• The New Metropolitan Commuter Transportation Mobility Tax
• New York City Business Income Tax Changes
• New Jersey Budget Supported by $1 Billion in Tax Increases

The New Metropolitan Commuter Transportation Mobility Tax

New York State has enacted a new tax that is separate and distinct from other taxes you may be familiar with. The new tax is known as the Metropolitan Commuter Transportation Mobility Tax (the “Mobility Tax”) and its revenues will subsidize the operations of the Metropolitan Transportation Authority. This letter is intended to apprise you of the requirements of the new law and assist you in taking action to comply therewith.

If you are either (a) an employer who pays compensation to employees whose services are allocated to the Metropolitan Commuter Transportation District (the “MCTD”) (i.e., the five boroughs of New York City and Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester counties) or (b) a person who has net earnings from self-employment allocable to the MCTD, you are subject to the new Mobility Tax. This tax is imposed at the flat rate of .34% of applicable compensation. No tax is imposed if the compensation paid in a calendar quarter is less than $2,500. Unfortunately, in some cases the cost of compliance with the requirements of this new tax to avoid penalties and interest will exceed the tax.

Employers

Employers are subject to the Mobility Tax for applicable payroll paid on or after March 1, 2009. The tax (and a related payroll report) is due on a quarterly basis as follows, with no extensions available:

Calendar Quarter	Due Date
January 1 to March 31	April 30*
April 1 to June 30	July 31*
July 1 to September 30	October 31*
October 1 to December 31	January 31

*For 2009, the first payment is due by November 2, 2009 and covers the period March 1, 2009 through September 30, 2009. 

The Mobility Tax is imposed on all compensation paid to an employee whose services are “allocable” to the MCTD. No allocation for time worked outside of the MCTD is allowed. Services are deemed allocable to the MCTD if they are either performed entirely therein or are performed both in and out of the MCTD, but the services performed outside of the MCTD are incidental to the services performed inside the MCTD. It will generally be difficult to claim that an employee’s compensation is not allocable to the MCTD because of the other applicable criteria, which take into consideration the location of the employee’s base of operations , where the direction and control of the employee emanates from, and whether the employee resides in the MCTD. 

The Mobility Tax cannot be deducted from an employee’s compensation.

The various payroll tax services are implementing plans to assist their clients in complying with the Mobility Tax.

Self-Employed Individuals

Individuals who have net-earnings from self-employment (e.g., sole proprietors, consultants, working partners, and working members of a limited liability company) allocated to the MCTD are subject to the Mobility Tax on those earnings, unless those earnings are $10,000 or less for the year. Thus, self-employed individuals will have to pay the Mobility Tax on compensation paid to their employees and on their own net earnings   

The Mobility Tax on net earnings from self-employment allocable to the MCTD is paid via quarterly estimated tax payments due on April 30, July 31, October 31, and January 31 of the following year. If there is an underpayment of estimated Mobility Tax, penalties will be assessed under the rules similar to those for personal income tax. These estimated tax payments cannot be combined with other tax payments. An annual Mobility tax “reconciliation” return is due by April 30 of the succeeding year. This due date can be extended, but full payment of any balance due from the prior year must be paid with the request for extension.

For 2009, the first payment of estimated Mobility Tax is due by November 2, 2009. This payment equals 75% of the estimated tax that will be due for 2009. Although this tax is technically effective as of January 1, 2009, it is imposed on only ten-twelfths of the total net earnings from self-employment allocated to the MCTD for the 2009 calendar year.

Net earnings from self-employment for purposes of the Mobility Tax is the same as net earnings from self-employment for Federal social security tax purposes, with no annual dollar limitation and no 7.65% reduction. The portion allocable to the MCTD is based on where business activity is conducted. This allocation can be based on books and records that fairly and equitably show net earnings from business activity in the MCTD. Alternatively, the allocation may be done using a business allocation percentage based on the average of a payroll percentage, a property percentage, and a gross income percentage. Other allocation methods may be approved by the New York State Department of Taxation and Finance. Partners in partnerships (including members of a limited liability company treated as a partnership) allocate their net earnings from self-employment derived from the partnership (or limited liability company) based on the partnership’s MCTD allocation method. The partnership is required to provide the information to its partners.

Partnerships (and limited liability companies treated as partnerships) will be allowed to file a group reconciliation return on behalf of those partners who elect to participate in the group return. Partnerships choosing this method will be required to make quarterly estimated tax payments on behalf of their partners included in the group return. The group return procedure will make compliance easier for most partners.

If a partnership (or limited liability company treated as a partnership) does not choose to utilize a group return or chooses to file a group return, but has partners who are nonresidents of New York who elect not to be included therein, the partnership would also be required to make estimated Mobility Tax payments on behalf of its partners who are nonresidents of New York (unless the amount required to be paid for such a partner is $300 or less). If a partner certifies to the partnership that he or she will make his or her own estimated Mobility Tax payments, the partnership will be relieved of this responsibility.

