; (4) it has receipts of $1,000,000 or more from merchant customers located in New York during the taxable year arising from credit card transactions; or (5) it has either 1,000 or more customers who are card holders or merchants in New York, or receipts of $1 million or more from customers who are cardholders or merchants in New York arising from credit card transactions. Section 1 of the bill also defines the term “credit card” to include various forms of cards that are generally considered credit cards, including bank, travel and entertainment cards.

Section 2 of the bill amends the allocation provisions in Tax Law § 1454(a)(2)(D) pertaining to receipts from credit card transactions. The amendments provide that interest, fees and penalties in the nature of interest, service charges, and other fees are earned within New York State if the mailing address of the card holder is within the State.

Article 32 of the Tax Law imposes a franchise tax on banking corporations that are doing business in a corporate or organized capacity in New York. See Tax Law § 1451. Under Tax Law § 1452(a)(9), banking corporations include those corporations, 65 percent or more of whose stock is owned or controlled by a bank or bank holding company that are principally engaged in a banking business or a business closely related to banking.

The term “doing business” as used in Tax Law § 1451 is explained in a regulation of the Department of Taxation and Finance. See 20 NYCRR § 16-2.7. The regulation contains several examples of activities that constitute doing business and primarily involves the operation of offices in New York. It does not expressly address credit card operations. The receipts of banking corporations from credit cards are allocated pursuant to Tax Law § 1454(a)(2)(D), which provides that interest, and fees and penalties in the nature of interest, are allocated based on the domicile of the card holder, and that service charges and fees are allocated based on the place where the card is serviced. Merchant discounts are allocated under this provision based on the location of the merchant.

This bill would subject out-of-State banking corporations that conduct significant credit card operations in New York, including subsidiaries of many bank and bank holding company taxpayers already doing business in New York, to the tax imposed by Article 32 of the Tax Law. This segment of the banking business is significant, and the portion of its revenues derived from New York customers or transactions is substantial. However, New York has never interpreted the “doing business” requirement in Tax Law § 1451 as encompassing credit card operations of corporations that do not otherwise maintain an office or some other physical connection to New York. As a result, banks that are based outside New York can conduct credit card operations in the State and yet avoid taxation. Similarly, banks that are subject to tax in New York can and do set up subsidiaries outside New York to conduct this business. This bill will extend the jurisdiction to tax banking corporations that conduct significant credit card operations in New York. As a result, corporations that access the New York market for credit cards or derive significant revenue from credit card operations in New York, will be required to pay tax based on their New York operations.

Budget Implications:

This bill will increase insurance tax receipts reflected in the State Financial Plan by an estimated $95 million in SFY 2008-09 and $75 million in SFY 2009-10. Thus, enactment of this bill is necessary to implement the 2008-09 Executive Budget.

Effective Date:

This bill takes effect immediately and applies to taxable years beginning on or after January 1, 2008

Part Z – Create a comprehensive program to encourage voluntary disclosure and to increase compliance with the Tax Law.

Purpose:

This bill creates a comprehensive program to encourage voluntary disclosure and to increase compliance with the Tax Law.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill states that this bill constitutes the Tax Enforcement and Compliance Initiative of 2008.

Subpart A of the bill would add a new Article 36 to the Tax Law. This article would create a structure for taxpayers and non-filers to report deficiencies and file returns. In return, penalties and possible criminal prosecution would be waived, conditioned upon satisfactory compliance with all future reporting and payment provisions. This new article would also contain a new penalty to penalize tax preparers who knowingly participate in the preparation of false or fraudulent returns. To facilitate the collection of warranted tax debts, this new article would require financial institutions to perform a data match and provide the Department of Taxation and Finance (“Department”) with tax debtors’ account information to identify funds to pay these debts, as is currently done for the child support enforcement program.

