New York's Highest Court Holds Commuter Tax Unconstitutional

Published: April 04, 2000
Source: R & H Letter to Clients & Friends

On April 4, 2000, New York's highest court unanimously ruled that the State's attempt to collect an additional income tax from nonresident commuters, while exempting New York resident commuters from that same tax, was unconstitutional.

For more than 30 years the New York City "Commuter Tax" was imposed on individuals who worked in New York City but lived elsewhere. On May 27, 1999, however, bowing to the political exigencies of a tight Rockland County election, the State passed legislation to repeal the Commuter Tax for individuals living in the New York suburbs. Individuals who worked in the City but lived in New Jersey, Connecticut, or any other state were still required to pay the tax.

The May legislation was immediately challenged. New York City filed suit, claiming that the repeal of this component of their revenue base could not be enacted without the City's consent. In addition, Roberts & Holland LLP, the States of Connecticut and New Jersey, and several other private plaintiffs challenged the discriminatory taxation of nonresidents as unconstitutional. (See Lary S. Wolf and Ellen S. Brody et al. v. State of New York, decided April 4, 2000.)

Even before the repeal took effect on June 30, the amended tax was held unconstitutional in a decision issued by Justice Barry Cozier of the New York Supreme Court on June 29, 1999. That decision was upheld by a unanimous decision of the Appellate Division, First Department issued on October 5, 1999. The Court of Appeals has now affirmed, once again unanimously, that the partial repeal of the tax violates the Privileges and Immunities Clause and the Commerce Clause of the United States Constitution.

Every court to hear the case has also concluded that the City's permission was not required to amend the Commuter Tax. As a result, the Commuter Tax has now been held to have been repealed for all commuters, resident and nonresident alike, effective July 1, 1999.

This important decision by the Court of Appeals raises two further questions:

  1. What next?
  2. How should nonresidents file their tax returns?

The answer to both questions is "Stay tuned."

Because the Court of Appeals based its decision solely on the Federal Constitution, it is legally possible for the State to appeal the case by asking the U.S. Supreme Court to grant certiorari. One would hope the State will not continue its quixotic defense of the tax, but we do not yet know what the State's decision will be.

In terms of filing 1999 New York tax returns, individuals who have not yet filed their 1999 returns will be able to take the Court of Appeals decision into account, and pay tax only on the amounts earned through June 30, 1999. Individuals who have already filed and paid Commuter Tax on their entire 1999 earnings will have to claim a refund for overpaid tax; it is possible the State will develop simplified procedures for claiming these refunds, but at this point that process remains unresolved. Individuals who have had Commuter Tax withheld from their 2000 earnings may find they have overpaid year 2000 taxes; again there may be some clarifying adjustments made by New York State year 2000 withholding, but we will have to await guidance on this point as well.