GMG Knowledge Base

Salt Spotlight
02 Apr, 2014

New York Issues Guidance Regarding IDA Sales Tax Exemption Benefits

Posted by Grant McCarthy Group on Apr 2, 2014 2:59:00 PM

Knowledge Base

 On February 12, 2014, the New York State Department of Taxation and Finance (the “Tax Department”) issued a revised technical memorandum explaining recently enacted legislation which changes the way Industrial Development Agencies and Authorities (IDAs) provide and report sales tax exemption benefits.  The legislative changes, effective March 28, 2013, include new recordkeeping and reporting requirements, new requirements related to the recapture of certain sales tax exemption benefits, and limitations on providing sales tax exemption benefits to certain retail sales projects. TSB-M-14(1.1)S

In General

IDAs are established to encourage and assist in the acquisition, construction, reconstruction, improvement, maintenance, equipping, and furnishing of industrial, manufacturing, warehousing, commercial, research, and recreational facilities in the State.  An IDA is exempt from sales tax on all of its purchases.  However, it is not customary for the IDA to make purchases on its own behalf.  Generally, the IDA appoints an agent (a business and/or developer, contractor, or subcontractor) to make purchases on its behalf. Such purchases are deemed to be purchases made by the IDA that are exempt from sales tax. 
Tax Exempt Purchases
Effective June 1, 2014, agents of an IDA are required to use Form ST-123, IDA Agent or Project Operator Exempt Purchase Certificate, when making exempt purchases. This process supercedes the Tax Department’s previous guidance instructing agents to provide suppliers with a copy of a letter written by the IDA on IDA letter head authorizing the agent to make qualifying project related purchases. Form_ST-123.pdf
New Recordkeeping Requirements
In accordance with the recent law changes, an IDA is required to keep records of the sales tax exemption benefits it provides to its agents and make such records available to the Tax Department.  Within 30 calendar days of granting sales tax exemption benefits to an agent, an IDA must file Form ST-60 reporting the estimated amount of such benefits to the Tax Department. Form_ST-60.pdf
The new law also includes the following recordkeeping requirements:
  • An IDA must include the terms and conditions in GML section 875(3), including provisions regarding recapture of benefits, within each of its resolutions and project documents that establish a project or appoint an agent or project operator for a project.
  • A letter must be sent to the Tax Department explaining why an agent’s appointment has been amended, revoked, or canceled or is no longer valid and include the effective date of the change.
  • An IDA must prepare an annual compliance report detailing the terms and conditions of each of its projects, its activities and efforts to recapture any state sales tax exemption benefits due, and any other information required by the Commissioner of Taxation and Finance and the Commissioner of Economic Development.  Failure to file this report may result in the revocation of the IDA’s authority to provide state sales tax exemption benefits.[1]
The Tax Department is now authorized to audit the records, actions and proceedings of an IDA and its agents to ensure that they comply with these requirements.  Additionally, an IDA must report and post on the internet free copies of its resolutions and agreements related to IDA projects it establishes as well as provide, without charge, copies of all reports and information related to a project upon request.  An IDA may, at the request of an agent, delete any information contained in a report that is specifically exempt from disclosure under the Freedom of Information Law.
 
New Requirements Related to Recapture of Certain Sales Tax Exemption Benefits
An IDA is now required to recapture state sales tax exemption benefits that were claimed whenever:
  • The benefits were not entitled or authorized to be taken;
  • The benefits were in excess of the amounts authorized;
  • The benefits were for unauthorized property or services; or
  • The benefits were for property or services not used according to the terms of the agreement with the IDA.
Any failure to pay over improperly granted sales tax exemption benefits to an IDA could result in an assessment to the project operator or agent, or other person or entity, for the state sales tax due, together with penalties and interest.  IDAs must remit recaptured state sales tax exemption benefit amounts to the Tax Department within 30 calendar days.
Limitations on Providing Sales Tax Exemption Benefits to Certain Retail Sales Projects
Pursuant to the recent law changes, IDAs may not grant financial assistance to a project that will include facilities or property where “retail sales” are made to customers who personally visit the facilities if the cost of the retail sales facility is more than one-third of the total project cost.  There is an exception for projects qualifying as “tourism destinations.”
Notwithstanding the above limitations, an IDA may provide financial assistance to a retail sales project if:
  • The project’s predominant purpose is to make available goods or services that are not readily accessible to residents of the municipality where the project is located; or
  • The project is located in a “highly distressed” area. 
Approval for a retail sales project meeting these conditions will not be granted unless the IDA finds after a public hearing that undertaking the project will serve the public purpose of preserving or increasing permanent private sector jobs in the State, and the chief executive officer of the municipality for whose benefit the IDA was created confirms the proposed action.

