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All Aboard: the Impact of the New York State MTA Payroll Tax on Alternative Investment Fund Managers

All Aboard: the Impact of the New York State MTA Payroll Tax on Alternative Investment Fund Managers

The Tax Adviser via Yellowbrix

ON MAY 7, 2009, NEW YORK GOVERNOR David Paterson signed into law Assembly Bill A08180, establishing the Metropolitan Commuter Transportation Mobility Tax (MCTMT, or MTA payroll tax).1 This bill was written to alleviate fare hikes and service cuts that were adopted as part of the Metropolitan Transportation Authority’s (MTA) budget in April. The bill imposes a new tax on employers and self- employed individuals engaging in business within the 12 counties of the Metropolitan Commuter Transportation District (MCTD), which consists of all five boroughs of New York City and Nassau, Suffolk, Westchester, Orange, Dutchess, Putnam, and Rockland counties.2 The MTA payroll tax is in addition to the MTA surcharge, which is imposed on corporations, transportation and transmission companies, banks, and insurance companies under Articles 9, 9-A, 32, and 33 of the New York Tax Law.3 Similar to the MTA payroll tax, the MTA surcharge was enacted to help finance mass transportation expenditures in the MCTD. Although originally enacted in 1982 as a temporary surcharge, the MTA surcharge has been extended year after year. For corporate taxpayers, the 17% MTA surcharge is calculated based on the 9% New York corporate franchise tax rate in effect in 1997.4

Undoubtedly, the MTA payroll tax further adds to the high tax burden on employers, such as alternative investment fund managers, doing business in the MCTD. While the intent of the tax is to fund vital mass transportation expenditures without having to significantly raise commuter fares, it may have the unintended effect of driving employers out of the MCTD and prolonging the economic recession in New York State and New York City.

Imposition of MTA Payroll Tax on Employers

The MTA payroll tax is imposed on the following:

  • All employers (other than public school districts) beginning on or after March 1, 2009;

  • Public school districts within the MCTD beginning on or after September 1, 2009; and

  • Self-employed individuals (including partners in partnerships and members of a limited liability company (LLC) treated as a partnership) for tax years beginning on or after January 1, 2009.5

“Employer” means any employer that is required by New York State Tax Law Section 671 to deduct and withhold New York State income tax from wages paid to employees and that has a payroll expense in excess of $2,500 in any calendar quarter, other than: (1 ) any agency or instrumentality of the United States; (2) the United Nations; or (3) an interstate agency or public corporation created under an agreement or compact with another state or Canada.6

“Payroll expense” means the total wages and compensation subject to federal Social Security taxes or railroad retirement taxes, as defined in Sees. 3121 and 3231, paid to covered employees.7 However, in computing the payroll expense, the annual limitation on the amount of wages and compensation of a covered employee subject to Social Security tax or railroad retirement tax does not apply.8

Application of Tests to Determine If an Employee Is a Covered Employee

A “covered employee” is an individual who is employed within the MCTD,’’ including an employee whose services are allocated to the MCTD. The new law provides for the application of the following successive tests to determine allocation. If one test results in the allocation of all services to the MCTD, the employer can stop; otherwise, the employer should proceed to the next test.10

Test 1 -Localization

All an employee’s services are allocated to the MCTD if the services are localized there. Services are deemed localized within the MCTD if they are either performed entirely within the MCTD or performed both within and outside the MCTD, but those performed outside the MCTD are incidental to the services performed within the MCTD (for example, the services are temporary or transitory in nature or consist of isolated transactions).

Test 2- Base of Operations

If an employee’s services are not localized in the MCTD, all services are allocated to the MCTD if the employee’s base of operations is in the MCTD. (This test cannot be applied if the employee has either more than one base or no base of operations.)

“Base of operations” means the place at which the employee is not continuously located but from which the employee customarily starts out performing his or her functions within or outside the MCTD. The base of operations is where the employee customarily returns in order to receive instructions from his or her employer or communications from other persons or to replenish stock and materials, repair equipment used, or perform any other function necessary in the exercise of his or her trade or profession.