In a case with far-reaching implications—including the potential for refund claims to be filed by any employer that has paid the Metropolitan Commuter Transportation Mobility Tax (the MTA Payroll Tax or MCTMT)—a Nassau County Supreme Court judge ruled that the MTA Payroll Tax was passed unconstitutionally. In anticipation of a flood of protective refund claims, the New York State Department of Taxation and Finance released special procedures for filing protective refund claims on October 17, 2012. Mangano v. Silver, No. 144440/10, New York Supreme Court (August 22, 2012).
The MTA Payroll Tax was passed during 2009 to help the Metropolitan Transportation Authority (MTA) address a $1.8 billion projected budget shortfall. The MTA Payroll Tax is paid by employers with employees (as well as self-employed individuals, including partners) located within the Metropolitan Commuter Transportation District (MCTD), and the revenue is dedicated to the New York City metro area subways, buses, and regional rail service. The MCTD includes all five boroughs of New York City and the surrounding counties of Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester. Under the current law, if an employer pays compensation that is subject to Federal Insurance Contributions Act (FICA) taxes or railroad retirement taxes of more than $312,500 per quarter during a calendar year to employees who are employed within the MCTD, employers must pay up to .34 percent of that payroll expense. A .34 percent tax is imposed on the net earnings of self-employed individuals that are attributable to the MCTD if such earnings exceed $50,000 per tax year.
The trial judge in Mangano held that the legislation enacting the MTA Payroll Tax did not address a matter of substantial state concern and therefore required passage either with a Home Rule message or by two-thirds vote in each house of the state legislature. The ruling also invalidated a variety of other fees that had been created by the MCTMT to address the MTA funding gap.
This issue is one that has been in dispute for years. Four prior challenges to the constitutionality of the MCTMT making the same argument have been dismissed (summaries of these challenges can be found on pages 19-20 of the Metropolitan Transportation Authority, Independent Accountant’s Review Report.
The MTA and the state of New York have both filed notices of appeal. The final resolution of this issue will likely take several years.
What Employers Should Do Now
The New York State Department of Taxation and Finance advises that taxpayers who have been paying the MTA Payroll Tax should continue to pay it and file returns pending the outcome of the appeal.
Employers and other taxpayers that have paid the MTA Payroll Tax should consider and file protective refund claims with respect to these payments as quickly as possible to avoid expiring limitations periods. The first MTA Payroll Tax filings for employers were generally due November 2, 2009. The deadline to file protective refund claims for all MTA Payroll Taxes remitted on November 2, 2009 is November 2, 2012. The deadline for filing protective refund claims for subsequent quarterly returns will expire three years after the due date of those returns.
The due date of the first MTA Payroll Tax filings for self-employed individuals and partners was April 30, 2010. Therefore, those taxpayers have until April 30, 2013 to file protective refund claims.
The filing of a protective refund claim will preserve the potential refund in the event that the Mangano decision is upheld on appeal.
Special Protective Refund Claim Filing Process
The New York State Department of Taxation and Finance released guidance on October 17, 2012 on how to file a protective refund claim. That guidance provides three options for filing protective refund claims:
- Online (if the taxpayer has an Online Service account)
- By completing an electronic form
- By calling an automated telephone application (518-485-2392)
There is no paper refund claim option. If the taxpayer has already submitted a protective refund claim by filing an amended MCTMT tax return, the guidance advises that the taxpayer must refile using one of the above options.
Refund claims filed after November 2, 2012. If taxpayers do not file a protective refund claim by November 2, 2012, they may still file a protective refund claim after that date. However, the protective claim will only apply for the filing periods that are still within the statute of limitations period. That statute of limitations period expires three years from the date the MCTMT return was filed or within two years from the date the MTA Payroll Tax was paid, whichever is later.
Only one protective refund claim need be filed to preserve the taxpayer’s right to a potential refund. Taxpayers do not need to file a protective claim with regards to the unconstitutionality of the MTA Payroll Tax for each filing period for which the tax was paid or will be paid. Once filed, a protective claim applies to all prior filing periods that are within the statute of limitations when the claim is filed and any future filing periods. For example, a protective refund claim filed by an employer on or before November 2, 2012, will apply to all prior and future filings of the MTA Payroll Tax.