United States: New York City Tenants: Beware Of The NYC Commercial Rent Tax

Real Estate

Too often we hear stories of New York City ("NYC") tenants not realizing they are obligated to pay the NYC Commercial Rent Tax (the "Commercial Rent Tax" or the "Tax"). One crucial reason is that this tax is payable directly by the tenant to NYC (as opposed to the landlord directly as part of rent). In addition to reminding tenants about the Commercial Rent Tax itself, this article will provide a base primer regarding the Tax, including who is required to pay such Tax, how the Tax is calculated and the manner in which the Tax is paid.

NYC generally imposes a Commercial Rent Tax on every business tenant, lessee, sublessee, licensee or concessionaire (together, "tenants") whose annual "base rent" (as defined below) for a tax year is greater than or equal to $250,000 with respect to any "taxable premises," subject to certain exceptions. For these purposes, a "taxable premise" generally includes any premise used or intended to be used or occupied for carrying on or exercising any trade, business, profession, vocation, or commercial activity. For example, a "taxable premise" may include a department in a department store (e.g., a florist, beauty parlor, optometrist, and any other commercial property), a parking lot or garage, and office space. However, certain tenants are generally exempt from this Tax including, but not limited to: (i) religious, educational or charitable organizations; (ii) tenants in the World Trade Center Area (as defined for these purposes), and (iii) tenants of taxable premises located in Manhattan north of 96th street or in the Bronx, Brooklyn, Queens, and Staten Island.

The Commercial Rent Tax is generally imposed on "base rent." "Base rent" is the "rent" paid by each tenant to a landlord for a taxable premise for a tax period, less certain specified deductions or exclusions. "Rent" is the amount paid or required to be paid for the use or occupancy of a premise and includes any payment that must be made by the tenant that is usually payable by the landlord (e.g., real estate tax, water rents or charges, sewer rents, insurance, etc.), but does not include any expenses for improving, repairing, or maintaining the tenant's premises. Specified reductions to base rent are permitted under certain circumstances. For example, base rent is reduced by 35% for a tenant's use of a taxable premise located in Manhattan south of 96th Street. In addition, if a tenant's monthly rent is measured in whole or in part by a tenant's gross receipt from sales, the tenant's rent is generally deemed not to exceed 15% of such gross receipts.

For purposes of the Commercial Rent Tax, the tax year begins June 1 and ends May 31 of the following calendar year. Tenants subject to the Tax must generally file quarterly returns within 20 days of the end of the following periods: (1) June 1 to August 31, (2) September 1 to November 30, and (3) December 1 to February 28. An annual return must also be filed by every tenant on or before June 20 for the tax year ending on May 31.

In addition, the Commercial Rent Tax is due and payable on or before the 20th day following the end of each quarterly period. The payment made with the final return (i.e., the return due by June 20) is the amount by which the actual tax for the tax year exceeds the amounts previously paid for the tax year. A tenant that is exempt from the Commercial Rent Tax because its annual rent is less than $250,000 for the year may still be required to file an annual return in certain situations.

A tenant that fails to timely file its Commercial Rent Tax may be subject to various penalties relating to the failure to timely file its Tax return or pay the applicable Tax.

Tenants with questions about the Commercial Rent Tax, or who have been contacted by a Commercial Rent Tax auditor, should consult experienced tax counsel to understand their Tax obligations. Blank Rome LLP has significant experience with these issues and can assist tenants navigate these issues.

To ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this Advisory is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the Code, and (B) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Service.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.