From Ernst & Young:Tax Alert: Recent ruling on NY’s MTA payroll tax 07/10/’13

Tax Alert: Recent ruling on NY’s MTA payroll tax
On June 26, 2013, the New York Supreme Court, Appellate Division, Second Department ruled that the state’s Metropolitan Commuter Transportation Mobility Tax (MTA payroll tax) is constitutional. Based on this ruling, it is possible that the New York State Department of Taxation and Finance (NYSDTF) may ultimately deny protective refund claims previously filed by taxpayers, including asset managers, operating within the affected jurisdictions of the Metropolitan Commuter Transportation District (MCTD).

Background

Self-employed fund managers and their employees who work within the MCTD have been subject to the MTA payroll tax since 2009. The MCTD encompasses nearly all of Southeastern New York State, including New York City.

The constitutionality of the MTA payroll tax was challenged by multiple plaintiffs, asserting that its enactment violates the home rule provision of the New York Constitution and that it is unconstitutional. In response, New York State argued that the home rule doctrine does not apply because the MTA payroll tax is a general law and does not appropriate funds for local purposes.

On August 22, 2012, a New York Supreme Court judge upheld the assertion that New York State’s MTA payroll tax was unconstitutional. The decision was then sent for review by New York’s higher courts. Although the decision did not affect the state from continuing to collect the tax, New York State did subsequently issue guidance to taxpayers allowing them to file protective claims for tax year 2009.

Considerations

The MTA payroll tax has created an additional expense and administrative burden for many asset managers headquartered in New York or with operations within the MCTD. As a result of the aforementioned guidance issued by NYSDTF, many fund managers have taken the opportunity to file protective claims in anticipation of a favorable ruling by the Appellate Division of the New York Supreme Court.

At this time it is unclear what actions will be taken by the NYSDTF with regard to these protective claims, but it is our understanding that it will continue to keep its filing portal open. Taxpayers with open years under the current statue of limitations could still file protective refund claims if they have not done so already. The decision by the New York Supreme Court, Appellate Division, Second Department may still be appealed through the state’s highest court, the New York Court of Appeals.

EY will continue to monitor this situation.

Bazzo 07/10/13

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