Subpart B of the bill would provide that an assessment that includes a fraud penalty would proceed directly to the Division of Tax Appeals for hearing without first going to the Department’s Bureau of Conciliation and Mediation Services. The severity of the tax abuse and misconduct that is the subject of a fraud assessment is so grave that it is imperative that the matter proceed directly to a formal hearing. This Subpart of the bill also requires that the record of the administrative hearing be subject to public inspection when the fraud assessment is sustained.

Subpart C of the bill would amend the criminal provisions in the Tax Law and other laws concerning tax crimes. These amendments seek to treat tax crimes the same as comparable larceny charges and emphasize that a tax crime is a theft of State monies.

Subpart D of the bill would make permanent the disclosure and penalty provisions relating to transactions that present the potential for tax avoidance through the use of tax shelters. The tax shelter provisions were first enacted in 2005 and are set to expire on July 1, 2009, unless they are renewed. These reporting requirements are similar to the tax shelter disclosure requirements for Federal income tax purposes. The tax shelter reporting requirements are imposed on taxpayers who utilize tax shelters and those who promote the use of tax shelters. Making these provisions permanent is an important step in curtailing abusive tax avoidance.

Subpart E of the bill would implement a sales tax registration program in order to update taxpayer information, delete obsolete registrations, and collect past-due taxes. In order to obtain a new certificate of authority under this subpart a vendor must pay, arrange for payment of, or otherwise dispose of, to the satisfaction of the Commissioner of Taxation and Finance (“Commissioner”) any liabilities that, when unpaid, are grounds for refusing to issue the certificate of authority.

Subpart F of the bill would provide the Commissioner with the ability to require electronic filing of tax returns and payments, while also establishing methods to permit paper transactions. In addition to allowing the Department and taxpayers to take advantage of investments in technology, electronic filing will allow for accurate and efficient tax administration and will assist in the Department’s compliance efforts.

Subpart G of the bill would amend various provisions of the Tax Law relating to cigarette and tobacco taxes, including enhancing enforcement with respect to cigarette manufacturers and licensed agents, wholesalers and retailers.

Section 2 of the bill contains a severability clause.

Section 3 of the bill would provide that the bill takes effect immediately.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-09 Executive Budget because these provisions are reflected in the Financial Plan. The sales tax registration would increase revenues by $12.2 million in 2008-09 and $36.9 million in 2009-10. The tax shelter reporting provisions would increase revenues by an estimated $17 million starting in 2009-10. The e-filing provisions would provide approximately $6.3 million in administrative savings in 2008-09 and thereafter. The voluntary compliance and enforcement provisions are estimated to increase revenues by $50 million in 2008-09 in various tax categories. Other provisions will increase receipts by $10 million in 2008-09.

Effective Date:

This bill would take effect immediately as provided in each Subpart of the bill.

Part AA – Provide tax credits for bioheat to be used for space heating or hot water production for residential purposes.

Purpose:

This bill provides corporate and personal income tax credits for the purchase of bioheat to be used for space heating or hot water production for residential purposes.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill would amend Tax Law § 210(39) to allow for a credit for the purchase of bioheat for residential customers. The credit is equal to $0.01 per percent of biodiesel per gallon of bioheat, not to exceed twenty cents per gallon, purchased by the taxpayer. This credit expired on June 30, 2007 and will be reinstated by the provisions of this bill for the period commencing January 1, 2008 and ending December 31, 2011. Section 2 of the bill makes identical amendments to the personal income tax in Tax Law § 606 (mm). Section 3 of the bill provides for the effective date.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it would reduce revenues by $1 million annually from SFYs 2009-10 through 2012-13, as reflected in the Financial Plan.

Effective Date:

The bill would take effect immediately.

Part BB – Authorize New York City to continue to impose a 4 percent sales and use tax after August 1, 2008.

