April 2000

High Court Upholds Commuter Tax Repeal

Out-of-state Residents To Receive Refunds

By Fong Chan

On April 4, the New York State Court of Appeals upheld the State Legislature's repeal of New York City's commuter tax and further ruled that the tax could not be applied to out-of-state residents.

Since 1966, New York City had imposed the tax on the earnings of individuals who work but do not live in the city. Last year, the State Legislature, with the governor's approval, repealed the tax for New York state residents but maintained it for commuters who live outside the state. The tax affected more than 800,000 people and resulted in revenues of approximately $360 million annually for New York City.

According to the New York State Department of Taxation and Finance, about 340,000 commuters, mostly from New Jersey, can request refunds totaling $115 million. The department has taken proactive measures to help taxpayers file for refunds. (See the accompanying sidebar on page 20 for details.)

Immediately after the Legislature's action last year, New York City sued on the grounds that it violated the state constitution's "home rule" provision, which prevents the Legislature from interfering in local affairs. Several other constituencies, including Connecticut and New Jersey residents and the State of Connecticut, filed suits challenging the selective repeal for New Yorkers only. These groups said that the tax violated the privileges and immunities and the commerce clauses of the U.S. Constitution.

Both the trial and intermediate appellate courts ruled against the city and declared that continued taxation of nonresident commuters is unconstitutional. The city appealed to the Court of Appeals--New York state's highest court--which, in a unanimous decision, affirmed the State Supreme Court's and Appellate Division's opinions. The Court of Appeals held that a home rule provision did not apply because the statute addressed a matter of state concern (i.e., tax relief for state residents who live outside of New York City and making the city more attractive for investment and economic growth). The court also declared that the statute violated the federal constitution by discriminating against non­New Yorkers.

Unless reversed by the U.S. Supreme Court--and New York City has not yet decided whether to seek an appeal--commuters living outside the city will no longer have to pay New York City personal income tax on wages earned in the city.

"This decision, hopefully, will put this matter to rest, once and for all," said Barry Horowitz, chair of the NYSSCPA New York State, Municipal, and Local Taxation Committee. "The law has caused a tremendous amount of confusion among CPAs and other tax preparers. I'm glad the State Department of Taxation and Finance has come up with a simple refund procedure." *