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2004-2005 NEW YORK STATE EXECUTIVE BUDGET
REVENUE ARTICLE VII LEGISLATION
MEMORANDUM IN SUPPORT

CONTENTS

Article VII Memo Content
PART DESCRIPTION STARTING PAGE NUMBER FOR:
SUMMARY, HISTORY & STATEMENT IN SUPPORT BUDGET IMPLICATION EFFECTIVE DATE
A Replace the permanent $110 clothing and footwear tax exemption with four $500 exemption weeks. 3 (Part A) 37 (Part A) 41 (Part A)
B Allow for an additional $2 million in tax credits annually, or $20 million over the ten-year life of the program, for the Low-Income Housing Tax Credit program which will spur a new round of affordable housing construction. 6 (Part B) 37 (Part B) 41 (Part B)
C Make Quick Draw permanent. 7 (Part C) 37 (Part C) 41 (Part C)
D Remove restrictions on Quick Draw. 7 (Part D) 37 (Part D) 41 (Part D)
E Extend the MTA surcharge that is scheduled to expire on December 31, 2005. 9 (Part E) 38 (Part E) 41 (Part E)
F Extend the Alternative Fuels Vehicle Program for one year. 9 (Part F) 38 (Part F) 41 (Part F)
G Modify the fixed dollar minimum tax base. 11 (Part G) 38 (Part G) 41 (Part G)
H Create a new exemption from the personal income tax for Federal military pay for New York State Guard members activated and deployed full-time in the New York War on Terror. 13 (Part H) 38 (Part H) 42 (Part H)
I Reduce the tax burden for manufacturers by phasing in a 100 percent receipts factor in determining income apportioned to New York State. 14 (Part I) 38 (Part I) 42 (Part I)
J Place sales tax rate surcharges on certain taxable services to fund public safety and security initiatives. 16 (Part J) 38 (Part J) 42 (Part J)
K Allow the direct shipment of wine into New York State from out-of-state wineries. 17 (Part K) 39 (Part K) 42 (Part K)
L Clarify rights regarding the availability of tax hearings. 18 (Part L) 39 (Part L) 42 (Part L)
M Create a new biotech program that would allow qualified biotech companies to sell their unused losses to eligible corporations based on 90 percent of the value of the losses. 20 (Part M) 39 (Part M) 43 (Part M)
N Ease filing requirements for low-income taxpayers under the personal income tax. 21 (Part N) 39 (Part N) 43 (Part N)
O Provide for the State to enter into price parity agreements with Native American nations with respect to cigarettes, motor fuel and alcoholic beverages and exempt such Native American nations from current regulations to collect the respective taxes. 22 (Part O) 39 (Part O) 43 (Part O)
P Extend the bank tax for one year and the Federal Gramm‑Leach‑Bliley Act provisions for two years to preserve current revenues. 23 (Part P) 40 (Part P) 43 (Part P)
Q Create a new State STAR credit under the personal income tax to protect the STAR benefit from the effects of inflation. 27 (Part Q) 40 (Part Q) 43 (Part Q)
R Authorize up to eight new facilities to be licensed by the Division of the Lottery to operate video lottery terminals. 28 (Part R) 40 (Part R) 43 (Part R)
S Include in New York source income, gains from sales of cooperative apartment stock for non-residents. 29 (Part S) 40 (Part S) 44 (Part S)
T Extend and reform the Empire Zones Program. 32 (Part T) 40 (Part T) 44 (Part T)

MEMORANDUM IN SUPPORT

A BUDGET BILL submitted by the Governor in
Accordance with Article VII of the Constitution

AN ACT to amend the tax law, in relation to exemptions from sales and compensating use taxes for certain clothing and footwear (Part A); 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 B); 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 other laws, in relation to the lottery game of Quick Draw (Part C); to amend the tax law, in relation to the lottery game of Quick Draw (Part D); to amend the tax law, in relation to certain tax surcharges (Part E); to amend the tax law and chapter 389 of the laws of 1997 amending the tax law, the banking law, and other laws relating to the 1997-1998 fiscal plan, in relation to extending certain tax credits and exemptions for alternative fuel vehicles (Part F); to amend the tax law, in relation to changing the fixed dollar minimum tax for a taxpayer based on the taxpayer’s gross payroll (Part G); to amend the tax law, in relation to making conforming amendments necessitated by the enactment of the federal military family tax relief act of 2003 and to exempt from tax certain compensation received by members of the New York state organized militia (Part H); to amend the tax law, in relation to the calculation of the business allocation percentage under article 9-A of such law for manufacturers (Part I); to amend the tax law, the state finance law and the county law, in relation to providing revenues for state homeland security activities and designation of the public safety and security account (Part J); to amend the alcoholic beverage control law, in relation to providing for certain limited direct interstate shipments of wine (Part K); to amend the tax law, in relation to modifying hearing rights upon certain notice and demands for taxes due and owing and providing for notice and demand procedures for the sales, compensating use and miscellaneous taxes (Part L); to amend the tax law, in relation to authorizing the transfer by biotechnology companies of certain tax benefits (Part M); to amend the tax law, in relation to eliminating the personal income tax filing requirement for residents having no tax liability because income does not exceed the New York standard deduction (Part N); to amend the executive law, the tax law and part T3 of chapter 62 of the laws of 2003 relating to sales on native American nation or tribal lands, in relation to authorizing parity agreements between the state and native American nations or tribes (Part O); to amend chapter 298 of the laws of 1985 amending the tax law relating to the franchise tax on banking corporations imposed by the tax law, authorized to be imposed by any city having a population of one million or more by chapter 772 of the laws of 1966 and imposed by the administrative code of the city of New York and relating to other provisions of the tax law, chapter 883 of the laws of 1975 and the administrative code of the city of New York which relates to such franchise tax, to amend chapter 817 of the laws of 1987 amending the tax law and the environmental conservation law, constituting the business tax reform and rate reduction act of 1987, and to amend chapter 525 of the laws of 1988 amending the tax law and the administrative code of the city of New York relating to the imposition of taxes in the city of New York, in relation to the effectiveness of certain provisions of such chapters; and to amend the tax law, in relation to permitting certain banking corporations otherwise subject to tax under article 32 of the tax law to make an election to be taxed under article 9-A of such law; and to amend the administrative code of the city of New York, in relation to permitting certain banking corporations otherwise subject to tax under subchapter 3 of chapter 6 of title 11 of the administrative code of the city of New York to be taxed under subchapter 2 of such code (Part P); to amend the tax law, in relation to providing a refundable personal income tax credit related to the STAR real property tax exemption (Part Q); to amend the tax law, in relation to video lottery gaming (Part R); to amend the tax law and the uniform commercial code, in relation to authorizing any city in this state having a population of one million or more and any county in this state to impose a tax upon the filing of a UCC financing statement for a cooperative interest and the taxation of gains from the sale of shares in a cooperative housing corporation by a nonresident of the state (Part S); and to amend the general municipal law and the tax law, in relation to the purpose, administration and benefits of the empire zones program; and to repeal certain provisions of the general municipal law relating thereto (Part T)

PURPOSE:

This bill contains provisions needed to implement the Revenue portion of the 2004-05 Executive Budget.

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

Part A – Replace the permanent $110 clothing and footwear tax exemption with four $500 exemption weeks.

This bill contracts the year-round State and local sales and compensating use tax clothing and footwear exemption to an exemption during four seven-day exemption periods each year, to authorize localities to elect the amended exemption and to authorize localities flexibility in electing the amended exemption and repealing the year-round exemption during a transition period.

Section 1 amends the “permanent” year-round exemption in section 1115(a)(30) of the Tax Law for certain clothing costing less than $110 per item and footwear costing less than $110 per pair of shoes or other articles of footwear from the State’s sales and compensating use taxes. The exemption is amended to apply only during four seven-day periods beginning on the last Monday in January and ending on the following Sunday, beginning on the first Saturday in April and ending on the following Friday, beginning on the second Saturday in July and ending on the following Friday, and beginning on the Tuesday before Labor Day and ending on Labor Day. Also, the threshold is raised from less than $110 per item to less than $500 per item.

Section 2 makes conforming amendments to section 1210(k) of the Tax Law, which authorizes New York City to adopt a resolution to elect the clothing/footwear exemption from the local sales and use taxes imposed in the City (the “Municipal Assistance Corporation [MAC] taxes” or “local NYC taxes”) by section 1107 of the Tax Law.

Section 3 is an unconsolidated law provision authorizing counties, cities and school districts which impose general sales and use taxes pursuant to section 1210(a)(1) or 1211 of the Tax Law and New York City where the local NYC MAC taxes are in effect (together, “localities”), to make certain elections, or not, relating to the transition period between the bill’s enactment and the date the amended clothing/footwear exemption takes effect on June 1, 2004. Section 3(a)(1) provides that, if a locality which elected to participate in the two temporary exemption weeks during 2003-04 wants the amended exemption to take effect on June 1, 2004, or at such future date, then such locality need not do anything. Section 3(a)(2) provides that if a locality elected to participate in the two temporary exemption weeks during 2003-04 but does not want the amended exemption to take effect on June 1, 2004 (that is, it would have no clothing/footwear exemption at all), then it must enact a model enactment prepared by the Commissioner of Taxation and Finance and give proper notice to the Commissioner at least 40 days prior to June 1, 2004, the date section 1 of the bill becomes effective. Upon enactment of this Budget Bill on or before April 1, 2004, such a locality will have to act expeditiously to accomplish all of the following tasks by April 21, 2004, in order to meet the statutory 40-day notice requirement prior to June 1, 2004: (1) schedule its local legislative body to meet, (2) request the model enactment from the Commissioner of Taxation and Finance, (3) hold its meeting and adopt its enactment and (4) mail a certified copy of the enactment to the Commissioner.

Section 3(b) provides that a locality which has not elected to participate in the two temporary exemption weeks during 2003-04 but wishes to elect the amended exemption to take effect on June 1, 2004, can do so by adopting a model enactment and mailing a certified copy of it to the Commissioner of Taxation and Finance at least 40-days prior to June 1, 2004. Such a locality will also have to act expeditiously to accomplish all of the above tasks by April 21, 2004, in order to meet the statutory 40-day notice requirement prior to June 1, 2004. A locality acting under section 3(a) or (b) will also have to comply with the usual rules in section 1210(a)(1), (d) and (e) and New York City would also have to comply with section 1210(k) as amended by section 2, in regard to other mailing and notice requirements. A school district would have to comply with section 1211(d) and (e).

Once the transition period provided for in section 3 is over and the State’s amended clothing/footwear exemption has taken effect on June 1, 2004, localities will continue to be able to elect or repeal the amended exemption under section 1210 of the Tax Law, just as they did the permanent exemption. Likewise, any such election or repeal of the amended exemption must take effect only on March 1 each year, in accordance with section 1210(d) and (e) or 1211(d) and (e) of the Tax Law.

Section 4 provides that sections 1 through 3 of the bill shall not be construed either as a failure or refusal to continue to impose the section 1107 local New York City MAC taxes on clothing and footwear for the periods they would be exempt from tax, or as a reduction in the rate of MAC taxes on such clothing and footwear during such periods. Except during such periods, if New York City elects for the amended exemption to apply during such periods, purchasers of clothing and footwear in New York City would continue to be subject to the local New York City MAC taxes on their clothing and footwear purchases, vendors of such clothing and footwear would still be required to

collect and pay over such MAC taxes, the Commissioner of Taxation and Finance would still be required to collect and account for such local MAC taxes, and the State Comptroller would still be required to deposit and pay over such taxes, as required under existing provisions of law, as if the act did not become law.

