September 7, 2012

New York State MTA Tax Unconstitutional! Now What?

New York State MTA Tax Unconstitutional! Now What? Tax & Business

The New York State Supreme Court ruled on August 22, 2012 that the Metropolitan Transportation Authority (“MTA”) Payroll Mobility Tax is unconstitutional, because it was passed in violation of the New York State Constitution. Judge Cozzens found that the payroll levy “does not serve a substantial State interest” which would trigger the necessity for certain special procedures to have been employed to pass the statute and effect enactment. These special steps were not taken, thus leading to a finding of unconstitutionality. Wasting no time, on August 24, 2012, the New York State Department of Taxation and Finance released a statement that it would continue to fight the ruling stating the litigation is not concluded. Therefore, the State advises taxpayers who are responsible for paying the tax to continue to do so and file all returns timely. The State will notify taxpayers if there is any change in payment and filing requirements.

The MCTMT/MTA Tax is imposed on certain employers, self-employed individuals and partners in a partnership conducting business within the Metropolitan Commuter Transportation District. This district includes the boroughs of New York City, the counties of Nassau, Rockland, Suffolk, Orange, Putnam, Dutchess and Westchester. The highest effective rate is .34% of net earnings for self-employed individuals, partners, and on an employer’s payroll expense for covered employees.

One could argue that the case was brought by downstate Republicans in their continuing effort against upstate Democrats to ease the tax burden on their local citizens. Their argument, which the Judge accepted, that downstate subways, roads and bridges are a local matter, as opposed to an overall State interest, is questionable, at best. After all, the MTA was created in the interests of the State to govern across multiple counties and create regional efficiencies. At this time, the MTA is on the defense. They have lost the first round in a lower court, but still have several higher courts to which they can and will appeal. In the meantime, the State Tax Department will continue to enforce the law and collect the tax.

At this time, we recommend our clients file and pay this tax timely, while taking appropriate action steps in the event the MTA levy is ultimately found to be unconstitutional.

Similar to other State tax levies, the three year statute of limitations applies to the filing of refund claims. For business entities who pay their MTA tax quarterly (MTA-305 filers), the statute of limitations for the first period of the MTA levy expires on November 2, 2009. For these taxpayers, protective claims must be filed on or before November 1, 2012. For self-employed individuals and partners filing Form MTA-6, the three year statute of limitations runs from the filing date of the initial return. The initial due date was April 30, 2010. The extended due date would have been November 1, 2010, so refund claims for self-employed and partners must be filed timely during 2013. Additional protective claims may need to be filed to prevent the simple passage of time from causing potential refunds to fall outside the statutory three year period.

This matter will most likely not be resolved in the near future. The matter may continue to run through the courts, or alternatively the New York State Legislature could take corrective action. Notwithstanding, for those taxpayers who have paid significant amounts of MCTMT tax in 2009 and later periods, if this matter drags on without resolution, protective claims must be addressed to ensure your ability to secure refunds.

We will continue to keep you apprised of developments. If you have any questions or need further assistance, please contact your dedicated Marcum LLP SALT professional.

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