A recent Advisory Opinion of the Department of Taxation and Finance addresses the question of when an employer must pay Metropolitan Commuter Transportation District Mobility Tax (“MCTD Tax”) on compensation paid to its employees who work on temporary client assignments in various locations. Advisory Opinion, TSB-A-11(1)MCTMT (N.Y.S. Dep’t of Taxation & Fin., July 21, 2011).

Beginning in 2009, most employers who operate within the Metropolitan Commuter Transportation District, which includes the five boroughs of New York City and seven nearby counties, are subject to the .34% MCTD Tax, a payroll tax on the employer, on the payroll of “covered employees.” Covered employees are defined as employees whose services are “allocated” to the MCT district. In “Metropolitan Commuter Transportation Mobility Tax,” TSB-M-09(1)MCTMT (N.Y.S. Dep’t of Taxation & Fin., June 1, 2009), the Department established a series of four alternative tests – localization, base of operations, place of direction and control, or employee residence – to determine when an employee is a “covered employee.” If an employee is a “covered employee” under TSB-M-09(1), all of the payroll expense for that employee is subject to the tax, without any allocation.

The question considered by the new Advisory Opinion is whether the prohibition against allocating payroll expense for an employee applies to employees on temporary assignments both within and outside of the district who do not have a “base of operations” anywhere.

The Advisory Opinion concerns a taxpayer that provides temporary staffing services to clients throughout the United States, primarily in the health care field. Most of its employees, called “billable employees,” work exclusively on temporary assignments for the company’s clients. These employees never report to the company’s offices, but only report to their temporary work assignment, wherever the client is located. This is usually, but not always, in the employee’s home state of residence.

Two situations are presented: Employee 1, a New York State resident, received temporary assignments from the company’s New York State office. For the first seven months of 2009 (January through July), the employee was assigned to a client location in the MCT district. For the next five months (August through December), the employee worked at a temporary assignment at a client’s Georgia location. Employee 2 is the reverse situation: a Georgia resident who receives assignments from the company’s Georgia office, and who worked at a temporary assignment in Georgia between January and July, and in the MCT district from August through December.

It was clear that both Employee 1 and Employee 2 would be considered “covered employees” for at least part of the year, since they worked on temporary assignments exclusively within the district, meeting the localization test. The ultimate question was whether the prohibition against allocating payroll expense would result in all of their payroll – for work performed both within and outside of the MCT district – to be subject to the MCTD payroll tax.

Critically, the Department ruled that the prohibition against allocating payroll expense applies only to employees who work at multiple locations over the course of one assignment. Since here Employees 1 and 2 have two distinct, consecutive assignments, it was appropriate to determine whether the employee was a covered employee for each separate assignment.

For their temporary Georgia assignments, the Department found that the employees did not meet the localization, base of operations, place of control or direction, or residence tests, and thus were not covered employees for those assignments, and their payroll with respect to those assignments was not subject to the tax. Since the employees met the localization test with respect to their temporary assignments within the district, they were covered employees with respect to those assignments, and their associated payroll expense was subject to the tax.

Additional Insights. The Advisory Opinion reaches an eminently reasonable result in bifurcating the classification of employees who are not connected with a “base of operations” anywhere, and who work on distinct and consecutive temporary assignments in various locations. It should be cautioned that the prohibition against an employer allocating payroll expense still remains with respect to employees who work at multiple locations over the course of one assignment. Moreover, the Advisory Opinion involves the somewhat unusual situation where the employee has no physical base of operations anywhere. Still, in allowing employers to ascertain, on an assignment-by-assignment basis and regardless of the employee’s state of residence, whether such employees are covered employees, the Department has prudently avoided subjecting to the MCTD tax compensation having no connection with the MCT district.