Recently, a trial court sitting in Nassau County, Long Island, found the MTA payroll tax to have been unconstitutionally enacted by the New York legislature. Mangano v. Silver, motions #013-#017 [PDF 446 KB] (N.Y. Sup. Ct. August 22, 2012)
The MTA payroll tax is imposed on employers engaged in business in the Metropolitan Commuter Transportation District (MCTD) and on net earnings of self-employed persons attributed to the MCTD.
The effective date of the MTA payroll tax on wages was generally retroactive to March 1, 2009, and for the tax on self-employment net earnings, to January 1, 2009.
The MCTD includes the 12 downstate counties of: New York (Manhattan), Kings (Brooklyn), Queens, Bronx, Richmond (Staten Island), Nassau, Suffolk, Westchester, Rockland, Orange, Dutchess and Putnam.
Revenues from the MTA payroll tax are dedicated to supporting MTA programs and providing the MTA with a stable source of funding.
The bill enacting the MTA payroll tax was approved by 60% of the Assembly and 52% of the Senate.
Challenge to MTA payroll tax
Some of the affected counties and municipalities in the MTCD brought suit challenging the constitutionality of the MTA payroll tax under several provisions of the New York constitution.
In general, municipalities cannot bring a suit challenging the constitutionality of state legislation. There are four exceptions to this general rule, including when the state statute impinges upon the “home rule” powers of the municipality that are guaranteed in the New York State Constitution.
Specifically, under the state constitution a “special law” relating to the property, affairs, or government of any local government cannot be enacted without a “home rule” message approved by the governing body or by the executive of the locality affected by the law, or a message of necessity from the governor coupled with two-thirds approval of the measure by each house of the General Assembly.
The trial court first determined that the bill adopting the MTA payroll tax (1) related to the property, affairs, or government of local governments; and (2) was a “special law” because it applied only to certain counties—rather than every county in New York State.
In addition, the court found it was clear that there was no “home rule” message associated with the bill and that it was not approved by two-thirds of the legislature. The trial court noted, however, there was an exception to the home rule message requirement of the constitution for instances when the special law “serves a substantial [s]tate concern.” The court, however, found that this exception did not apply in this case. The law did not “have a reasonable relationship to an accompanying substantial state concern” because, in the court’s view, the MTA shortfall affected only counties in the MCTD and the MTA payroll tax was imposed only in the MCTD—rather than throughout the state.
As a result, the trial court held that the MTA payroll tax statute was a special law that was not passed with a home rule message and did not serve a substantial state interest. As such, the statute was unconstitutionally enacted by the New York legislature, and the court declared the MTA payroll tax was unconstitutional.
Tax professionals believe it is likely that this decision will be appealed to an appellate court. In the interim, taxpayers need to continue to pay the MTA tax pending the outcome of the expected appeal. However, protective refund claims need to be considered and filed for any years or which the statute of limitations is closing. The first MTA payroll tax filings for employers and self-employed persons were generally due November 2, 2009—meaning the statute of limitation for such filings would expire on November 2, 2012. See TSB-M-09(1)MCTMT (June 1, 2009).
For more information, contact:
Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax)
+1 (202) 533-3084