Purpose:

This bill imposes sales and compensating use taxes authorized by Article 29 of the Tax Law at the rate of 4% in New York City upon the expiration of the 4% local sales and compensating use taxes imposed in the city by Tax Law § 1107, and conforms the base of the city’s Article 29 taxes to the base of the expiring § 1107 taxes.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Since 1975, when the Municipal Assistance Corporation for the City of New York (“MAC”) was established, Tax Law § 1107 sales and use taxes have been imposed in the city at the rate of 4%. Prior to that, the city was authorized to impose an additional 1% rate of sales and use taxes so that its total rate was 4%. Generally, this bill amends Articles 28 and 29 of the Tax Law to authorize a 4% rate of sales and use taxes in New York City effective August 1, 2008, immediately after the § 1107 taxes expire at the end of July, 2008, and to conform the base of the city’s Article 29 taxes to the base of the expiring § 1107 MAC taxes. The bill also directly amends the New York City Administrative Code to impose the 4% rate of sales and use taxes on the conformed base.

Section 1 amends § 1105(c)(3)(vi) to remove obsolete text and a non-conforming provision relating to the expiring § 1107 MAC taxes. This makes a statewide provision excluding tax on services to exempt farm production machinery and equipment apply also to the MAC taxes, since the § 1115(a)(6) farm production M&E exemption already applies to the MAC taxes.

Section 2 amends Tax Law § 1142-A(a), which imposes the special parking vendor recordkeeping requirements applicable in Manhattan, to add a reference to the new city taxes that will resume August 1, 2008.

Section 3 amends Tax Law § 1210 to authorize the city to impose its 4% rate effective August 1, 2008. While this change would take effect in the middle of a sales tax quarterly period, there should be no harm since the rate and base of the expiring and new taxes would be unchanged. MAC bonds are expected to be fully discharged in July 2008, and current law provides that the city’s taxes will resume on the first day of the following month, which would be August 1, 2008.

Section 4 amends Tax Law § 1210(a)(1)(i) to make conforming changes. A principal change is to simplify the structure of § 1210(a)(1)(i) by removing special rules applicable only to New York City and placing them instead in § 1210(a)(4).

Section 5 amends Tax Law § 1210(a)(4) to conform the city’s authority for its sales and use taxes to the base of the § 1107 taxes, including the exceptions in § 1107(b) and the additional 2% rate on parking services in § 1107(c). However, the exceptions relating to interior cleaning and maintenance services and protective and detective services found in § 1107(b)(8(i) are not included, since the city will impose tax on those services pursuant to § 1210(a) once the bill takes effect. This § 1107(b)(8) exception currently provides that if the city does not impose tax on those services pursuant to § 1212-A, then § 1107 would impose tax on them. Since the city has imposed tax on those services pursuant to § 1212-A, § 1107 has not imposed tax on those services.

Section 6 amends Tax Law § 1210(f) to clarify that the date through which the city taxes are suspended is the later of July 1, 2008, or the last day of the month in which the MAC debt is discharged. Currently § 1210(f) provides it is the later of July 1, 2008 or the day on which the debt is discharged.

Section 7 makes conforming changes to Tax Law § 1210(i). A reference to the § 1107 MAC taxes as “state” taxes is dropped to conform to prior clarifying amendments indicating the § 1107 MAC taxes are “local” taxes. Under current law, the city taxes that recommence when the MAC taxes expire would be the sales and use taxes the city imposed in 1975. This provision is clarified to provide that the resumed city taxes will incorporate changes to Article 28 of the Tax Law that have occurred in the interim, so that the city’s resumed taxes are similar to the state’s taxes, except as otherwise provided by law. Article 28 changes are automatically incorporated into Article 29 of the Tax Law, which authorizes localities to impose sales and use taxes, as well as directly into the local enactments imposing those sales and use taxes.

Section 7-a repeals Tax Law § 1212-A(f) and (g), which authorize the city to impose its 4% sales tax on interior cleaning and maintenance services and protective and detective services, since the city will impose tax on those services pursuant to § 1210(a) of the Tax Law once the bill takes effect.

