Impact of Recent Amendments to Utility Tax for Landlords Providing Utility Services to Tenants
The New York State and New York City taxes on gross receipts of landlords providing electric, gas, steam, water and refrigeration services to their tenants were amended by Chapter 536 of the Laws of 1998. The amendments eliminate a landlord's obligation to pay the gross receipts taxes on receipts from its tenants, whether on a rent inclusion or submetered basis, for electric, gas, steam, water and refrigeration services, provided that the taxes on electricity, gas and steam are paid to the utility company on its sale to the landlord. The law was amended on August 4, but is effective as of January 1, 1998.
In addition to relieving landlords of the responsibility to collect utility taxes in the future, this important amendment raises two transitional issues:
- The need to file refund claims for 1998
- The resolution of past years' tax liabilities
Refund Claims
. Due to the retroactive effective date of this legislation, landlords who filed utility tax returns for the period from January 1, 1998 through August 31, 1998 (the date that the major utilities revised their billing systems to reflect the change) may be entitled to a refund of all or part of the utility taxes paid. The New York City utility tax provides that refunds must be claimed within one year of the date the tax was paid. NYC Administrative Code Search7RH11-1108(a). Therefore, the statute of limitations for claiming a refund of tax paid for the month of January 1998 (for which the monthly return was due on February 25, 1998) will expire on or before February 24, 1999. The statute of limitations for the State tax is three years from the date the tax was paid. Tax Law Search7RH1087(a).Past Years' Exposure
. We have been working with the Real Estate Board of New York in its efforts to reach an industry-wide resolution of the City's utility tax on landlords for all tax periods prior to January 1, 1998. In preliminary discussions with the City's Department of Finance, the broad outline of a resolution has been proposed that would include the following: landlords providing utility service on a rent inclusion basis would file one tax return (rather than monthly returns) and pay utility tax for the one-year period January 1 through December 31, 1997(1); the tax would be calculated using the methodology set forth in Sage Realty, et al. v. O'Cleireacain, (i.e., imposing tax only on the landlord's net profit, after deducting all amounts paid to the utility company, for utility service provided on a rent inclusion basis); no tax would be paid on HVAC or overtime HVAC; tax would be paid on 25% of the receipts for chilled water or condenser water; the City will not assert utility tax against landlords furnishing utility service to tenants for any period prior to January 1, 1997; and all returns must be filed and payment made by August 31, 1999 to be part of the settlement. Once the settlement period is ended, the City could resume enforcement activity against those not participating. While this particular proposal is still preliminary and the City has not yet committed to the foregoing terms, we believe it is likely a settlement of prior years' City tax exposure along these lines will be offered in the near future, and it will be important for landlords to respond to that offer promptly.With respect to potential New York State utility tax exposure, the current situation is less clear. The State gross receipts tax also technically covers landlords who provide utilities on a rent inclusion basis. The State has been less aggressive in auditing landlords, but at this point it is not clear whether the State will consider settlements of prior years' exposure, what the terms of any settlement proposal might be, or whether agreeing to a City settlement might impact a landlord's State tax exposure. We will advise you of any developments in this area.
Sales Tax
. It should be noted that the law was not changed with respect to the sales tax obligations of a landlord who supplies utilities on a submetered basis to tenants. To facilitate their record-keeping, however, some utilities are requesting that new resale certificates be filed with them. Landlords should continue to collect sales tax on the sale of electricity to submetered tenants, and should provide resale certificates where appropriate.If you have any questions about the new law, refund claims or appropriate settlements of prior years, please contact us at (212) 903-8700 and ask for Lary Wolf or Glenn Newman.
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1. Apparently some landlords with submetered premises gave remission certificates claiming a resale exemption, but then failed to file utility tax returns. In these cases, since no tax was paid by anyone, the City may require returns and payment of tax for more than a one-year period.