GMG Observations

Over the past several years, the Tax Department has worked closely with the Economic Development Commission to monitor, quantify and audit sales tax benefits received by taxpayers pursuant to various incentive programs.  The new IDA reporting requirements reflect a continuation of this trend. 
In light of the Tax Department’s increased focus on sales tax exemption benefits, IDA agents should keep records of purchases made using Form ST-123, including invoices for such purchases, and closely monitor the amounts and types of items purchased to ensure that such purchases fall within the amounts and items authorized by the IDA.  In addition, since the new law requires an IDA’s resolutions, agreements and reports to be made available to the public, agents of IDAs should carefully review any applicable information and consider requesting that any information exempt from disclosure under the Freedom of Information Law be deleted.  

Tax Relief for Manufacturers

In order to provide relief to the manufacturing sector, the Governor proposes a property tax credit to offset a portion of a manufacturer’s corporate income tax liability.  The refundable credit would be equal to 20% of a manufacturer’s annual real property taxes.  For manufacturers located outside the MTA region, the Governor proposes to lower the corporate income tax rate to zero.  This proposal goes even further than the proposal made by the Tax Relief Commission which recommended lowering the tax rate imposed on such manufacturers to 2.5%, and demonstrates his commitment to bringing back manufacturing to upstate New York.

Corporate Tax Reform

In order to modernize the corporate tax and create a more competitive taxing environment, the Governor proposes to reduce the corporate income tax rate from 7.1% to 6.5% (the lowest rate since 1968), and to merge the existing bank tax (Article 32) into the corporate franchise tax (Article 9-A).  Both of these proposals were recommended by the Tax Relief Commission. 
The Governor did not provide any specificity as to how the merging of the taxing structures would be implemented.   However, it is likely that the Governor and legislature will adopt certain proposals recommended by the Tax Reform and Fairness Committee, many of which were embraced by the Tax Relief Committee.  The proposals advanced by the Tax Reform and Fairness Committee include:
  • Adopting a single sales factor apportionment formula using customer sourcing rules (both Committees appeared to support this proposal);
  • Adopting mandatory water’s edge unitary combined reporting with an ownership test of more than 50%;
  • Expanding nexus to include economic nexus;
  • Revising exemptions for subsidiary and investment income (since both the bank tax and the corporate income tax have different rules for these types of income, it appears that a merging of the two taxes would have a significant impact on these exemptions);
  • Broadening the tax base by eliminating certain special deductions and exemptions;
  • For non-US corporations, using federal “effectively connected income” as the starting point for computing New York entire net income;
  • Requiring combined reporting for all captive insurance companies;
  • Repealing the tax treaty exception to the royalty add back provision;
  • Providing for mandatory attribution of interest expense to exempt income with expanded direct tracing of interest expense in certain situations; and
  • Providing credits to the alternative tax bases for taxes paid to other states to avoid constitutional challenges.

 

Accelerating the Phase-Out of the 18-A Utility Surcharge

Currently, the Temporary Utility Assessment (18-A), a 2% assessment on electric, gas, water and steam utility companies which is passed through to customers in the form of higher rates, is scheduled to phase-out by 2017-2018.  The Governor proposes to eliminate the surcharge immediately for industrial consumers and accelerate the phase-out for all other taxpayers.  

 

Going Forward  

An anticipated $2B in surplus, to be realized in the fiscal year 2016-2017, is expected to pay for these initiatives.  While many of these proposals are being lauded by the business community, certain members of the New York legislature believe that it is too soon to be allocating surplus funds to tax relief.   It is therefore unclear, based on the current legislative climate, how many of these proposals will actually be enacted.