Effective June 1, 2004, section 1115(a)(30) of the Tax Law exempts on a year-round basis clothing and footwear to be worn by human beings (as defined in section 1101(b)(15) of the Tax Law) from the State’s sales and use taxes imposed by sections 1105(a) and 1110 of such law, if the cost per item of clothing or per pair of shoes or other articles of footwear is less than $110. Sections 1210(a)(1) and 1211 of the Tax Law authorize counties, cities and school districts which impose the general sale and use taxes pursuant to section 1210 (counties and cities) or section 1211 (school districts) to elect the same clothing/footwear exemption from their local taxes. Section 1210(k) authorizes New York City to elect to provide the exemption from the local New York City MAC taxes imposed by section 1107 in the city, by adopting a resolution set out in section 1210(k)(2). If the city adopts the resolution as prescribed, then section 1107 is deemed to be amended to provide the clothing/footwear exemption as if enacted by the State Legislature and approved by the Governor. The current versions of sections 1115(a)(30) and 1210(k) of Tax Law in sections 1 and 2 of Part I3 of Chapter 62 of the 2003 (section 1 as amended by Part S of Chapter 63 of the Laws of 2003) which provided the two temporary exemption periods from the State’s sales and use taxes for clothing and footwear costing less than $110 and the corresponding local temporary exemption periods for those localities which elected the temporary exemptions will expire on May 31, 2004, and be deemed repealed as of such date. Thus, on June 1, 2004, the law as it existed on May 31, 2003, is restored; it is the law that this bill amends.

Section 1210(d) of the Tax Law provides that a county or city can elect the clothing/footwear exemption effective only on March 1 of a given year and can repeal any such exemption effective only on March 1 of the same or a subsequent year. Section 1210(d) also provides that, in order for any such enactment to be given effect, the county or city must mail a certified copy of its enactment by certified or registered mail to the Tax Commissioner at the Commissioner’s Albany office at least 90 days prior to its effective date. However, the Commissioner can waive and reduce such 90-day period to a period of not less than 30 days if the Commissioner deems it consistent with the Commissioner’s duties under Article 29 of the Tax Law to do so. In addition, section 1210(e) of the Tax Law provides that, in order for any enactment governed by section 1210(d) to be effective, the county or city must also mail certified copies of the enactment to the Secretary of State, State Comptroller and the county or city clerk. Section 1211, subdivisions (d) and (e), provide similar requirements for school districts.

Section 1109(f) of the Tax Law provides that the clothing/footwear exemption is not automatically incorporated into the section 1109 MCTD 1/4 percent taxes, as other State sales/use tax exemptions usually are. The MCTD consists of seven downstate counties and New York City. Section 1109(g) provides that, if a county or city elects the exemption from its own sales/use taxes, then the exemption would also apply to the State’s section 1109 1/4 percent rate of taxes imposed in the area of the MCTD located in such county or city. In the event of such an election, section 1109(g) also provides that the State and the locality making the election would each be required to reimburse 50 percent of the revenue lost on account of such exemption to the MTOA Fund, established by State Finance Law section 88-a.

This proposal is similar to the Governor’s Budget Bill in Part C of S. 1410-A/A. 2110-A of 2003.

The State’s Fiscal Plan includes the revenues that would be generated by contracting the year-round clothing/footwear exemption to an exemption applicable only during the four annual seven-day periods. The dates of these periods are intended to benefit consumers availing themselves of sales that typically occur during such periods, for example, the back-to-school shopping that precedes Labor Day. Localities which have the current year-round exemption and elect the amended exemption will also benefit from the increased revenues. Likewise, limiting the exemption to four seven-day periods each year will likely make it possible for those localities which were not able to afford the year-round exemption to elect the amended exemption, thus improving the competitive position of vendors in such localities.

Part B – Allow for an additional $2 million in tax credits annually, or $20 million over the ten-year life of the program, for the Low-Income Housing Tax Credit program which will spur a new round of affordable housing construction.

This bill increases the aggregate amount of low-income housing tax credit the Commissioner of the Division of Housing and Community Renewal (DHCR) may allocate from $4 million to $6 million.

Section 1 of the bill amends section 22 of the Public Housing Law by increasing the aggregate amount of low-income housing tax credit the Commissioner may allocate from $4 million to $6 million.

Current State law provides for total allocation authority of $4 million per taxable year. This $4 million in credit allocation by the Commissioner can be claimed each year for ten years, for a total credit allowed over the ten-year life of the program of $40 million.

The low-income housing credit was enacted by Chapter 80 of the Laws of 2000, and the aggregate dollar amount of the tax credit that could be allocated in a taxable year was increased by $2 million by Chapter 85 of the Laws of 2002.

Currently, the demand for the low-income housing credit exceeds the supply. The limited availability of the credit has slowed development of affordable housing. Providing an additional allocation of $2 million in tax credits, for a total program allocation of $6 million, would encourage developers and investors to devote substantial resources to the program.

Part C – Make Quick Draw permanent.

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

Section 1 of part AA of Chapter 85 of the Laws of 2002 is amended to delete the automatic expiration of the Quick Draw game on May 31, 2004.

The Division of the Lottery has operated Quick Draw since 1995, with an interruption of several months in 1999. By the middle of December 2003, Quick Draw exceeded the $4 billion mark in sales since inception, while generating over $1.2 billion for education and $240 million to Lottery retailers as commissions. Ticket sales during State fiscal year 2002-03 were over $474 million. In that fiscal year alone, Quick Draw produced over $155 million in earnings, which were available for aid to education. To date this fiscal year, Quick Draw has produced over $372 million in sales, with over $121 million in aid to education. With the increased need for revenues this fiscal year, the importance of continuing Quick Draw has never been greater.

This bill seeks to safeguard these revenues by making the Quick Draw game’s authorization permanent. Permanent authorization will also have the effect of encouraging retailers who are reluctant to offer the game because of concerns about its stability, to apply for licenses to sell the game.

Part D – Remove restrictions on Quick Draw.

The bill repeals specific restrictions on the operation of the Lottery’s Quick Draw game.

This bill removes the restrictions on hours of operation, food sales and the minimum size of the premises imposed on Quick Draw by the 1995 authorizing statute. Removal of those restrictions makes it unnecessary to provide exceptions for bowling establishments and pari-mutuel facilities; therefore, the bill also deletes these exceptions. Finally, an obsolete authorization of emergency rulemaking at the time of Quick Draw start-up is deleted.

Current law authorizes the Lottery to operate the Quick Draw game with the following restrictions. Quick Draw may only be offered at: (1) premises licensed for the sale of alcoholic beverages for on-premises consumption where at least 25 percent of gross sales are from sales of food; (2) premises greater than 2,500 square feet in area which are not licensed for the sale of alcoholic beverages for consumption on the premises, (3) commercial establishments, or (4) bowling establishments and pari-mutuel gambling facilities. In addition, Quick Draw is limited to no more than 13 hours of daily operations, no more than 8 hours of which may be consecutive.

The restrictions imposed on Quick Draw by the 1995 authorizing statute were experimental. In practice, they have proven to be cumbersome and unnecessary, and have substantially reduced the amount of revenue otherwise available from this game.

The 25 percent food sales requirement for bars, restaurants, and other businesses licensed to serve alcoholic beverages on premises is similar to a discredited policy that previously was applied to those same businesses under the Alcoholic Beverage Control Law. This policy has long since been abandoned as unworkable. It is impossible to enforce the restriction without conducting regular, systematic audits of the financial records of each business; and the Lottery has never possessed the resources needed to carry out such an aggressive audit program. Moreover, any attempt to do so would be pointless, since most of the businesses licensed to sell Quick Draw would rather surrender their Lottery Sales Agent Licenses than submit to such an intrusion into their finances.

The limitation on the minimum size of a Quick Draw location has the effect of eliminating many locations that are ideal for the game and deprive many small businesses the opportunity to increase their profits through the commissions paid on Quick Draw sales and from the ancillary sales accompanying the increased traffic generated by offering a popular lottery game.

The limitations on the hours of operation also has the effect of arbitrarily restraining Quick Draw sales. Contrary to initial fears about Quick Draw, it has proved to be only slightly more attractive than other Lottery games. Instances of players wagering more than they can afford have not been shown to be a problem and there is a minimal chance that expanding the number of hours of operation would increase the frequency of such instances. On the other hand, expanding the hours of operation would benefit the 3,300 businesses that currently offer the game and produce a significant increase in revenue dedicated to education.

As a group, these restrictions are unnecessary; they have produced no perceptible benefits; they are difficult and sometimes impossible to enforce; and they cause poor relations with the businesses that offer the game. Eliminating these restrictions is not expected to cause any undesirable results, while adding substantially to the revenue available for education.

Lifting these restrictions will result in an incremental revenue growth of $43 million in State fiscal year 2004-05, if this bill becomes effective by April 1, 2004.

Part E – Extend the MTA surcharge that is scheduled to expire on December 31, 2005.

This bill extends for four years the temporary Metropolitan Transportation Authority (MTA) tax surcharges imposed under Articles 9, 9-A, 32 and 33 of the Tax Law to help finance mass transportation expenditures in the Metropolitan Commuter Transportation District.

Sections 1 through 6 of the bill amend sections 183-a, 184-a, 186-c (Article 9), 209-B (Article 9-A), 1455-B (Article 32) and 1505-a (Article 33) of the Tax Law, respectively, by extending the MTA surcharges imposed in the Metropolitan Commuter Transportation District through taxable years ending prior to December 31, 2009. Section 7 of the bill provides for an immediate effective date.

Under current law, the MTA surcharges are imposed for taxable years ending before December 31, 2005.

This bill is necessary to assist with the financing of mass transportation expenditures in the Metropolitan Commuter Transportation District. The Metropolitan Commuter Transportation District has relied on these funds in the past and needs continued funding for the future.

Part F – Extend the Alternative Fuels Vehicle Program for one year.

This bill: (a) extends, for one year, existing income and corporation tax credits and sales tax exemptions for alternative fuel vehicles; (b) clarifies that “qualified hybrid vehicles” do not qualify for the “clean-fuel vehicle” or “clean-fuel vehicle refueling property” credits; and simplifies the sales tax exemption provided for “qualified hybrid vehicles” by fixing the “incremental cost” for such vehicles at $3,000.

Section 1 amends subdivisions 3 through 6 and 9 of section 187-b of the Tax Law to clarify that a qualified hybrid vehicle may not qualify for either the corporate tax clean-fuel vehicle property credit or the clean-fuel vehicle refueling property credit available under that section. This section also extends the sunset date of the alternative fuel vehicle provisions of section 187-b for one year. The alternative fuel vehicle provisions include tax benefits for electric vehicles, clean-fuel vehicle property, clean-fuel vehicle refueling property, and qualified hybrid vehicles.

Section 2 extends the corporate franchise tax credit available under section 210.24(a)(ii) of the Tax Law for one year.

Section 3 amends paragraphs (c) through (f) and (i) of section 210.24 of the Tax Law to clarify that a qualified hybrid vehicle can not qualify for either the clean-fuel vehicle property credit or the clean-fuel vehicle refueling property credit available under that section. This section also extends the sunset date of the alternative fuel vehicle provisions for one year.

Section 4 amends subsections 3 through 6 and 9 of section 606(p) of the Tax Law to clarify that a qualified hybrid vehicle can not qualify for either the income tax clean-fuel vehicle property credit or the clean-fuel vehicle refueling property credit available under that section. This section also extends the sunset date of the alternative fuel vehicle provisions of section 606(p) for one year.

Section 5 amends section 1115(p)(1) of the Tax Law, a provision relating to the sales and use tax exemption for alternative fuel vehicles. This amendment provides that, for taxpayers purchasing a qualified hybrid vehicle for the period between the sunset of the current statutory sections (that is, February 29, 2004) and the date of the enactment of this bill, the “incremental cost” for such a vehicle need not be separately stated in either the written contract or the bill rendered to the purchaser.

Section 6 amends section 1115(p)(5)(iv) of the Tax Law to simplify the sales tax exemption by providing that the “incremental cost” of a qualified hybrid vehicles, for the purposes of the sales and use tax exemption, will be fixed at $3,000.

Section 7 extends the sunset of the alternative fuel vehicle provisions of section of 1115(p) for one year, from February 29, 2004, until February 28, 2005, without interruption.

Section 8 provides that the income tax and corporation tax sections of the bill will take effect immediately, but will apply to taxable years beginning on or after January 1, 2004. The sales tax provisions will be deemed to have been in effect on the date (February 29, 2004) on which the current statutory language expires.

