As a state and local tax practitioner located in New York City, one of the questions I hear most often from potential clients is "What is Commercial Rent Tax?" Usually, that inquiry is immediately followed by the exclamation "I didn’t even know such a tax existed!" After I start explaining the nature of the Commercial Rent Tax ("the CRT") to them, they generally find it difficult to believe that New York City (the "City") imposes a tax on the very expensive rent already being paid by them. Guess what, it does!
The CRT is a tax imposed at the rate of 6% with respect to the rent paid by tenants who occupy or use a property located in Manhattan south of a hypothetical center line running down 96th Street for commercial purposes. The tax is not applicable to commercial tenants located in the City’s outer boroughs. The CRT is triggered when the annual rent being paid by the tenant is $250,000 or more. Tenants are required to file returns, however, if their annual rent is at least $200,000. These amounts are evaluated prior to any deductions that may be available to the taxpayer.
For purposes of the CRT, the definition of "rent" is very expansive. Essentially, it is the amount paid or required to be paid for the use or occupancy of a space and includes any payment made by a tenant that is usually payable by the landlord. Thus, payments by a tenant for real estate tax, water charges and insurance are included in rent, but amounts paid for improving, repairing or maintaining the tenant’s leased premises are not.
Specifically, the CRT is imposed on a tenant’s "base rent." Base rent is considered to be the amount of rent paid by the tenant to the landlord, less certain specified deductions or exclusions. In reaching the base rent figure, a tenant’s rent is reduced by the amount of any rent received by, or due, them from a subtenant. This reduction is available even if the amount of the subtenant’s rent falls below the CRT’s $250,000 taxing threshold. In addition, after taking into account any reductions available regarding rent paid by subtenants, a further reduction of 35% of the remaining rent is permitted in calculating base rent. The 35% reduction is available to all tenants subject to the CRT, whether they are eligible for any subtenant deductions or not.
Assume Take Charge Company occupies commercial premises located in Midtown Manhattan for which it pays an annual rent totaling $2,000,000 (inclusive of real estate taxes paid on behalf of the landlord). Foul Line LTD, a sub-tenant of Take Charge, pays an annual rent of $150,000 to that company. In calculating its base rent, Take Charge may reduce the amount of its rent by the $150,000 it receives from Foul Line, and then further reduce its rent by 35% of the remaining $1,850,000. Accordingly, the amount of Take Charge’s base rent is $1,202,500, and its CRT obligation is $72,150 (6% of its base rent).
The City’s Department of Finance (the "Department") has issued several interesting rulings over the years which can have a significant impact on the amount of the CRT payable by tenants.
In one such ruling, in essence, the issue was whether the amounts paid to a hotel company by its guests constituted amounts that could be deducted from the hotel’s rent as payments made by subtenants, notwithstanding that in most cases the guests only occupied their rooms for short time periods, resulting in relatively small rental amounts being remitted to the hotel. The Department concluded that the amounts paid by the hotel’s guests constituted rent paid by subtenants for purposes of the CRT. As a consequence, in calculating its base rent, the hotel was permitted to deduct the room rental fees.
In another ruling of interest, the Department determined that amounts paid by subtenants to a related party tenant could be subtracted from the tenant’s rent even if the amount of the rents paid by the related party subtenants were set at below market rates. Also, the Department noted in this ruling that an important fact regarding its conclusion was that the related party subtenants all carried on businesses separate and apart from the tenant’s business. In other words, the Department concluded that the structure was not set up merely as a "sham" to avoid the CRT.
The CRT often catches taxpayers unaware. The Department is placing more focus on this area, with lines added in 2011 to both the City’s General Corporation Tax and Unincorporated Business Tax returns, asking whether the taxpayer is subject to the CRT, and if so, are they in compliance with it. Don’t ignore potential liability for the CRT. Help is generally available with respect to outstanding CRT liabilities through participation in the Department’s Voluntary Disclosure Program. Participants usually qualify to have potential penalties waived, and often may qualify for a limited look-back period regarding their outstanding CRT obligations. However, any opportunity to participate in the City’s program is lost if the Department finds a taxpayer first. It should be noted that the statute of limitations never runs on periods for which a CRT return is not filed. Further, penalties can be significant. Don’t play the "audit lottery" with the CRT!
If you have any questions about the CRT, please contact the author at (212) 842-7019, or if you prefer, via e-mail at firstname.lastname@example.org.