On Wednesday, New York’s Appellate Division of the Second Department in an opinion reversed a lower court ruling and upheld the constitutionality of the Metropolitan Commuter Transportation Mobility Tax Law (“MCTMT”). The MCTMT had been declared unconstitutional by a Nassau County judge in October 2012.

The MCTMT is found in Article 23 of the New York Tax Law, and is imposed on employers and self-employed individuals under section 801(a) “[f]or the sole purpose of providing an additional stable and reliable dedicated funding source for the [MTA] and its subsidiaries and affiliates to preserve, operate and improve essential transit and transportation services in the Metropolitan Commuter Transportation District.”

The MCTMT charges large employers in the MTA region thirty-four cents for every $100 of payroll, and smaller businesses pay lower rates.

The County of Nassau, joined by other parties, brought an action in 2010 to seek a declaration that the MCTMT was unconstitutional on the basis that the law was passed without a “home rule message.” Under Article IX, section 2 of the New York Constitution, a “special law” relating to the property, affairs or government of any local goverment must be enacted pursuant to the “home rule powers” from the localities affected by the law.

If, however, the special law serves a “substantial state concern,” the home rule powers need not apply. As noted in the opinion, some cases have held that “[c]ertain matters of local concern have been held to be of sufficient importance affecting the whole of the State.” Here, the court concluded that

the MTA Employer Tax Law, which provides a funding source for the preservation, operation, and improvement of essential transit and transportation services in the [Metropolitan Commuter Transportation District], serves a substantial State concern.

The MTA can rejoice that this ruling sustained the $1.2 billion yearly revenue stream generated by this tax. The broader implications of this case are as of yet unclear. This ruling follows a line of cases that apply the “substantial state concern” exception to rules relating to the MTA (McAnemy, Salzman, Metropolitan Transp. Auth.), so it is not surprising that the exception was applied here.

Given this outcome, the state legislature could attempt to use this ruling to issue taxes on other local concerns such as municipal sewer systems, parks, waste disposal, taxis, and any other matters that meet the “substantial state concern” exception. If this case is followed, local governments could not object to such taxes pursuant to their constitutionally granted “home rule” powers. Whether the legislature takes such action remains to be seen.

The NYS Department of Taxation and Finance has not yet updated its page addressing the MCTMT legal proceedings. The page discusses filing a protective claim for MCTMT taxes already paid. If the County of Nassau et al. do not appeal the Second Department’s decision, then the MCTMT remains in full force and payable by taxpayers. The Counrty of Nassau has until July 26, 2013 to appeal this ruling to New York’s highest court, the Court of Appeals.

Submitted by Brad Polizzano on Fri, 06/28/2013 – 14:21