Currently, the Tax Law provides a $2,000 income or corporate tax credit for qualified hybrid vehicles in Articles 9, 9-A and 22 of the Tax Law, and an exemption — based on the incremental cost of such vehicles — from the sales and use tax in Article 28. If such incremental cost is not determinable, an incremental cost is set, for sales and use tax purposes, at $3,000. The provisions providing credits for qualified hybrid vehicles, as part of the provisions relating to alternative fuel vehicles under Articles 9, 9-A and 22 of the Tax Law are set to expire on December 31, 2003. The exemption afforded to qualified hybrid vehicles under Article 28, including the alternative fuel provisions, contained in section 1115(p) of the Tax Law are set to expire on February 29, 2004.

This bill extends the alternative fuel program contained in Articles 9, 9-A, 22 and 28 of the Tax Law for one year. In addition, the bill makes technical corrections to the alternate fuel vehicle provisions to clarify that qualified hybrid vehicles are not also eligible for either of the clean-fuel vehicle credits.

Since it is unlikely that the bill will be enacted before February 29, 2004, it is necessary to give the bill’s sales tax provisions retroactive effect to avoid an indeterminate gap in the provision of the sales tax exemption for alternative fuel vehicles. A lapse in the sales tax exemption would lead to an immediate lapse in taxpayers receiving the exemption, and such a lapse would likely appear to be arbitrary to the average taxpayer that purchases a qualified hybrid vehicle after the expiration of the current sunset date, but before the enactment of this bill. However, such retroactive effect requires a brief waiver of the “separately stated” requirement imposed by section 1115(p)(1) of the Tax Law. Otherwise, taxpayers who purchase a qualified hybrid vehicle after the February 29, 2004, sunset date but before this bill is enacted would have to return to their dealership to request a modified sales receipt or invoice indicating the “incremental cost” amount. To avoid this impractical situation, the bill provides a waiver from the separately stated requirement of section 1115(p)(1) for the retroactive period of the bill.

It has been the Department’s experience that continuing to apply the “incremental cost” concept in section 1115(p) as it is applied to qualified hybrid vehicles has led to unnecessary confusion since only a few hybrid vehicle models have a “comparable motor vehicle” to use as a comparison for determining the correct incremental cost. This problem has been magnified by the fact that hybrid vehicles are attractive to a much wider group of potential purchasers than traditional alternative fuel vehicles. In order to simplify the sales tax exemption provided by section 1115(p), the bill sets the “incremental cost” for all qualified hybrid vehicles at $3,000.

None of the bill’s technical corrections make any change to the definition of qualified hybrid vehicle which is contained in section 606 of the Tax Law. The bill does not, therefore, attempt to exclude any model of hybrid from being included in the scope of the alternative fuel program. Since there are few types of hybrid vehicles on the market today, the definition contained in section 606 will likely continue to be functional, and will not be a problem either for the retroactive aspect of the bill or for the short extension period. However, since it is anticipated that a growing number of hybrid vehicles will come onto the market in 2005 and beyond, any further extension of the alternative fuel vehicle provisions should carefully consider revising the definition of hybrid vehicle so that it does not result in an unacceptable revenue loss and takes into account technological advances in light of environmental and tax policy goals.

Part G – Modify the fixed dollar minimum tax base.

This bill modifies the gross payroll levels that determine the amount of the fixed dollar minimum tax payable by corporations under Article 9-A of the Tax Law.

Section 1 of this bill amends paragraph (d) of subdivision 1 of section 210 of the Tax Law to modify the fixed dollar minimum tax for corporations, which is based on the corporation’s gross payroll, as follows:

If the gross payroll is $25 million or more, the fixed dollar minimum amount of tax will be $10,000.

If the gross payroll is less than $25 million but more than $6.25 million, the fixed dollar minimum amount of tax will be $5,000.

If the gross payroll is $6.25 million or less but more than $1 million, the fixed dollar minimum amount of tax will be $425.

If the gross payroll is $1 million or less but more than $500,000, the fixed dollar minimum amount of tax will be $325.

If the gross payroll is $500,000 or less, the fixed dollar minimum amount of tax will be $100, except that if the corporation’s (i) gross payroll, (ii) receipts within and without the state and (iii) average value of assets are each $1,000 or less, such corporation’s fixed dollar minimum amount of tax will be $800.

Under existing law, the relationship between a corporation’s gross payroll and the fixed dollar minimum amount of tax is as follows:

If the gross payroll is $6.25 million or more, the fixed dollar minimum amount of tax is $1,500.

If the gross payroll is less than $6.25 million but more than $1 million, the fixed dollar minimum amount of tax is $425.

If the gross payroll is no more than $1 million but more than $500,000, the fixed dollar minimum amount of tax is $325.

If the gross payroll is no more than $500,000 but more than $250,000, the fixed dollar minimum amount of tax is $225.

If the gross payroll is $250,000 or less the fixed dollar amount of tax is $100, except that if the corporation’s (i) gross payroll, (ii) receipts within and without the state and (iii) average value of assets are each $1,000 or less, such corporation’s fixed dollar minimum amount of tax is $800.

This is a new proposal.

The current relationship between a corporation’s gross payroll and its fixed dollar minimum amount of tax was established under chapter 61 of the Laws of 1989. The new relationship provided for under this bill between gross payroll and the fixed dollar minimum amount of tax reflects the changes in economic realities since this relationship was originally established. In addition, this bill will be beneficial to small businesses since it reduces the fixed dollar minimum for those companies with a gross payroll of $500,000 or less.

Part H – Create a new exemption from the personal income tax for Federal military pay for New York State Guard members activated and deployed full-time in the New York War on Terror.

This bill: (a) exempts from personal income tax, compensation received by members of the State organized militia for service provided pursuant to active duty orders in relation to efforts to combat terrorism in the State; and (b) conforms the Tax Law with the provisions of the Federal Military Family Tax Relief Act of 2003.

Sections 1 through 3 and section 5 of the bill conform the Tax Law with the provisions of the Federal Military Family Tax Relief Act of 2003 (P.L. 108-121).

Section 1 amends the title to section 696 of the Tax Law to include astronauts.

Section 2 provides that service members serving outside the United States in a “contingency operation” will be afforded the same tolling of the limitations period and deadlines for filing returns and making payments under the Tax Law that is currently afforded to members of the armed forces serving in a combat zone.

Section 3 provides astronauts who have died in the line of duty after December 31, 2002, with the same exemption from taxation as provided to victims of terrorist attacks. The changes also will be incorporated by reference into the estate tax by virtue of Tax Law section 990, which means that the estates of astronauts killed in the line of duty will owe no estate tax.

Section 4 provides that compensation received by members of the State organized militia for providing active duty State service related to the effort to combat terrorism within the State is exempt from taxation.

Section 5 expands the classes of people that an organization or post of past or present members of the armed forces, including an auxiliary unit, society of, trust or foundation for, may include to determine if the organization meets the criteria for tax-exempt status for sales and compensating use tax purposes under section 1116 of the Tax Law.

Section 6 revokes, for State and local taxes, fees and other impositions administered by the Commissioner of Taxation and Finance, the tax-exempt status of terrorist organizations whose tax-exempt status has been revoked by the Internal Revenue Service (I.R.S.). If the I.R.S. reinstates an organization’s tax-exempt status, the organization must submit an application or applications requesting tax-exempt status. When an organization’s tax-exempt status is revoked, any sales by the organization shall be taxable and the organization is required to collect the sales tax due. If the organization does not collect the sales tax, the purchaser is required to remit the tax due, without penalty, to the Commissioner of Taxation and Finance.

Currently, members of the armed services and those serving in support of the armed services in areas designated as combat zones are afforded a stay of the time that they must file and pay their income taxes, claim credits, pay assessments and do other acts pursuant to the Tax Law during the time that they are serving in the combat zone or continually hospitalized due to injuries received while serving in a combat zone plus 180 days from the date that duty or hospitalization ends. Similarly, the State suspends assessment, collection and other activities relating to these taxpayers for the same period of time. Victims of terrorist attacks are exempt from any taxation imposed by the Tax Law for the year ending in the victim’s death and for any taxable year immediately before the taxable year in which the victim’s injuries, which ultimately led to the victim’s death, were incurred. An organization seeking tax-exempt status pursuant to section 1116 of the Tax Law cannot have less than 75 percent of its membership comprising active or retired members of the armed forces. Further, substantially all of the remaining 25 percent of the organization’s membership must be cadets, spouses, widows, or widowers of armed forces members. There is no provision in the Tax Law exempting from personal income taxation any compensation received by a member of the State organized militia who is on active duty in the war against terrorism in this State. In addition, there is no provision in the Tax Law that automatically revokes an organization’s tax-exempt status based on a similar action by the I.R.S.

New York State Tax Law automatically conforms only to those amendments contained in the Federal Military Family Tax Relief Act of 2003 that impact the calculation of gross income (such as the income exclusions for death benefit payments and certain home sales). However, there are other provisions in that Federal Law, concerning the tolling of certain statutes of limitations and exemptions from taxation, that New York State should follow. This bill is necessary to conform provisions of the Tax Law to those provisions. In addition, the exemption from taxation for the compensation of the members of the New York State armed militia for their State active duty in relation to efforts to combat terrorism is part of the State’s effort to support our citizen soldiers and their families who are protecting our State.

Part I – Reduce the tax burden for manufacturers by phasing in a 100 percent receipts factor in determining income apportioned to New York State.

This bill amends Article 9-A of the Tax Law in relation to the calculation of the business allocation percentage for manufacturers.

Section 1 of the bill adds a new subparagraph 10 to section 210.3(a) of the Tax Law to provide a specific business allocation percentage for manufacturers. This bill requires a manufacturer to utilize a business allocation percentage that is determined using a higher weighted receipts factor then other taxpayers under Article 9-A. The higher weighted receipts factor will be phased-in over five years beginning January 1, 2005. For taxable years beginning on or after January 1, 2005, and before January 1, 2006, a manufacturer will use a 60 percent weighted receipts factor. For taxable years beginning on or after January 1, 2006, and before January 1, 2007, a manufacturer will use a 70 percent weighted receipts factor. For taxable years beginning on or after January 1, 2007, and before January 1, 2008, a manufacturer will use an 80 percent weighted receipts factor. For taxable years beginning on or after January 1, 2008, and before January 1, 2009, a manufacturer will use a 90 percent weighted receipts factor. Lastly, for taxable years beginning on or after January 1, 2009, a manufacturer will use a 100 percent weighted receipts factor and the property and payroll factors will not be counted. Clause B of this new subparagraph 10 sets forth the definition of a manufacturer. A “manufacturer” is defined as a taxpayer which during the taxable year is principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture, commercial fishing and research and development. In addition, in those cases where a combined report is filed by a group of corporations, the entire combined group shall be considered a “manufacturer” if the combined group during the taxable year is principally engaged in the activities described above. A taxpayer or combined group will be considered to be “principally engaged” in those activities if, during the taxable year, more than 50 percent of its gross receipts are derived from such activities. In determining a combined group’s gross receipts, intercorporate receipts shall be eliminated. Section 2 amends section 210.3-a of the Tax Law to conform the definition of the alternative business allocation percentage for manufacturers with the provisions of new subparagraph 10 of section 210.3-(a) added by section one of this bill. Section 3 amends section 209-B of the Tax Law by adding new subdivision 2-c. Subdivision 2-c requires a manufacturer to determine the portion of its business activity carried on within the Metropolitan Commuter Transportation District by using a higher weighted receipts factor than other taxpayers under Article 9-A. This higher weighted receipts factor is phased-in and computed in the same manner as the new business allocation percentage for manufacturers added in section 1 of this bill. Section 4 provides that this bill will take effect immediately.

