A New York court has ruled that the metropolitan commuter transportation mobility tax (MCTMT) was unconstitutionally passed by the New York Legislature. The tax, which is also referred to as the Metropolitan Transportation Authority (MTA) payroll tax, applies to certain employers and self-employed individuals engaging in business within the Metropolitan Commuter Transportation District (MCTD). (Mangano v. Silver, Supreme Court, 10th Judicial District (New York), No. 14444/10, August 22, 2012)

The court found that the tax is a special law that does not serve a substantial state interest. Therefore, under the New York Constitution, the law should have been passed either with a home rule message or by message of necessity with a two-thirds vote in each house. Because this did not occur, the tax is unconstitutional.

In addressing the question of substantial state concern, the court noted that the Legislature could have reasonably taxed every county within the state under a general tax law to meet the MTA deficit. Instead, the Legislature chose to tax only those counties within the MCTD because it is only those counties that are affected by the continuance of development of the MTA. According to the court, the actions of the Legislature itself showed that the tax is an issue of concern only to the residents within the MCTD. Therefore, the MTA’s budgetary crisis is not a matter of substantial state concern, and the exception to the home rule message requirement did not apply.

Certain individual defendants were dismissed from the action because they passed the tax within the scope of their official capacities as legislators. Their actions were protected under the Speech and Debate Clause of the New York State Constitution.

The MTA has announced that it will appeal the decision and that the tax remains in effect for now. The MTA’s release is available at http://www.mta.info/news/stories/?story=786.

Because the litigation is not concluded, the New York Department of Taxation and Finance advises that taxpayers who have been paying the tax should continue to pay it and file returns. If this requirement changes, taxpayers will be notified. The department’s notice is available at http://www.tax.ny.gov/bus/mctmt/default.htm.

CBIZ MHM Observation: The New York Department of Taxation and Finance indicates it will appeal the decision. As a result, CBIZ MHM recommends continuing to file and pay the tax. In the meantime, however, taxpayers should consider filing protective refund claims for periods closing under the statute of limitations. The initial MCTMT report and payment were due November 2, 2009. Taxpayers have until November 2, 2012 to file a protective refund claim for this period.

If you have any questions regarding the decision to file protective refund claims, please contact Craig Williams, National SALT Practice Leader, or your local CBIZ MHM tax advisor.

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