The New York City Department of Finance has issued an “Update on Audit Issues” regarding the commercial rent tax treatment of amounts paid for the placement of advertising on billboards and digital signs in Manhattan. Update on Audit Issues, Commercial Rent Tax, Billboards, May 28, 2014. According to the Audit Update, the tenant of a billboard lease in Manhattan (for premises south of the center line of 96th Street, and for an annual gross rent of at least $250,000) must file commercial rent tax (“CRT”) returns. For businesses that are not in compliance and that are not under audit by the Department, the Audit Update recommends participation in the Department’s Voluntary Disclosure and Compliance Program.
For those businesses that are under audit, the Department has announced that it will accept payment of tax and interest for the most recent six CRT years in full satisfaction of the taxpayer’s CRT deficiency. The Department’s auditors will also consider the impact of the billboard payments on the taxpayer’s general corporation tax (“GCT”) and unincorporated business tax (“UBT”) returns (typically, through adjustments to the property factor of the business allocation percentage). If such adjustments are necessary, “the Department may choose to address the matter separately or as part of a single resolution with the CRT deficiency.”
Over the past year, many businesses have been the subject of CRT audits with respect to their payments to display advertising on digital signs affixed to buildings principally in the Times Square area of Manhattan. The Department has claimed that the payments are for the use or occupancy of commercial premises. The issue has been a contentious one for several reasons. For one thing, although the regulations provide that advertising signs "occupied or used by a tenant" are taxable premises, the Department undertook the CRT audit initiative after many years of non-enforcement. The CRT audit initiative subjected businesses to lengthy (and unexpected) CRT assessments. In addition, there is the legal question of whether the signage arrangements are truly for the use or occupancy of commercial premises within the meaning of the CRT law. The new limited lookback is a reasonable effort by the Department to avoid the egregious impact of retroactive enforcement, but does not resolve the underlying question of the taxability of these arrangements.
The Audit Update specifically leaves open for resolution on a case-by-case basis the resulting impact on the GCT and UBT from treating the billboard payments as payments for the use or occupancy of premises. It does not address whether the Department will treat the arrangements as resulting in taxable nexus for a business that has no other connection with the City of New York, although that would appear to be a consequence of the Department’s audit policy.