Under Article 9-A of the Tax Law, business income and business capital are apportioned to New York based on a taxpayer’s business allocation percentage. In general, the business allocation percentage is the average of three factors: a property factor, a payroll factor and a receipts factor. In calculating the factors, the taxpayer compares the amount of the property, payroll or receipts in New York, with the taxpayer’s respective amounts of property, payroll and receipts wherever located. In determining the New York business allocation percentage, the receipts factor is double weighted in comparison to the property and payroll factors. Thus, half of the business allocation percentage is based on the taxpayer’s receipts factor, while the property and payroll factors each comprise one-quarter of the business allocation percentage. An annual surcharge is imposed on any corporation exercising its corporate franchise, doing business, owning or leasing property, employing capital, or maintaining an office in the area described as the Metropolitan Commuter Transportation District. The surcharge applies only to the portion of tax attributable to activity conducted in the district, measured by the average of the percentages of tangible property, receipts and payroll within the district. This apportionment formula generally tracks the business allocation percentage used to allocate a corporation’s business income within the State. However, the receipts factor is not double weighted.

Similar legislation was proposed as part of the 2001-02 Executive Budget.

This bill will reduce the net tax burden on manufacturing companies by phasing in and eventually using a manufacturing company’s receipts factor only when determining that company’s share of income and capital to be apportioned to New York. Under the Tax Law’s current allocation method used for apportioning a manufacturing company’s New York income, many traditional upstate based New York manufacturing industries compute higher payroll (i.e., employment) and property (i.e., facilities) factors as compared to their receipts factor. This is due to the fact that these New York “export” industries sell a high percentage of their products outside New York which allows them to allocate the receipts from those sales outside New York. These manufacturing taxpayers incur a larger tax liability than they would encounter under a system that does not use an apportionment formula that places half its weight on a taxpayer’s property and payroll factors. Moreover, these same manufacturing companies are discouraged from increasing their employment and expanding their facilities in New York because such activities would result in an increase in their New York tax liability under the present three-factor apportionment system. Accordingly, this bill will help reduce the tax liability of manufacturers in New York and also encourage them to retain and expand their facilities, other property and employment in New York.

Part J – Place sales tax rate surcharges on certain taxable services to fund public safety and security initiatives.

This bill increases revenue available to fund public security and other critical public safety activities by imposing a 3 percent State-only sales and use tax surcharge on the protective and detective services now taxable under Tax Law section 1105(c)(8) and by imposing a 4 percent State-only sales tax surcharge on the admission charges now taxable under Tax Law section 1105(f)(1). Also, this bill amends State Finance and County Law to change the name of the account these surcharges will be deposited into from the New York State Wireless Telephone Emergency Service Account to the Public Safety and Security Account.

Section 1 of the bill adds a new section 1105-D to the Tax Law. Subdivision (a) imposes sales and compensating use tax surcharges (a) at the rate of 3 percent, which shall be identical to the sales and compensating use taxes imposed on protective and detective services by Tax Law section 1105(c) (8) and clause (C) of Tax Law section 1110(a); and (b) at the rate of 4 percent, which shall be identical to the sales tax imposed on admission charges by Tax Law section 1105(f)(1). All the other provisions of Tax Law Article 28 would be applicable to the additional rates imposed by new section 1105-D. Subdivision (c) would require the Commissioner of Taxation and Finance to make daily deposits in an account at a depository designated by the Comptroller in the name of the Comptroller. Subdivision (c) also would require the Commissioner to certify to the Comptroller, on or before the twelfth day of each month, the amount of all revenues so received during the prior month as a result of the taxes, interest and penalties so imposed; in addition, on or before the last day of June, the Commissioner shall certify the amount of such revenues received during and including the first 25 days of June. The amount of certified revenues shall be deposited by the Comptroller into the Public Safety and Security Account established by section 97-qq of the State Finance Law.

Section 2 amends Tax Law section 1148, the sales tax deposit and disposition of revenue provisions, to allow for the exception made by section 1 of this bill.

Funds collected from these new charges are to be deposited into the Special Revenue Fund that funds public security activities, enhanced wireless 911 local assistance programs, the Statewide Wireless Network and other critical public safety programs.

Sections 3 through 6 amend sections of State Finance and County Law to change the account name that the new funds will be deposited into, from the New York State Wireless Telephone Emergency Service Account to the Public Safety and Security Account.

Part K – Allow the direct shipment of wine into New York State from out-of-state wineries.

This bill amends the Alcoholic Beverage Control Law to allow for the direct shipment of wine into New York State by out-of-State wineries.

This bill allows an out-of-State winery, upon obtaining an “out-of-State winery shipper’s license” from the New York State Liquor Authority for an annual license fee of $125, to ship up to two cases (18 liters) of wine per month to a New York resident who is 21 years old or older, for the resident’s personal use. The winery must agree to pay all State excise and sales taxes due, and report shipment quantities to the State.

This is a new bill. It allows New Yorkers to order their favorite out-of-State wines and have them shipped directly to their homes. The bill is consistent with the Twenty First Amendment to the United States Constitution that provides that states have the right to regulate the “delivery or use” of intoxicating beverages. Currently, out-of-State wineries may not ship directly to New York residents.

If this bill becomes law, New York wineries would be allowed to ship wine directly to consumers in “reciprocating states.”

Part L – Clarify rights regarding the availability of tax hearings.

This bill restores former State practice with respect to the availability of hearings on notice and demands and notices of additional tax due issued for amounts due to mathematical or clerical errors, Federal changes, and failure to pay tax shown on the return which are deemed to be self-assessed.

This bill eliminates formal prepayment hearing rights in the Department of Taxation and Finance’s Bureau of Conciliation and Mediation Services and in the independent Division of Tax Appeals where additional tax is owed due to mathematical or clerical errors on the return, changes made to the taxpayer’s Federal return by the Internal Revenue Service or other competent Federal authority (Federal changes), or in cases where the taxpayer has not paid all or part of the amount of the tax that the taxpayer has shown as due on the return. Some taxes are administered through the use of tax stamps, such as the cigarette tax, under Article 20 of the Tax Law; the bill contains language to cover comparable cases in tax stamp situations as well.

After payment, the taxpayer will be able to apply for a refund, and if the refund is denied by the Division of Taxation, the taxpayer may then apply for a conciliation conference in the Bureau of Conciliation and Mediation Services or petition for a hearing in the Division of Tax Appeals, or both. However, this bill will continue to require prepayment hearings for penalties unless the penalties are related to a mathematical or clerical error, failure to pay amounts shown on the return as due, or a Federal change.

The above post-payment procedures for mathematical or clerical errors, Federal changes, and failure to pay tax shown cases, as well as certain penalty cases, were the procedures in New York State prior to the case of Meyers v. Tax Appeals Tribunal, 201 A.D.2d 185 (Third Dept. 1994), leave to appeal denied, 84 N.Y.2d 810 (1994), in which the New York courts required the Department of Taxation and Finance to provide the taxpayers with the opportunity for a formal hearing prior to payment of the income tax estimated tax penalty. The Tax Appeals Tribunal decision, Matter of Jaffe (September 14, 1995), extended the Meyers decision to apply to mathematical errors assessed by notice and demand and additional tax due resulting from Federal changes assessed by a notice of additional tax due. These decisions related to amounts assessed by documents other than a notice of deficiency, as a notice of deficiency had always given taxpayers the right to prepayment hearings. New York State follows the Federal practice in using a notice of deficiency (a notice of determination is the terminology used for the sales and use and miscellaneous taxes) in order to assess more tax than the taxpayer acknowledges owing. A formal hearing process is provided to give the taxpayer an opportunity to resolve the dispute, and collection of the contested amount is deferred until resolution of the issue.

In contrast, in cases where no prior notice of deficiency or notice of determination had been issued, a notice and demand is used when the tax shown due exceeds the amount remitted by the taxpayer or in other self-assessment situations (in cases, for example, involving mathematical errors on the tax return such as incorrectly adding line amounts to a sub-total; or for a clerical error, such as using the incorrect tax table, calculation worksheet or liability determination mechanism; or in certain other situations where failure to perform an objective act [for example, failure to timely file a return] gives rise to a penalty). The amount in the notice and demand is due within 21 calendar days of receipt of the notice and demand (ten business days if the amount in the notice and demand is $100,000 or greater). A notice of additional tax due is issued to assess additional tax resulting from Federal changes which have not been reported to the Department. Prior to the Meyers and Jaffe decisions, if the taxpayer disagreed with the Department, the taxpayer had 30 days, from when the notice of additional tax due was issued, to file the taxpayer’s own report of Federal changes or an amended return with a statement showing where the Department’s determination was erroneous; if the Department determined that tax was still due, a notice and demand was issued. An informal protest mechanism is, and has always been, available in the Department of Taxation and Finance for taxpayers to dispute the determination of the Department in these cases and for taxpayers to provide any additional, or missing, information. Currently, most protests on these notices are resolved informally, with only a negligible percentage going on to a formal protest in the Department’s Bureau of Conciliation and Mediation Services.

A Budget Bill, S.1834/A.3134 was introduced in the 1995 legislative session to reverse the effect of the Meyers decision, but was not acted upon by the Legislature.

The Department of Taxation and Finance interpreted the holdings of the Meyers and Jaffe decisions as being applicable to all amounts considered to be self-assessed by taxpayers. The current prepayment proceedings for penalties assessed by notice and demand (except for those penalties related to mathematical or clerical errors, failure to pay amounts shown on the return, or Federal changes) will not be changed by this bill as there may be issues relating to the imposition of penalties which may benefit from the prepayment hearing procedures. On the other hand, there are many fewer issues that will benefit from prepayment hearing procedures in cases where a taxpayer has admitted to owing a certain amount on the return but has not paid that amount, where the underpayment is due to a mathematical or clerical error, or where Federal authorities have already finally determined a matter which affects the calculation of the State personal income tax or a State corporate franchise tax. Due process for taxpayers is, and will continue to be, provided in self-assessment cases by the Department’s post-payment procedures which include formal protest options, while the Department is able to accelerate the collection process for liabilities which taxpayers have admitted to owing.

In addition to modifying the prepayment hearing provisions for mathematical or clerical errors, Federal changes and failure to pay tax shown cases, the bill also creates a statutory notice and demand for the sales and compensating use and miscellaneous taxes in order to make the modifications to the prepayment hearing procedures for such taxes. Further, the bill makes technical changes to provisions of the Tax Law to change the references from “mathematical errors” to “mathematical or clerical errors” in order to be consistent with the references in the Internal Revenue Code.

Part M – Create a new biotech program that would allow qualified biotech companies to sell their unused losses to eligible corporations based on 90 percent of the value of the losses.

This bill amends the Tax Law to provide biotechnology companies with a source of capital by allowing them transfer their net operating loss carry forwards to other corporate franchise tax taxpayers.

Section 1 of the bill adds a new section 30 to the Tax Law which establishes the corporate franchise tax benefit transfer program. This program, which will be administered by the Department of Economic Development, in consultation with the Department of Taxation and Finance, will allow certain biotechnology companies to sell their net operating loss carry forwards to general business corporations, banks or life insurance corporations subject to tax under Article 9-A, 32 or 33 of the Tax Law, respectively. The amount that a biotechnology company may receive for its net operating loss carry forward is ninety percent of the product of (1) the net operating loss carry forward, (2) the biotechnology company’s business allocation percentage, and (3) the tax rate in effect for the year in which the transfer occurs. To apply to participate in this program, a biotechnology company must be an Article 9-A taxpayer that, in the year that it seeks approval to transfer tax benefits, is headquartered or has its principal base of operations located in New York State, has less than 225 employees, at least 75 percent of whom are employed in New York State, and has not been a party to certain liquidations or corporate reorganizations. The Commissioner of Economic Development is required to adopt rules that set forth the criteria to be used to review and approve the applications by eligible biotechnology companies and the bill provides a framework for these rules. The Department of Taxation and Finance is required to review an applicant’s franchise tax returns to determine the proper amount of tax benefit that can be transferred and is authorized to share this tax return information with the Department of Economic Development, notwithstanding the secrecy provisions in Article 9-A. The corporate franchise tax benefit transfer program will last 10 years and will start in 2005. The Department of Economic Development is authorized to approve the transfer of no more than $10 million per year. The bill sets forth standards which explain how to allocate that $10 million among the applicants.