Section 8 amends Tax Law § 1223(a) to remove an erroneous reference to the city’s taxes. Section 1223 by its terms can apply, as applicable here, only to § 1210 taxes imposed by a county or by a city located in a county. Since New York City itself is authorized to impose sales and use taxes, and the counties in the city are not authorized to impose such taxes, the reference to the city’s taxes is meaningless and confusing.

Section 9 amends Tax Law § 1261(c) relating to the Tax Department certification of sales tax collections to the State Comptroller and the Comptroller’s payment of the certified amount to the counties and cities imposing the taxes. The expenses of the State Financial Control Board and the State Special Deputy Comptroller for the city would be withheld by the Comptroller from the city’s revenues and paid quarterly into the miscellaneous special revenue funds of the State.

Sections 10 and 12 amend State Finance Law §§ 92-b and 92-d to ensure the continued flow of stock transfer tax money into the stock transfer incentive fund once the MAC certifies that all of its liabilities have been paid. Currently, this money flows through the stock transfer fund and then is transferred into the stock transfer incentive fund, upon quarterly certifications by the MAC. Since these certificates will no longer be necessary once the MAC bonds are paid off, the proposed changes would provide a mechanism to deposit the moneys directly into the stock transfer incentive fund and would also simplify the administration of the funds.

Section 11 amends State Finance Law § 92-d to authorize the Tax Commissioner to allocate revenues from the 3-month sales tax quarter ending August 31, 2008 between the § 1107 MAC taxes and the city’s resumed § 1210 taxes. This allocation would be based on the number of months the respective taxes are in effect, just as the State Tax Commission was authorized to allocate revenues from the first quarter of the MAC taxes between the MAC taxes and the city’s suspended taxes.

Section 13 amends the New York City Administrative Code to repeal the city’s suspended, outdated general sales and use tax provisions and re-impose the new 4% taxes on the conformed base, pursuant to Tax Law § 1210(a), as amended by bill sections 4 and 5. The current suspended Administrative Code provisions reflect the law as it was in 1975, and there have been numerous changes since then. Since Tax Law § 1218 provides that Article 28 provisions, and amendments thereto, are incorporated into § 1210, as well as into local enactments adopted pursuant to the authority of § 1210, there is no need to amend all of the outmoded city provisions. Rather, the new Administrative Code § 11-2001 added by bill Section 13 would impose the city’s § 1210(a) general sales and use taxes at 4%, with changes to reflect the current state of the law and the conformed base. Since bill Section 5 deletes the exceptions relating to interior cleaning and maintenance services and protective and detective services, those services will be imposed by the city pursuant to Tax Law § 1210(a) once the bill takes effect. Likewise, new Administrative Code § 11-2002 would impose the city’s sales taxes on certain miscellaneous services, such as beauty and barbering services, that are currently imposed by Administrative Code § 11-2002(h).

Section 13-a amends the heading of subchapter 3 of the city’s Administrative Code to delete references to taxes on interior cleaning and maintenance services and protective and detective services, since new city Administrative Code § 11-2001, as amended by bill Section 13, will impose those taxes.

Section 13-b repeals city Administrative Code § 11-2040(a)(2) and (3), which currently impose the city’s sales taxes on interior cleaning and maintenance services and protective and detective services.

Section 13-c amends city Administrative Code § 11-2041 to delete transitional rules relating to the city’s taxes on interior cleaning and maintenance services and protective and detective services, since those taxes will be imposed in a different part of the Administrative Code.

Section 14 amends city Administrative Code § 11-2043 to add a conforming reference to new § 11-2001.

Section 15 provides that this bill will take effect August 1, 2008, and will apply to sales made, uses occurring and services rendered on or after that date in accordance with the applicable transitional provisions in Tax Law §§ 1106, 1107 and 1217.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-09 Executive Budget because collections from this tax will be used to fund costs for both the State Financial Control Board and the Office of the State Deputy Comptroller for New York City. The continuation of this tax is also assumed in the New York City budget and four year financial plan.