New York City Business Income Tax Changes

Governor Paterson has signed legislation that impacts enterprises and individuals doing business in New York City. Generally, this legislation conforms the New York City allocation of business income methodology to that of New York State, provides for greater minimum and capital taxes, makes some changes related to the unincorporated business tax, and increases enforcement and compliance provisions. The allocation provisions are generally favorable to New York City-based businesses in that the allocation will be based on one factor, receipts, and not a combination of receipts, payroll and property.

The changes include the following:

• The General Corporation Tax (“GCT”), Unincorporated Business Tax (“UBT”), and Banking Corporation Tax (insofar as it relates to banks that provide management or distributive services) are amended to provide for a single sales factor for computing income allocable to New York City, to be phased in over 10 years, beginning in 2009.

• The geographical source of income from certain services of registered broker-dealers of securities and commodities, including commissions received, will now be based on the customer’s mailing address for GCT and UBT.

• The New York State rules on mandatory combined filings are extended to New York City, including corporations with substantial intercompany transactions and captive REITs and RICs.

• The highest amount of tax under the capital tax base alternative is now capped at $1,000,000 (formerly $350,000) and the minimum tax is changed to a sliding scale, based on gross receipts, from $25 to $5,000 (formerly flat $300).

• Various enforcement and compliance provisions, including mandatory e-filing, similar to state rules will apply.

The following changes relating to the Unincorporated Business Tax (in addition to any of the above changes which may affect UBT) were also enacted:

• The credit allowed in computing UBT taxes has been changed, effective for years after 2008. A full credit is now available for UBT of $3,400 or less, and a partial credit for UBT between $3,400 and $5,400. No credit is allowed for UBT liabilities in excess of $5,400 (which equates to incomes in excess of $135,000).

• Unincorporated businesses are now only required to file a UBT return if gross income is more than $95,000 (previously $75,000) or the UBT taxable income is more than $35,000.

• Unincorporated businesses will not have to make estimated tax payments if their estimated tax can reasonably be expected to be $3,400 or less (previously the threshold was $1,800).

It should be noted that there are still material differences between New York State and New York City tax provisions.

We also note that other recently enacted legislation increased the New York City sales and use tax rate to 4.5%, effective August 1, 2009. As a result of this increase, the combined state and city sales and use tax rate will be 8.875%. In addition, New York City’s exemption for clothing and footwear will now apply only to purchases costing less than $110 per item, which conforms to New York State’s law.

New Jersey Budget Supported by $1 Billion in Tax Increases

New Jersey Governor Jon S. Corzine recently signed a $29 billion fiscal 2010 budget into law. The new budget cuts spending by $4 billion and includes federal stimulus aid of $2.25 billion, more than $1 billion in tax increases, and a $525 million windfall from the state's recently ended tax amnesty program.

The bulk of the new revenue is to come from a one-year increase in the income tax on people earning more than $400,000 per year. Those with NJ taxable income of more than $400,000 but less than $500,000 will be taxed at an 8% marginal rate up from 6.37%; and those with NJ taxable income of $500,000 but less than $1,000,000 at 10.25% marginal rate, up from 8.97%. The change increases the highest tax bracket from 8.97% to 10.75%, for those earning more than $1,000,000. For example, a married couple with $1,000,000 of New Jersey taxable income will pay $80,688 in tax using the new rates versus $72,658 using the old rates.

Nonresidents of New Jersey with New Jersey source income will also face higher New Jersey taxes based on the new rates.

There are also major changes in the eligibility for property tax rebates and the property tax deduction. Only residents with income up to $75,000 can expect at least partial rebates. This means that 500,000 homeowners will be denied the rebate for 2009. In addition, the rebate for renters has been eliminated. The property tax deduction will be limited to $5,000 (or actual tax paid if lower) for taxpayers with income of $150,000 to $250,000. Taxpayers with income above $250,000 will not be allowed a deduction for property taxes paid. Certain exceptions apply for senior citizens and the disabled.

Taxes will also increase 25% on hard liquor and wine, and 12.5 cents per pack to $2.70 per pack on cigarettes. Lottery winnings of more than $10,000 will also be taxed and a mandatory 3% withholding tax will apply to these winnings.

The 4% surcharge businesses pay on their corporate taxes which was scheduled to expire has been extended another year through 2010.

The American Recovery and Reinvestment Act of 2009 allowed certain businesses to repurchase debt instruments and defer the reporting of the discharge of indebtedness until 2014, at which time the income would be spread over five years. The new legislation decouples from the federal provision but allows for the future exclusion from NJ taxable income to avoid double taxation