Section 2 of the bill makes a technical amendment to section 210.1(a).

Section 3 of the bill adds a new paragraph (f) of section 210.3 to provide a general business corporation subject to tax under Article 9-A which has purchased a tax benefit under this program with a deduction from the portion of the taxpayer’s entire net income allocated within the State in the year of purchase. The deduction is equal to the net operating loss deduction carry forward that it has purchased multiplied by the approved

biotechnology company’s business allocation percentage. Sections 4 and 5 make similar amendments to sections 1453 and 1503 providing deductions to taxpayers under the franchise tax on banking corporations and insurance corporations, respectively, which have purchased tax benefits.

Section 208.9(f) provides a net operating loss deduction to Article 9-A taxpayers. This deduction is similar to the net operating loss deduction provided by section 172 of the Internal Revenue Code. However, corporations that are in a loss position are not able to take advantage of this deduction. Therefore, the net operating loss deductions are able to be carried forward for 20 years. Section 208.9 defines entire net income for purposes of Article 9-A. Section 210.3 sets forth the method for determining the amount of entire net income allocated within the State. Section 1453 defines entire net income for purposes of Article 32. Section 1503 defines entire net income for purposes of Article 33.

This is a new proposal.

Biotechnology is a research-intensive business. A biotechnology company, as it starts in business, may make huge investments and incur significant losses. The company may earn a net operating loss deduction for the losses incurred, which can be used to reduce its taxable income in future years. However, it may take the company a number of years to start to make money and have a positive income for tax purposes. Thus, the net operating loss deduction may remain unused for a long period of time. In the meantime, the company is in need of a source of cash to conduct and expand its business. This bill provides biotechnology companies with access to new capital which they can use to expand their businesses and create jobs. This bill is modeled after a successful program in the State of New Jersey.

Part N – Ease filing requirements for low-income taxpayers under the personal income tax.

This bill eliminates the requirement that residents must file New York personal income tax returns even if they do not have sufficient income to incur New York tax.

The bill amends the resident income tax filing rule at Tax Law section 651(a)(1) to: (a) eliminate the requirement that an individual must file a New York return if he or she is required to file a Federal return; and (b) eliminate the $4,000 income threshold for filing, effective for taxable years beginning on or after January 1, 2004.

Section 651(a)(1) of the Tax Law requires resident individuals to file a New York income tax return if, inter alia, (a) they are required to file a Federal income tax return, or (b) Federal adjusted gross income plus New York additions to income exceeds the lesser of $4,000 or the New York standard deduction. However, under the New York tax calculation, there is no New York taxable income unless New York (not Federal) adjusted gross income exceeds the taxpayer’s New York standard deduction. Also, the New York standard deduction nearly always exceeds $4,000. Accordingly, the filing rules require low-income taxpayers to file a New York return even when no tax liability accrues.

This proposal was included in the 1999-2000 Executive Budget.

When the present-law filing threshold was enacted as part of the 1987 New York Tax Reform and Reduction Act (Chapter 28, Laws of 1987), it somewhat approximated the New York standard deduction amounts then in effect ($2,650 to $5,300, depending on filing status). Since then, the New York standard deduction has been increased numerous times so that only the standard deduction of “dependent filers” (taxpayers who can be claimed as a dependent on another taxpayer’s return) is less than $4,000. For other filing classes, the standard deduction ranges from $6,500 to $14,600. These increases in the standard deduction have shielded many low-income individuals from the obligation to pay New York income tax, but they are still required to file New York returns, resulting in many more “no-tax” filings than anticipated in the 1987 Tax Act. To shield these “no-tax” individuals from the filing requirement, it is also necessary to eliminate the rule that individuals must file if they are required to file Federal returns. If the Federal filing rule is retained, many “no-tax” individuals would continue to be required to file New York returns even though they owe no New York State tax.

The bill addresses the rules that mandate filing an income tax return. The bill in no way limits an individual’s right to file a return, for instance to secure the return of tax withheld on wages, or the payment by the State of tax benefits such as the refundable circuit breaker, child care, earned income and New York City STAR credits. It is anticipated that these individuals will continue to file New York returns. It is estimated that this proposal will eliminate the filing of approximately 500,000 “no-tax” returns annually.

Part O – Provide for the State to enter into price parity agreements with Native American nations with respect to cigarettes, motor fuel and alcoholic beverages and exempt such Native American nations from current regulations to collect the respective taxes.

To amend the Executive Law and Tax Law in relation to authorizing parity agreements between the State and Native American nations or tribes.

Section 1 amends the Executive Law by adding a new section to authorize the State, through the Governor, to execute agreements with Native American nations or tribes in relation to price or tax parity with respect to the sales of tangible personal property or services.

Section 2 amends the Tax Law by adding a new section 21 to allow Native American vendors or wholesalers to purchase cigarettes, tobacco products, automotive fuel and alcoholic beverages exempt from the covered taxes, to make customers of Native

American vendors exempt from the covered taxes once a parity agreement with the State is in force, and to provide the Commissioner of Taxation and Finance the power to promulgate rules and regulations necessary to implement the provision of this act.

Section 3 amends section 470 of the Tax Law by adding a new subdivision defining “stamps” to include any stamp, sticker, decal, label or other indicia of tax status under this act.

Section 4 amends section 471 of the Tax Law by adding a new subdivision to allow a licensed wholesale dealer to sell cigarettes exempt from the tax.

Section 5 delays implementation of the necessary rules or regulations until March 1, 2005, and authorizes the Commissioner of Taxation and Finance to delay or suspend the implementation or enforcement of such rules or regulations pending adjudication of any challenge to such a rule or regulation.

Part P – Extend the bank tax for one year and the Federal Gramm-Leach-Bliley Act provisions for two years to preserve current revenues.

This bill extends the sunset date of certain provisions of the Tax Law and the Administrative Code of the City of New York relating to the taxation of banking corporations and the applicability of the transitional provisions concerning the enactment and implementation of the Federal Gramm-Leach-Bliley Act.
Section 1 of the bill amends section 51 (the effective date provision) of Chapter 298 of the Laws of 1985, as amended, to extend for one year the provisions of such chapter which relate to commercial banks.

Section 2 amends subdivisions (d) and (f) of section 110 (the effective date provision) of the Business Tax Reform and Rate Reduction Act of 1987 (L. 1987, Ch. 817) to extend for one year the provisions concerning the bad debt deduction for commercial banks for New York State franchise tax purposes.

Section 3 amends subdivisions (c) and (d) of section 68 (the effective date provision) of Chapter 525 of the Laws of 1988 to extend for one year the amendments to the bad debt deduction for commercial banks for the New York City banking corporation franchise tax. Chapter 525 is the New York City equivalent to the Business Tax Reform Rate and Reduction Act of 1987, and this bill section parallels bill section 2.

Section 4 extends for 2 additional years the transitional provisions in Tax Law section 1452 relating to the enactment and implementation of the Federal Gramm-Leach-Bliley Act which eliminated many of the prohibitions against the affiliation of banks, insurance companies and securities firms. This extension is accomplished by adding a new subsection (k) to Tax Law section 1452. This new subsection is the same as subsections (h), (i) and (j) of section 1452, except that it applies by its terms to taxable years beginning on or after January 1, 2004 and before January 1, 2006.

Section 5 amends subparagraph (iv) of section 1462(f)(2) of the Tax Law to extend for two additional years the right of a financial holding company to file a combined report, or avoid filing a combined report, with 65 percent or more owned subsidiary banking corporations.

Section 6 adds a new subdivision (j) to section 11-640 of the New York City Administrative Code that parallels the amendment to Tax Law section 1452 made in section 4 of the bill.

Section 7 amends subparagraph (iv) of section 11-646(f)(2) of the New York City Administrative Code to extend for two additional years the right of a financial holding company to file a combined report, or avoid filing a combined report, with 65 percent or more owned subsidiary banking corporations.

Section 8 provides that the bill takes effect immediately. However, sections 4 through 7 apply to taxable years beginning on or after January 1, 2004.

Chapter 298 of the Laws of 1985 made significant changes to the franchise tax on banking corporations under the Tax Law and the Administrative Code of the City of New York. Many of those amendments, however, were made subject to a sunset provision providing that they would no longer be effective as to commercial banks for taxable years beginning on or after January 1, 1990. This sunset provision has been extended numerous times since 1990. These provisions will expire for taxable years beginning on or after January 1, 2005. In order to prevent a windfall to New York State, the Business Tax Reform and Rate Reduction Act of 1987 decoupled from the changes made by the Federal Tax Reform Act of 1986 with regard to the bad debt deduction. This decoupling was effective for taxable years beginning on or after January 1, 1987. However, the provisions concerning the bad debt deduction for commercial banks sunset for taxable years beginning on or after January 1, 2005.

Tax Law sections 1452(h), (i) and (j) establish transitional provisions relating to the Federal Gramm-Leach-Bliley Act which removed the prohibition against the affiliation of banks, securities firms and insurance companies. Under the transitional provisions in subsection (h), a banking corporation in existence before January 1, 2000 that was subject to tax under Article 32 of the Tax Law remains taxable under Article 32 in 2000. A corporation in existence before January 1, 2000, that was subject to tax under Article 9-A during 1999 remains taxable under this article in 2000. A corporation formed on or after January 1, 2000, and before January 1, 2001, may elect to be taxed under either Article 32 or Article 9-A if it is either (1) a “financial subsidiary” as defined in Tax Law section 1452(h), or (2) owned 65 percent or more by a financial holding company (as defined in Tax Law section 1450(h)) and is principally engaged in activities which are financial in nature or incidental to financial activities as described in sections 4(k)(4) or 4(k)(5) of the Federal Bank Holding Company Act of 1956, as amended (and regulations promulgated thereunder). These transitional provisions apply to taxable years beginning on or after January 1, 2000, and before January 1, 2001. The transitional provisions in subsections (i) and (j) are substantively the same and together apply to taxable years beginning on or after January 1, 2001, and before January 1, 2004. Thus, these transitional provisions sunset for taxable years beginning on or after January 1, 2004.

Section 11-640(g) of the Administrative Code of the City of New York sets forth parallel transitional provisions for purposes of the franchise taxes imposed by the City of New York.

Tax Law section 1462(f)(2)(iv) provides that a financial holding company, for its taxable year beginning on or after January 1, 2000, and before January 1, 2004, may be included in a combined return with any banking corporation whose voting stock is 65 percent or more owned or controlled, directly or indirectly, by that financial holding company, without seeking permission from the Department of Taxation and Finance, provided both companies are taxpayers in New York. In addition, the Department of Taxation and Finance may not require a financial holding company to file a combined return with any banking corporation whose voting stock is 65 percent or more owned or controlled, directly or indirectly by that financial holding company. These provisions apply only to financial holding companies which register for the first time to be bank holding companies on or after January 1, 2000, and before January 1, 2004. Registration as a bank holding company is a general prerequisite to becoming a financial holding company.

Section 11-646(f)(2)(iv) of the Administrative Code of the City of New York establishes similar provisions allowing combination of such corporations for purposes of the franchise taxes imposed by the City of New York.

The amendments made by Chapter 298 of the Laws of 1985, Chapter 817 of the Laws of 1987 and Chapter 525 of the Laws of 1988 first were scheduled to sunset in 1990. They have been extended numerous times since then. The Gramm-Leach-Bliley transitional provisions were first enacted in 2000 and were extended twice thereafter so that they currently apply to taxable years beginning on or after January 1, 2003, and before January 1, 2004. The most recent enactment of these extension provisions was contained in Chapter 62 of the Laws of 2003.

Extension of the Bank Tax Provisions:

The provisions of Chapter 298 of the Laws of 1985 which relate to the taxation of commercial banks and the bad debt provisions for commercial banks included in Chapter 817 of the Laws of 1987 and Chapter 525 of the Laws of 1988 have been effective in accomplishing their legislative goals. It is appropriate, therefore, to extend the sunset date for these provisions. The extension made by this bill will conform the sunset date of these provisions with the sunset date provided for the Gramm-Leach-Bliley transitional provisions.

