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Potential Refund Claims: New York MTA Payroll Tax Held Unconstitutional

Taxpayers should act now to protect refund claims based on the New York Supreme Court's recent determination that the MTA Payroll Tax is unconstitutional.

On August 22, the New York State Supreme Court held that the New York State Metropolitan Commuter Transportation Mobility Tax (MTA Payroll Tax or MCTMT) violated the New York State Constitution.[1] Although the decision will be appealed, taxpayers should take action immediately (filing protective refund claims for 2009 by the due date of November 1, 2012) in order to protect their ability to claim refunds of the MTA Payroll Tax. Guidelines explaining these refunds will soon be released by the New York State Department of Taxation and Finance. Some large employers and many employees in New York City and surrounding counties may be entitled to hundreds of thousands, or even millions, of dollars in refunds.

Overview of MTA Payroll Tax

The MTA Payroll Tax is a 0.34% tax that was enacted in 2009 in response to the Metropolitan Transportation Authority's (MTA's) budget shortfall. (Slightly lower tax rates have applied to small employers since April 1, 2012.) The tax is imposed on employers (excepting only certain governmental agencies) that have paid wages subject to either Federal Insurance Contributions Act (FICA) taxes or railroad retirement taxes of more than $312,500 per quarter to employees working primarily in, directed from, or residing within the Metropolitan Commuter Transportation District (MCTD). The MTA Payroll Tax also applies to all self-employed individuals, including partners of partnerships and members of limited liability companies that are treated as partnerships, with net earnings from self-employment of more than $50,000 per year that is allocated to the MCTD. The MCTD includes New York City and Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester counties.

MTA Payroll Tax Unconstitutional

Various local governments within the MCTD challenged the MTA Payroll Tax as unconstitutional under the New York State Constitution. In Mangano, the Tenth District of the New York Supreme Court held that the MTA Payroll Tax violated the New York State Constitution because it was not passed by the New York State Legislature with a home rule message or by a message of necessity with a two-thirds vote of each house of the Legislature. As such, the court granted the plaintiffs' motion for summary judgment.

Potential Refund Claims

On August 28, the MTA issued an official statement that it will be appealing the ruling in Mangano.[2] Prior to Mangano, four constitutional challenges to the MTA Payroll Tax had been unsuccessful. The New York State Department of Taxation and Finance also has provided that taxpayers should continue to report and remit the tax. We do not recommend that any taxpayers refrain from reporting and remitting the MTA Payroll Tax because substantial penalties and interest would be applied to taxpayers if the MTA Payroll Tax is upheld on appeal.

Protective refund claims may be filed, however, in order to keep the statute of limitations open in the event that the MTA Payroll Tax is finally determined to be unconstitutional. The initial MCTMT returns and payments were due on October 31, 2009 (although returns and payments dated until November 2 were timely since October 31 fell on a Saturday), except for PrompTax filers, which were required to make payments on the same dates as their withholding tax payments.

Under the statute of limitations, refund claims must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later (returns filed early are considered to be filed on the due date). As such, taxpayers must act now in order to file protective refund claims by November 1, 2012, for the initial calendar 2009 tax period.

Copyright © 2020 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume II, Number 277

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About this Author

Mary Hevener, tax lawyer, Morgan Lewis
Partner

Mary B. “Handy” Hevener helps US and multinational enterprises minimize corporate payroll taxes and maximize benefits–related tax deductions. She focuses her practice on the tax treatment of employee and independent contractor benefits outside qualified retirement plans, including stock options and other stock-based compensation; executive income deferrals; golden parachutes; and fringe benefits that range from health and life insurance, to employee loans, cars, planes, and prizes.

202.739.5982
William Colgin Jr., Corporate tax lawyer, Morgan Lewis
Partner

William F. Colgin Jr. primarily represents corporate taxpayers in complex civil tax controversies and tax litigation. Bill litigates in the US Tax Court, federal district courts, state courts, and appellate courts. He represents clients in Internal Revenue Service (IRS) examinations and appeals, and in similar proceedings before state taxing authorities. He began his tax litigation career as a trial attorney in the Tax Division of the US Department of Justice, representing the IRS.

415.442.1347
Barton Bassett, Intellectual Property Lawyer, Morgan Lewis
Partner

Barton W. S. Bassett counsels Silicon Valley–based and global multinational technology companies on international tax planning for the outbound operations of US companies doing business abroad, and for the inbound operations of foreign companies seeking to do business within the United States. Barton advises clients on structuring mergers and acquisitions (M&A), internal restructurings and operations, joint ventures, external and internal financings, and transfer pricing matters, including the transfers and licenses of intellectual property (IP).

650.843.7567