Audit Report on the Reliability and Accuracy of Commercial Rent Tax Data Administered by the Department of Finance

The Department of Finance (DOF) collects City revenues, encourages compliance with City tax and other revenue laws, values all real property in the City, provides a forum for the public to dispute tax and parking violation liability, and maintains property records. In Fiscal Year 2012, DOF collected approximately $673 million in Commercial Rent Tax (CRT).

CRT is charged to commercial tenants who occupy or use a location for commercial activity in Manhattan south of 96th Street and locations that have an annual or annualized gross rent paid that is at least $250,000. Tenants are exempted for reasons such as short rental periods, residential subtenants, use for theatrical productions, and not-for-profit status. The statutory tax rate is 6 percent of the base rent paid by tenants of the premises that are used to conduct any business, profession, or commercial activity. In addition, a tax credit is allowed for taxpayers whose annualized base rent is between $250,000 and $300,000.

An annual return (CR-A)¹ is required to be filed by every tenant, on or before June 20, covering the preceding year from June 1 to May 31, unless the annual gross rent paid for any taxable location is $200,000 or less and the rent received from any subtenant of the premises is $200,000 or less. Every tenant subject to tax for a period must file a quarterly return (CR-Q1, CR-Q2, and CR-Q3). Quarterly returns are due for the three-month periods ending on the last days of August, November, and February of each tax year and must be filed within 20 days after the end of the period they cover. DOF utilizes an in-house system called Fairtax to process and maintain information relating to all those who pay these taxes and fines.

Audit Findings and Conclusion

The CRT data exists in a secure environment, and it is readily accessible to all essential users identified by DOF. The CRT data is generally reliable for collection purposes, and it generally contains the required information for enforcement and penalty collection purposes.

During the course of audit fieldwork, we noted several issues for DOF follow-up. CRT billing periods are kept independent of each other. As a result, previous period outstanding balances are not carried over to the next billing period, which may hamper collection efforts. We also identified an outstanding balance of $8.4 million owed to the City. In addition, we found overpaid tax balances on the system totaling $57.6 million, which DOF states are due to taxpayer filing errors or prepayments rather than actual tax overpayments.

Audit Recommendations

DOF should:

• Ensure that the billing process is corrected and previous years’ account balances are carried forward.
• Collect the outstanding taxes due as applicable.
• Review, analyze, and correct all the inaccurate overpaid information on the system.
• Review and, if necessary, modify its filing process to ensure taxpayers are following the filing instructions.

Agency Response

In their response, DOF officials generally agreed with one recommendation, but disagreed with our recommendations dealing with: previous years’ account balances being carried forward, the outstanding CRT balance of $8.4 million, and the need to take any actions to correct the inaccurate overpaid information on the system.