Effective Date:

This act takes effect August 1, 2008, and applies to sales made, uses occurring and services rendered on and after that date in accordance with the applicable transitional provisions in Tax Law §§ 1106, 1107 and 1217.

Part CC – Classify little cigars as cigarettes under the Tax Law.

This bill would amend the definition of “cigarette” for both New York State and New York City tax purposes to include little cigars.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 of the bill would amend the definition of “cigarette” in Tax Law § 470 to include little cigars. This provision of the bill conforms the definition of “cigarette” under the Tax Law to the federal definition. Section 1 of the bill would further simplify the definition of “tobacco products” under Tax Law § 470(2) to exclude little cigars. Lastly, section 1 of the bill would add a new Tax Law § 470(19) to define “cigar” as it is defined under federal law.

Section 2 of the bill would clarify Tax Law § 480-b(2-a) to prohibit licensed cigarette stamping agents from stamping any non-fire-safe cigarettes that are required under Executive Law § 156-c to be fire safe.

Section 3 of the bill would amend the definition of “cigarette” in the Administrative Code of the City of New York § 11-1301 to be consistent with the amendments to the definition of “cigarette” in the Tax Law made in section 1 of the bill.

Section 4 of the bill would amend the definition of “cigarette” in the Administrative Code of the City of New York § 20-201 pertaining to retail cigarette dealers, to be consistent with the amendments to the definition of “cigarette” in the Tax Law made by section 1 of the bill.

Section 5 of the bill would amend the definition of “cigarette” in the law authorizing the City of New York to impose its cigarette excise tax on little cigars.

Section 6 of the bill would allow retailers of “tobacco products” to sell their inventory of “tobacco products” that would now be defined as cigarettes under the amendments made by this bill, for 30 days after the effective date of the bill without penalty, even if sold without the cigarette tax stamps otherwise required.

Section 7 of the bill would provide that the bill takes effect July 1, 2008, and would establish a transition rule for the certifications required from cigarette manufacturers under Tax Law § 480-b(1).

Currently, little cigars are taxed under the Article 20 tobacco products tax at the rate of 37% of their wholesale price, and are not taxed under the cigarette tax. There is no tobacco products tax imposed by the City of New York, nor are dealers of little cigars regulated as cigarette dealers under Title 20 of the Administrative Code of the City of New York.

This bill would require little cigars that are practically indistinguishable from cigarettes to be treated and taxed like cigarettes. The bill would require that little cigars be affixed with a tax stamp and be subject to the certification and escrow requirements of the Master Settlement Agreement. Due to the existence of a joint State and City stamp, the Administrative Code of the City of New York must conform to the New York State Tax Law.

Budget Implications:

This bill will increase receipts by $3.6 million in 2008-09 and $4.8 million when fully effective, and its enactment is necessary to implement the 2008-2009 Executive Budget.

Effective Date:

This bill would take effect on July 1, 2008; provided, however, that any tobacco products manufacturer will be required to file a certification between April 16 and April 30, 2008, under Tax Law §480-b(1), with respect to cigarettes that are first being defined as cigarettes as a result of the amendments made by this act. The certification must be made no later than July 1, 2008.

Part DD – Authorize video lottery gaming at Belmont Park.

Purpose:

This bill authorizes the operation of video lottery terminals (VLTs) at Belmont Park, increases the commission rate paid to the operator of VLTs at Aqueduct, and sets the commission rate paid to the operator of VLTs at Belmont Park.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Section 1 amends Tax Law § 1612(b) to set the commission rate paid to a vendor track located in Nassau or Queens counties at 32 percent of total revenue wagered after payout of prizes, and to set the additional vendor’s marketing allowance for vendor tracks located in Nassau County at 4 percent of total revenue wagered after payout of prizes.

Section 2 amends Tax Law § 1617-a(a) to authorize the operation of video lottery gaming at Belmont Park.