Extension of the Gramm-Leach-Bliley Transitional Provisions:

The Federal Gramm-Leach-Bliley Act enacted in 1999 allows banks, insurance companies and securities firms for the first time to freely affiliate. This change on the Federal level prompted the formation of a task force by the Department of Taxation and Finance to review state tax statutes to determine the most appropriate way of taxing these industries as the lines between them blur. It also resulted in the passage of transitional provisions by the State and City of New York to guide financial institutions in the proper filing and reporting of tax liability while these issues were being studied.

These transitional provisions, however, expire for tax years beginning after December 31, 2004. Without these provisions, businesses in the financial industry may encounter unexpected tax consequences or be left with difficult uncertainties concerning their tax status. This comes about by the fact that, in order to affiliate, the banking, securities and insurance industries must do so under the umbrella of a financial holding company. Since most financial holding companies are, by definition, bank holding companies, securities firms making the financial holding company election and their subsidiaries find themselves unwittingly subjecting themselves to liability under the Bank Tax provisions of Article 32 because they fall within the definition of a banking corporation (see, Tax Law section 1452(a)(9)). This sudden reclassification of a company from an Article 9-A taxpayer to an Article 32 taxpayer will cause a considerable administrative and compliance burden. In addition, in light of the expanded activities that may be engaged in by financial subsidiaries, these companies may have a difficult time determining whether or not they meet the requirements of section 1452(a)(9) and should be classified as an Article 32 taxpayer. Moreover, the ability of such companies to join in the filing of a combined report is left open to question. Comparable issues exist for financial holding companies and their affiliates under the New York City General Corporation Tax and Banking Corporation Tax.

This bill extends the transitional relief two additional years. This extension allows taxpayers to retain their taxable status through 2005 and allows financial subsidiaries and newly formed companies owned or controlled by financial holding companies to elect to be taxed for their taxable years beginning in 2004 or 2005 under either Article 9-A or Article 32 and the comparable provisions of the New York City General Corporation Tax and Banking Corporation Tax. It also authorizes bank holding companies present in New York that elect to become financial holding companies in 2004 or 2005 to file combined reports with 65 percent or more owned subsidiaries or to avoid combination with such subsidiaries.

Part Q – Create a new State STAR credit under the personal income tax to protect the STAR benefit from the effects of inflation.

This bill provides a yearly adjustment to taxpayers entitled to the STAR real property tax exemption by allowing taxpayers to claim a credit on their New York State personal income tax return equal to the product of their STAR savings and the consumer price index adjustment.

Section 1 of this bill adds a new subsection 606(gg) to the Tax Law to provide a taxpayer with a credit against his or her New York personal income tax equal to the product of his or her STAR savings and the consumer price index adjustment. The credit shall not be allowed to a taxpayer in a year in which his or her school district is not in compliance with the statutory spending cap set forth in Education Law section 2022, as added by a chapter of the Laws of 2004. If two or more taxpayers together own real property which qualifies for the STAR exemption and the taxpayers file separate returns, the credit allowed is divided between the taxpayers based on their percentage of ownership in the property. The consumer price index adjustment applicable to a taxable year is the percentage increase, if any, of the average of the monthly consumer price indices published by the United States Bureau of Labor Statistics for the 12-month period ending with the month of June in that taxable year from the average of those monthly consumer price indices for the 12-month period ending with June 2003. If this credit exceeds the taxpayer’s tax for the year, the excess is refundable. Section 2 provides that this bill shall take effect immediately and shall apply to taxable years beginning on or after January 1, 2004.

The Real Property Tax Law provides a school tax relief program referred to as STAR. Section 425 of the Real Property Tax Law provides a partial tax exemption from school property taxes. All New Yorkers who own and live in their one-, two-, or three-family home, condominium, cooperative apartment, manufactured home, or farm dwelling are eligible for a STAR exemption on their primary residence. Under section 1306-a(2) of the Real Property Tax Law, school districts are required to put a statement on each school tax bill that tells homeowners the amount of their tax savings from the STAR exemption.

This is a new proposal.

The formula set forth in the Real Property Tax Law to calculate the amount of the STAR real property tax exemption does not provide for any inflationary adjustments. By allowing taxpayers a refundable income tax credit equal to the product of their STAR savings and the consumer price index adjustment, taxpayers get the benefit of an adjustment to their STAR savings for inflation without imposing any additional costs on school districts around the State.

Part R – Authorize up to eight new facilities to be licensed by the Division of the Lottery to operate video lottery terminals.

This bill authorizes the Lottery Division to award up to eight licenses for the operation of video lottery franchise gaming facilities in New York State.

Section 1 is amended to add a new section 1621 of the Tax Law to authorize the Division of the Lottery to be able to award up to eight licenses to operate video lottery gaming facilities. The Lottery Division shall award the licenses on a competitive basis and each location would require a separate license. Any entity, including but not limited to Off Track Betting Corporations, which demonstrates to the satisfaction of the Division that it possesses the qualifications and expertise to operate the video lottery franchise, shall be eligible to competitively bid for a license.

The following geographical restrictions shall apply: (1) Licenses may not be granted for locations within 15 miles of any racetrack licensed to operate video lottery gaming pursuant to Section 1617-a of the Tax Law; (2) The operation of video lottery gaming in New York City is limited to New York County south of 59th Street, Kings, and Richmond counties, with no more than five locations; and (3) Licenses may not be granted for locations within the counties of Westchester, Rockland and Putnam. The Division can waive any of the above restrictions if any racetrack authorized to conduct video lottery gaming has not begun, or is not scheduled to begin operating video lottery gaming on or before April 1, 2005. Video lottery gaming venues will not be allowed in temporary structures for longer than 18 months.

Subdivision b of new section 1621 allows the Lottery Division to promulgate rules and regulations governing all aspects of the video lottery gaming operation. Included in the criteria for awarding licenses is: maximizing financial support for education, timely implementation of video lottery franchise gaming, location and quality of the facility, and expertise of the applicant. The rules and regulations may be adopted on an emergency basis pursuant to section 202 of the State Administrative Procedure Act.

Subdivision c of new section 1621 designates that the each licensee will pay a one-time license fee to be established by the Lottery Division for each license issued.

Subdivision d of new section 1621 provides that the specifications for video lottery franchise gaming shall be designed so that prizes will average no less than 90 percent of sales.

Subdivision e of new section 1621 states that the Division of the Lottery will pay into the State treasury on or before the twentieth day of each month, to the credit of a separate and distinct account to be known as the Sound Basic Education Account within the State Lottery Fund created by section 92-c of the State Finance Law, the balance of the total revenue after payout for prizes, less an amount established by such rules and regulations to be retained by the division for operation, administration and procurement purposes, and less a lottery agent fee, which will be determined and paid to each licensee at a rate, to be established by such rules and regulations, but not to exceed 20 percent of total revenue wagered after the payout of prizes at such agent’s facility. The intention is to provide the maximum lottery support for education while also ensuring the effective implementation of this section through reasonable reimbursements and compensation to the licensees for participation in video lottery franchise gaming.

Subdivision f of new section 1621 states that the Lottery Director is authorized to enter into contracts as an agent of the State with private entities and non-profit racing associations licensed pursuant to section 1621 and 1617-a of the Tax Law to encourage timely participation in video lottery gaming. The contracts may include a commitment by the State that each video lottery gaming facility shall have the exclusive right to operate the facility at its licensed location consistent with the geographical restrictions contained in subdivision a, of this bill for a period of ten years. An agreement by a video lottery gaming facility operator to build and operate a licensed video lottery gaming facility shall be deemed good and valid consideration for the foregoing commitment by the State.

Subdivision g of new section 1621 provides that the Lottery Division is authorized to amend, upon negotiated agreement, competitively bid contracts on the effective date of this act in connection with video lottery gaming authorized pursuant to section 1617-a of the Tax Law. This will allow those contractors to provide goods and services for the video lottery franchise gaming and to extend the terms of such contracts.

Section 2, Subdivision b of section 1612 of the Tax Law is amended to direct the Division to pay into the State Treasury, to the credit of a separate account of the State Lottery Fund to be known as the Sound Basic Education Account, which will be kept separate and apart from all other State Lottery funds, education revenues generated by section 1617-a video lottery gaming.

This bill seeks to expand the video gaming program in order to generate additional education revenues.

Part S – Include in New York source income, gains from sales of cooperative apartment stock for non-residents.

This bill: (a) treats the sales of shares of stock in a cooperative housing corporation coupled with a proprietary leasehold as the sale of an interest in real property, by authorizing New York City, Yonkers and any county in the State to impose the mortgage recording tax upon the filing of a financing statement under the Uniform Commercial Code to perfect a security interest in shares of a cooperative housing corporation to conform with how mortgages on other forms of home ownership (deeds or condominiums) are treated; and (b) imposes the personal income tax on the gains from the sale or other disposition of shares in a cooperative housing corporation by nonresidents to conform with the taxation of gains from the sales of other types of interests in real property.

Section 1 of the bill makes a conforming change to the definitions in section 250 of the Tax Law, necessitated by the amendments made in section 2 of the bill. Section 2 of the bill adds a new section 253-g to Article 11 of the Tax Law to authorize New York City, Yonkers and counties in the State, to enact a local law to impose a tax on the filing of a financing statement under the Uniform Commercial Code to perfect a security interest in shares of a cooperative housing corporation. Generally, the rate of the tax would be seventy-five cents for each $100 of principal debt or obligation, of which fifty cents would be distributed to the cities and towns in the county. The rate in New York City, Yonkers, Rockland County and Broome County would be higher to equal the sum of the seventy-five cent rate and the current mortgage recording tax rate in those localities. The bill provides that the perfected security interest may not be enforced unless the tax has been paid. In addition, bill section 3 amends section 9-516 of the Uniform Commercial Code to provide that a financing statement may not be filed unless the tax is paid.

Sections 3 and 4 amend section 631 of the Tax Law to impose the personal income tax on gains recognized by nonresidents from the sale or other disposition of shares in a cooperative housing corporation where the premises represented by such shares are located in New York. The bill taxes such gains whether the nonresident owns the shares in the cooperative housing corporation directly, by a partnership, in trust, or otherwise. Sections 5, 6 and 7 amend section 663 of the Tax Law to require the remittance of estimated personal income tax on the gain, if any, recognized upon the sale, conveyance, or other disposition of shares of stock in a cooperative housing corporation within 15 days of the delivery of the instrument effecting such disposition. Section 8 contains the effective date provisions.

Under current law, the transfer of shares of stock in a cooperative housing corporation is taxed as a conveyance of real property under the real estate transfer tax. However, a mortgage recording tax is not paid when a Uniform Commercial Code (UCC) financing statement is filed with regard to a security interest in the shares of stock in a cooperative housing corporation because those financing statements legally do not qualify as “mortgages” subject to the mortgage recording tax under Article 11 of the Tax Law. The Uniform Commercial Code provides that the financing statement for a cooperative interest is filed with the recording officer for the county where the real property is located (i.e., the office designated for the recording of a mortgage on the related real property; Uniform Commercial Code section 9 501(a)(1)(C)). Further, the law provides that a security interest in a cooperative interest (i.e., the shares in a cooperative corporation accompanied with a proprietary lease of a portion of the real property owned by the cooperative corporation) may be perfected only upon the recording of a financing statement (Uniform Commercial Code section 9-310(d)).

New York City currently imposes a mortgage recording tax pursuant to the authority of Tax Law section 253-a. The tax rates for the New York City mortgage recording tax are: $1.00 for each $100 of principal debt with respect to real property securing a principal debt of less than $500,000; $1.125 for each $100 of principal debt with respect to one, two- or three family houses or individual condominiums securing a principal debt of $500,000 or more; and $1.75 for each $100 of principal debt with respect to all other real property. Yonkers imposes a mortgage recording tax pursuant to the authority of Tax Law section 253-d equal to $1.00 for each $100 of principal debt. Broome County imposes a tax pursuant to the authority of section 253-e of the Tax Law equal to $.25 for each $100 of principal debt or obligation. Rockland County also imposes a $.25 tax pursuant to the authority of section 253-f of the Tax Law.