Section 3 provides for an immediate effective date.

The Video Lottery program was first authorized in 2001. At that time, Belmont Park was specifically prohibited from operating a video lottery facility. This bill would provide Belmont with the authority to operate VLTs.

The current commission rate set in statute for the operator of video lottery gaming at Aqueduct Racetrack is 32 percent on the first $50 million of net machine revenue, 29 percent on the next $100 million of net machine revenue, and 26 percent on net machine revenue over $150 million. This bill would increase the commission rate for Aqueduct to 32 percent on all net machine income. The commission rate for Belmont Park would also equal 32 percent of net machine income.

Budget Implications:

Enactment is required to produce receipts necessary to support the Financial Plan over the forecast period.

Effective Date:

This bill would take effect immediately.

Part EE – Prohibit certain tax avoidance schemes.

Purpose:

This bill would narrow the sales tax exemption for commercial aircraft and the use tax exemption for motor vehicles, vessels, and aircraft in order to curtail certain abusive sales and use tax avoidance schemes.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

The purchase of aircraft, motor vehicles, and vessels is generally subject to sales tax. See Tax Law § 1105(a). When a resident purchases the property out-of-state and uses the property in-state, the compensating use tax applies. The Tax Law, however, provides an exemption from the sales and use taxes for commercial aircraft primarily engaged in commerce. See Tax Law § 1115(a)(21). Business entities are taking advantage of the commercial aircraft exemption to avoid sales tax on their purchases of aircraft used primarily to transport corporate executives by having the airplane purchased by a non-resident affiliate, which then charges resident affiliates for use of the aircraft.

Section 1 of the bill would end this method of avoiding sales tax by amending the definition of “commercial aircraft” in Tax Law § 1101(b)(17) to provide that an aircraft used primarily to transfer the purchaser’s personnel or those of an affiliated entity does not qualify for the exemption.

The Tax Law also provides an exemption from the use tax for tangible personal property purchased out-of-state by a non-resident. See Tax Law § 1118(2). Some New York residents are using the “new resident” use tax exemption in Tax Law § 1118(2) to avoid the sales tax on motor vehicles, vessels and aircraft used in-state by forming a new corporation or a limited liability corporation to purchase the item in question out-of-state, and then bringing the item into the State and using it at will.

Section 2 of the bill would address this tax avoidance method by amending Tax Law § 1118(2) to provide that the new resident exemption would not apply to the use of an aircraft, vessel, or motor vehicle purchased by a business entity out-of-state for use in-state primarily to carry persons employed by or otherwise associated in specified ways either (1) with the purchaser if any of the transported persons were residents at the time of the property’s purchase, or (2) with an affiliated entity of the purchaser if the affiliated entity was a resident when the property was purchased. The bill would define “carry” to mean taking any person from one point to another, whether for business purposes or pleasure of that person. The term “affiliated persons” has the same meaning given that term in the definition of “vendor” in Tax Law §1101(b)(8)(v). Thus, under section 2 of the bill, where a resident individual or business creates a new business entity for the sole purpose of purchasing an aircraft, vessel, or motor vehicle out-of-state for the use of an in-state resident associated with that individual or business, the new business entity would owe use tax. This bill is not intended to limit the common law remedies available to the Department to combat similar use tax avoidance schemes for tangible personal property.

Section 3 of the bill provides that the bill takes effect on June 1, 2008 and applies to sales made and uses occurring on or after that date.

This is a new proposal.

Budget Implications:

Enactment of this bill is necessary to implement the 2008-2009 Executive Budget because it would increase revenues by $4 million in 2008-09 and $6.3 million in 2009-10.

Effective Date:

This bill takes effect on June 1, 2008 and applies to sales made and uses occurring on or after that date.

The provisions of this act shall take effect immediately, provided, however, that the applicable effective date of each part of this act shall be as specifically set forth in the last section of such part.