These local taxes are in addition to the State-imposed mortgage recording tax which has three components. The tax imposed under subdivision 1 of section 253 is at a rate of $.50 for each $100 of principal debt. This component is distributed to the cities and towns where the property secured by each mortgage is located. The additional mortgage recording tax is an additional $.25 for each $100 of principal debt and the special additional mortgage recording tax (which provides financial support to SONYMA) is another $.25 for each $100 of principal debt. Some counties have opted out of imposing the additional mortgage recording tax (which is used to provide financial support to regional transportation authorities). Thus, the total State rate varies by county and may either be $.75 or $1.00 for each $100 of principal debt.

Under current law, nonresidents do not pay personal income tax on gains associated with the sale or other disposition of shares in a cooperative housing corporation where the premises represented by such shares are located in New York and the premises are used solely for residential purposes. Ownership of shares of stock in a cooperative housing corporation, and the accompanying proprietary leasehold interest, are considered the ownership of intangible personal property. Gains from the sale or other disposition of intangible personal property are taxable only in specific statutorily designated situations where the intangible acquires or manifests a taxable situs in New York. The Department of Taxation and Finance has previously issued an administrative pronouncement that provides guidance with regard to the tax consequences of mixed business and residential use of a cooperative unit. In such situations, a portion of the gain on the sale is taxed based on the level of business use.

Nonresidents are required under section 663 of the Tax Law to make estimated personal income tax payments of the tax due on any gain from the sale of real property in the State. This estimated tax payment is made to the recording officer at the time a deed is recorded. Under current law, these estimated tax provisions do not apply to the sales of interests in cooperative housing corporations because no deeds are required to be recorded.

Cooperative apartments, as a form of home ownership, are common in New York City. They may also be used as a form of ownership in other parts of the State. The collateral or security for a loan to purchase a cooperative apartment is generally the shares of the cooperative corporation. To perfect its security interest in that collateral, a lender will cause a UCC financing statement to be filed. No mortgage recording tax is

imposed because the filing a UCC financing statement is technically not the recording of a mortgage. In contrast, a mortgage recording tax is paid whenever a mortgage is recorded to secure the security interest of a lender making a traditional mortgage loan for the purchase of building or home or a condominium unit.

If a nonresident recognizes gains on the disposition of shares of stock in a cooperative housing corporation, the gains are not taxed by New York. In contrast, a nonresident who recognizes a gain from the sale of a condominium or other piece of real property that is located in New York is liable for personal income tax on the gain. Thus, gains from the sale of a cooperative apartment are afforded a unique tax benefit that is not available to condominiums and other real property.

This bill, by authorizing New York City, Yonkers and counties to impose a tax on the recording of a UCC financing statement to perfect a security interest in the shares of a cooperative housing corporation and by imposing the personal income tax on gains recognized from the sale of an interest in a cooperative housing unit, eliminates this inequity of treatment between forms of home ownership. In addition, the estimated tax requirements imposed by this bill will bring parity to the compliance responsibilities imposed on sellers of real property and sellers of stock in a cooperative housing corporation.

Part T – Extend and reform the Empire Zones Program.

This bill amends the General Municipal Law and the Tax Law, in relation to the purpose, administration and benefits of the Empire Zones Program in order to improve accountability, focus benefits to communities that most need job growth and investment, provide flexibility to secure projects with large job creation potential, preserve local decision-making authority, and enhance State oversight.

Section 1 amends §956 of the General Municipal Law to recognize the current economic environment and to acknowledge the importance of the Empire Zones Program in increasing the State’s competitiveness to attract projects with large job creation potential in addition to revitalizing distressed areas.

Section 2 amends §957 of the General Municipal Law to add definitions for “Neighborhood Revitalization Empire Zone”, “Countywide Development Empire Zone” and “targeted areas” to be in accord with new provisions relating to the placement of Empire Zone acreage. In addition, technical clarifications are made.

Section 3 amends §958 of the General Municipal Law to require local Empire Zones, designated pursuant to eligible census tracts, to place Empire Zone acreage within a four square mile “superboundary”, which must be located in an eligible census tract(s) or census tract(s) contiguous to such eligible census tract(s), and may be one contiguous area or up to three non-contiguous areas. Local Empire Zones, designated pursuant to countywide criteria, are required to place at least 60 percent of the total Empire Zone acreage in up to six “targeted areas”, which must be located within census tracts that have rates of unemployment and poverty that exceed the countywide unemployment and poverty rates according to the most recent census data available. Authority is provided to the Commissioner of Economic Development to annually designate areas of up to one non-contiguous square mile in total, which will attract large projects, including agribusinesses contributing to the development and production of biofuels, involving job creation of at least 300 new jobs in the State outside of the Metropolitan Transportation Authority District; or projects that are located within distressed census tracts that create at least 100 new jobs. In addition, technical clarifications are made.

Section 4 amends §959 of the General Municipal Law to authorize the Commissioner of Economic Development to establish reporting requirements and performance measures for determining the economic and revitalization impacts of the Empire Zones Program. Requires the Commissioner of Economic Development in conjunction with the Department of Taxation and Finance to prepare an annual report regarding tax credits claimed under the program. Authorizes the Commissioner of Economic Development to promulgate rules and regulations to certify significant investments made in distressed census tracts located within an Empire Zone in order to receive Qualified Empire Zone Enterprise tax benefits. Authorizes the Commissioner of Economic Development to receive and review a plan submitted by the local Empire Zone administrative boards addressing workforce development, human services, small business, child-care, and increased participation of minority- and women-owned small businesses. Condenses and clarifies many existing powers and responsibilities of the Commissioner of Economic Development and moves the annual report regarding zone activity that is required to be submitted to the Department of Audit and Control and the Legislature to §959 from §963.

Section 5 amends §960 of the General Municipal Law to remove expired authorization for designation of Empire Zones and to remove outdated reporting requirements.

Section 6 amends §961 of the General Municipal Law to make technical clarifications.

Section 7 amends §962 of the General Municipal Law to replace the existing requirements of a zone development plan with new requirements, including specific criteria for determining Empire Zone boundaries and types of businesses to be targeted for inclusion in the program. In addition, a new zone development plan is required to be submitted to the Commissioner of Economic Development by December 31, 2004, and every three years thereafter.

Section 8 amends §963 of the General Municipal Law to bring the responsibilities of local Empire Zone administration into accord with new performance and reporting requirements, and requires local Empire Zone administrators to consider the development plan when making certification determinations.

Section 9 amends §964 of the General Municipal Law to remove the authorization to form new Zone Capital Corporations. In addition, the bill removes the zone capital credit cap of $500,000 for qualified investments in certified zones businesses.

Section 10 amends §966 of the General Municipal Law to make a technical clarification.

Section 11 amends §969 of the General Municipal Law to extend the program five years to July 31, 2009.

Section 12 amends section 14 of the Tax Law to make changes in the way the Qualified Empire Zone Enterprise (QEZE) benefits are calculated. Business enterprises certified as EZ businesses under Article 18-B of the General Municipal Law on or after April 1, 2004 will have a ten-year business tax benefit period instead of a 15-year period. In addition, the employment test, which must be satisfied in order for a business enterprise to qualify as a QEZE, is changed for business enterprises certified as EZ businesses under Article 18-B of the General Municipal Law on or after April 1, 2004 and business enterprises certified as EZ businesses before April 1, 2004 which either have a base period of zero years or are electric generating facilities. The new test is modeled on the EZ wage tax credit qualifying test. Under the new test, the QEZE’s employment number in the EZs and in the State in the tax year must exceed its employment number in the EZs and in the State during the base period. The base period is shortened to four taxable years and changed to the four taxable years immediately preceding the year the business enterprise is certified under Article 18-B. The definition of “employment number” has also been modified to provide that the exclusion from that number for individuals employed within the immediately preceding 60 months by a related person as that term is defined in the Federal Internal Revenue Code (IRC), section 465(b)(3)(c), applies only to those individuals employed by the related person within the State. In addition, the definition of “related person” is amended to clarify that it includes an entity, which would have qualified as a related person if it had not been dissolved, liquidated, merged with another entity or otherwise ceased to exist or operate. This change, since it is simply a clarification of current law, is made retroactive to taxable years beginning on or after January 1, 2002.

Section 13 amends section 15 of the Tax Law to change the way the QEZE real property tax credit is calculated for business enterprises certified under Article 18-B of the General Municipal Law on or after April 1, 2004 and business enterprises certified as EZ businesses before April 1, 2004 which either have a base period of zero years or are electric generating facilities. Specifically, the employment increase factor is changed. Under the bill, the employment increase factor will be the amount, not to exceed 1.0, which is the excess of the QEZE’s employment number in the EZs where it is certified for the taxable year over the QEZE’s base period employment number, divided by 100. For this purpose, the employment number in the EZs will not include individuals employed within the State but outside the EZs by the QEZE or by a related person to the QEZE within the preceding sixty months. The bill also provides that if the Commissioner of Economic Development certifies that the QEZE has made an investment that qualifies as a qualified Empire Zone investment pursuant to General Municipal Law section 959, then the QEZE’s employment increase factor will be 1.0. Section 13 also amends the definition of “eligible real property taxes” to include taxes paid by a QEZE which is a lessee of real property if the following conditions are met: (1) the taxes must be paid pursuant to explicit requirements in a written lease; (2) such taxes become a lien on the real property during a taxable year in which the lessee of the real property is both certified under Article 18-B of the General Municipal Law and a QEZE; and (3) the lessee has made direct payment of such taxes to the taxing authority and has received a receipt for such payment of taxes from the taxing authority. Further, the bill makes amendments to the provisions in the definition of “eligible real property taxes” concerning payments in lieu of taxes (PILOTS). The bill provides that a PILOT made by a QEZE pursuant to a written agreement executed or amended on or after January 1, 2001, would not constitute eligible real property taxes in any taxable year to the extent that such payment exceeds the product of: (A) the QEZE’s investment in the property (more specifically, the greater of (i) the basis for Federal income tax purposes, determined on the later of January 1, 2001, or the effective date of the QEZE’s certification pursuant to Article 18-B of the General Municipal Law, of real property, including buildings and structural components of buildings, owned by the QEZE and located in EZs with respect to which the QEZE is certified, or (ii) the basis for Federal income tax purposes of such real property on the last day of the taxable year, and (B) the estimated full value tax rate most recently reported to the Commissioner of Taxation and Finance by the Secretary of the State Board of Real Property Services or his or her designee. The State Board would calculate such estimated effective full-value tax rates annually based on the most current information available to it. This change is effective for taxable years beginning on or after January 1, 2004. The credit limitation applicable to the QEZE real property tax credit is amended to provide that, in the case of a business enterprise which is certified under Article 18-B on or after April 1, 2004 and business enterprises certified as EZ businesses before April 1, 2004 which either have a base period of zero years or are electric generating facilities, the employment increase limitation will be the product of $10,000 and the excess of the QEZE’s employment number in the EZs with respect to which the QEZE is certified for the taxable year, over the QEZE’s base period employment number in those zones. For this purpose, individuals employed within the State but outside of those zones within the preceding 60 months by the QEZE or by a related person to the QEZE will not be included. The bill also specifies that the credit limitation for a lessee is the employment increase limitation.

Sections 14, 15 and 16 amend the EZ wage tax credit to update the definition of targeted employee, provide that a business certified in a zone equivalent area (ZEA) before June 13, 2004 (when the ZEAs expire) will be allowed to claim a full five years of wage tax credits, and conform the related person definition for wage tax credit purposes to the related person definition for QEZE purposes, respectively.

Section 17 amends the EZ capital corporation credit under Article 9-A to provide that the credit component for qualified investments in or donations to a zone capital corporation will not be applicable in taxable years beginning on or after January 1, 2005 and will only apply to investments in or donations to a zone capital corporation established prior to July 31, 2004.

Sections 18 through 25 make conforming changes to the EZ wage tax credits and the EZ capital corporation credits under the franchise tax on banking corporations and the franchise tax on insurance companies.

Section 26 provides that any business enterprise certified under Article 18-B of the General Municipal Law prior to April 1, 2004 will be entitled to apply to the Commissioner of Economic Development for permission to determine its status as a QEZE using the law in effect immediately prior to the enactment of this act and calculate its QEZE real property tax credit and its QEZE tax reduction credit for taxable years beginning in 2004 or after using the law in effect for taxable years beginning in 2003. The Commissioner of Economic Development is required to promulgate rules that shall set forth the procedures for business enterprises to follow to apply for such permission and the standards to be used to determine whether or not such permission will be granted. The Commissioner of Economic Development is also required to notify the Commissioner of Taxation and Finance of all applications received for such permission and the disposition of all such applications.

The Empire Zones Program began in the mid 1980s and has been amended many times in recent years. Most significantly, the Empire Zones Program was amended in 2001 when the Qualified Empire Zone Enterprise (QEZE) program was enacted to include a tax reduction credit, a credit for real property taxes and a State sales and use tax exemption (with a local option) for tangible personal property and services used or consumed by a zone enterprise. Various provisions of the QEZE program were amended in the 2002-03 enacted Budget. These amendments included some provisions, such as the new business test, designed to reduce the abuses that were taking place by organizations wanting to take advantage of the Program’s generous benefits. However, these amendments from 2002-03 have only been partially successful in reducing the abuses.

The Empire Zones Program has a successful track record of facilitating projects that increase employment and spur investment across New York State. However, the existing statutory framework for the program allows for certain abuses that have allowed businesses to secure State benefits without creating new jobs. In addition, the current law fails to encourage effective local economic development planning, and requires improvements to allow for neighborhood revitalization. This legislation addresses these statutory flaws. In addition, the legislation will enhance program reporting and evaluation by establishing a framework that integrates local development goals with an interagency reporting system to measure performance as it relates to job growth, investment and program implementation.

The reforms in this bill are designed to protect State revenues while ensuring that the Empire Zones Program continues to provide significant economic and tax incentives to businesses.

BUDGET IMPLICATIONS:

Part A – Replace the permanent $110 clothing and footwear tax exemption with four $500 exemption weeks.

During its first fiscal year of effect, SFY 2004-05, this bill would increase State sales and use revenues by approximately $400 million. During its first full fiscal year of implementation, SFY 2005-2006, this bill would increase State sales tax revenues by approximately $429 million.

Part B – Allow for an additional $2 million in tax credits annually, or $20 million over the ten-year life of the program, for the Low-Income Housing Tax Credit program which will spur a new round of affordable housing construction.

This bill would reduce tax revenues by $2 million beginning in State fiscal year 2004-05. As with the existing program, since the additional $2 million in credit allocation by the Commissioner of DHCR can be claimed each year for ten years, the total aggregate credit allowed over the ten-year life of the program expansion would be an additional $20 million, for a total program amount of $60 million.

Part C – Make Quick Draw permanent.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget because the expiration of Quick Draw would cause the loss of $135 million included in the State’s Financial Plan.

Part D – Remove restrictions on Quick Draw.

Removing restrictions on the licensing of Quick Draw retailers maintains the Lottery’s ability to generate and grow revenues to support education at the budgeted levels. There will be no increased costs to administer or operate this game.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget because an estimated incremental revenue amount of $43 million has been included in the State’s Financial Plan.

Part E – Extend the MTA surcharge that is scheduled to expire on December 31, 2005.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget because it maintains the existing annual revenue stream available to support transportation services in the Metropolitan Commuter Transportation District.

Part F – Extend the Alternative Fuels Vehicle Program for one year.

It is estimated that this bill will reduce State tax receipts by $10 million in State fiscal year 2004-05 and by $10 million in 2005-06. These receipts losses are included in the State Financial Plan. Therefore, this bill is necessary for enactment of the 2004-05 Executive Budget.

Part G – Modify the fixed dollar minimum tax base.

Enactment of this bill is necessary to implement the 2004-05 Executive budget because it would increase annual State revenues by an estimated $40 million.

Part H – Create a new exemption from the personal income tax for Federal military pay for New York State Guard members activated and deployed full-time in the New York War on Terror.

It is estimated that this bill will result in a reduction of $1 million in tax receipts in 2004-05. This receipts reduction is included in the State Financial Plan. Thus, enactment of this bill is necessary to implement the 2004-05 Executive Budget.

Part I – Reduce the tax burden for manufacturers by phasing in a 100 percent receipts factor in determining income apportioned to New York State.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget because the tax savings to corporations from phasing in the single receipts factor apportionment formula for manufacturers is estimated to be $40 million when fully effective.

Part J – Place sales tax rate surcharges on certain taxable services to fund public safety and security initiatives.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget, which includes $39 million in new Special Revenue–Other Fund revenues associated with these surcharges.

Part K – Allow the direct shipment of wine into New York State from out-of-state wineries.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget because it would increase State revenues by $2 million.

Part L – Clarify rights regarding the availability of tax hearings.

The bill will result in an acceleration of $50 million in tax revenues into the 2004-05 State fiscal year. These receipts are included in the Financial Plan for 2004-05 and, thus, this bill is necessary for implementation of the 2004-05 Executive Budget.

Part M – Create a new biotech program that would allow qualified biotech companies to sell their unused losses to eligible corporations based on 90 percent of the value of the losses.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget because it will provide the capital needed for biotech companies to expand existing facilities and to purchase equipment. This proposal is estimated to result in revenue losses of $5 million in State fiscal year 2004-05.

Part N – Ease filing requirements for low-income taxpayers under the personal income tax.

This bill decreases the cost of administering personal income tax returns by $1 million in 2004-05. Therefore, enactment of this bill is necessary to implement the Financial Plan included with the 2004-05 Executive Budget.

Part O – Provide for the State to enter into price parity agreements with Native American nations with respect to cigarettes, motor fuel and alcoholic beverages and exempt such Native American nations from current regulations to collect the respective taxes.

Enactment of this bill is necessary to implement the 2004-05 Executive Budget because this proposal would preserve approximately $60 million in 2004-05 revenues.

Part P – Extend the bank tax for one year and the Federal Gramm-Leach-Bliley Act provisions for two years to preserve current revenues.

Enactment of this bill is necessary implement the 2004-05 Executive budget in order to maintain the current Article 32 revenue stream.

Part Q – Create a new State STAR credit under the personal income tax to protect the STAR benefit from the effects of inflation.

This bill will reduce personal income tax receipts by an estimated $11 million in 2004-05. This receipts decrease is included in the 2004-05 Financial Plan and, therefore, enactment of this bill is necessary to implement the 2004-05 Executive Budget.

Part R – Authorize up to eight new facilities to be licensed by the Division of the Lottery to operate video lottery terminals.

There is no revenue budgeted for this proposal because the Legislature and the gaming industry will need to negotiate several crucial parameters that are involved in the operation of the VLT facilities.

Part S – Include in New York source income, gains from sales of cooperative apartment stock for non-residents.

It is estimated that this bill will increase State tax receipts by $5 million in 2004-05 and by $20 million annually thereafter. These receipts gains are included in the State Financial and, therefore, enactment of this bill is necessary to implement the 2004-05 Executive Budget.

Part T – Extend and reform the Empire Zones Program.

This bill is necessary to implement the 2004-05 Executive Budget, which assumes the extension of the program from the current June 31, 2004 sunset, and that State tax expenditures will decrease by $25 million in 2005-06 as a result of the elimination of abuses allowable under the existing legislation.

EFFECTIVE DATE:

Part A – Replace the permanent $110 clothing and footwear tax exemption with four $500 exemption weeks.

The bill takes effect immediately, provided that bill sections 1 and 2 shall take effect on June 1, 2004, and apply in accordance with applicable transitional provisions in sections 1106 and 1217 of the Tax Law.

Part B – Allow for an additional $2 million in tax credits annually, or $20 million over the ten-year life of the program, for the Low-Income Housing Tax Credit program which will spur a new round of affordable housing construction.

The bill takes effect immediately.

Part C – Make Quick Draw permanent.

The bill takes effect immediately.

Part D – Remove restrictions on Quick Draw.

This bill takes effect immediately.

Part E – Extend the MTA surcharge that is scheduled to expire on December 31, 2005.

This bill takes effect immediately.

Part F – Extend the Alternative Fuels Vehicle Program for one year.

The bill takes effect immediately; however, the changes to Articles 9, 9-A and 22 of the Tax Law would apply to taxable years beginning on or after January 1, 2004, and the alternative fuel vehicle provisions contained in these Articles would be extended so that they expire on December 31, 2005. The changes to Article 28 would have retroactive effect to March 1, 2004, and the sunset date for the alternative fuel vehicle provisions in Article 28 would be extended to February 28, 2005.

Part G – Modify the fixed dollar minimum tax base.

This bill applies to taxable years commencing on and after January 1, 2004.

Part H – Create a new exemption from the personal income tax for Federal military pay for New York State Guard members activated and deployed full-time in the New York War on Terror.

This bill takes effect immediately; provided however, section 4 of this act shall apply to taxable years beginning on or after January 1, 2004; and provided then, however, that section 5 shall take effect on June 1, 2004, and apply to sales made, uses occurring, and services rendered on or after that date, in accordance with applicable transitional provisions in sections 1106 and 1217 of the Tax Law.

Part I – Reduce the tax burden for manufacturers by phasing in a 100 percent receipts factor in determining income apportioned to New York State.

The bill takes effect immediately.

Part J – Place sales tax rate surcharges on certain taxable services to fund public safety and security initiatives.

Sections 1 and 2 of this bill take effect on the first day of the sales tax quarterly period, as described in Tax Law section 1136(b), next commencing at least 60 days after this act shall have become a law and shall apply on and after that date in accordance with the applicable transitional provisions of Tax Law section 1106.

Sections 3 through 6 take effect immediately.

Part K – Allow the direct shipment of wine into New York State from out-of-state wineries.

This bill takes effect 60 days after if becomes a law.

Part L – Clarify rights regarding the availability of tax hearings.

This bill takes effect immediately, and applies to notice and demands and notices of additional tax due issued on or after December 1, 2004.

Part M – Create a new biotech program that would allow qualified biotech companies to sell their unused losses to eligible corporations based on 90 percent of the value of the losses.

This bill takes effect immediately and applies to taxable years beginning on or after January 1, 2005.

Part N – Ease filing requirements for low-income taxpayers under the personal income tax.

This bill takes effect immediately and is applicable to taxable years beginning on or after January 1, 2004.

Part O – Provide for the State to enter into price parity agreements with Native American nations with respect to cigarettes, motor fuel and alcoholic beverages and exempt such Native American nations from current regulations to collect the respective taxes.

This bill takes effect immediately.

Part P – Extend the bank tax for one year and the Federal Gramm-Leach-Bliley Act provisions for two years to preserve current revenues.

The bill takes effect immediately, except that sections 4 through 7 apply to taxable years beginning on or after January 1, 2004.

Part Q – Create a new State STAR credit under the personal income tax to protect the STAR benefit from the effects of inflation.

This bill takes effect immediately and applies to taxable years beginning on or after January 1, 2004.

Part R – Authorize up to eight new facilities to be licensed by the Division of the Lottery to operate video lottery terminals.

The bill would become effective immediately.

Part S – Include in New York source income, gains from sales of cooperative apartment stock for non-residents.

This bill takes effect immediately; provided, however, that sections 5 and 6 shall apply to taxable years beginning on or after January 1, 2004; and sections seven through nine shall take effect ninety days after this act shall have become a law and apply to sales, conveyances or other dispositions occurring on or after such date.

Part T – Extend and reform the Empire Zones Program.

This bill takes effect immediately; provided, however, that (i) except as provided in (ii) of this section, sections 12, 13, 15, 20 and 23 of this act shall apply to taxable years beginning on or after January 1, 2004; and (ii) the amendment in section 12 of this act to subdivision (g) of section 14 of the tax law concerning “related person” and sections 16, 21 and 24 of this act shall apply to taxable years beginning on or after January 1, 2002.

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