Who Is Going To Pay? Comptroller Kennedy Says Homeowners

Who is going to be taxed for the nitrogen-reducing septic systems installed under Suffolk County’s grant program? County Comptroller John Kennedy believes homeowners are liable. The comptroller issued tax forms to homeowners who participated in the county’s grant program and installed nitrogen-reducing septic systems. If the comptroller’s position is correct the homeowners could face a tax liability in the thousands of dollars.  The Bellone administration is asking the comptroller to rescind the tax notices immediately. Kennedy, in a Newsday article said he is seeking an opinion from the IRS.

The County Septic Improvement Program is the first of its kind in New York State.  Suffolk County grants are provided to homeowners who choose to replace their cesspool or septic system with new nitrogen reducing septic systems. The program, established in 2017, was approved by voters in a 2014 referendum.

The county’s program, supported by Governor Cuomo, was awarded nearly 70 percent of the $15 million awarded statewide under the first year of the State’s Septic System Replacement Fund. Bellone’s statement claims that the “Comptroller’s Action Would Jeopardize Cuomo Administration’s $10 Million Award to Fund County Drinking Water Program”.

Yesterday, Water Quality Czar Peter A. Scully requested the tax forms sent to homeowners be rescinded saying, “Suffolk County taxpayers are already facing a difficult income tax season as a result of Washington’s federal tax code changes that limit deductions of local property taxes. The last thing they need is for the County Comptroller’s actions to expose them to additional tax liability.”

The statement issued by Mr. Scully states, “In early 2018, the County Comptroller’s office sent the 1099 forms for individual system installations to both homeowners, designers and installers, for the same installations. In early 2019, the Comptroller’s office sent 1099s for installations completed in 2018 to homeowners only, and sent “corrected” forms for 2017 to companies which had received disbursements of funds from the County, stating that they hadn’t received any. In an article in today’s Newsday, the Comptroller indicated for the first time that he plans to seek a letter ruling from the IRS on the issue.”

A full copy of the letter can be found below:

Dear Comptroller Kennedy,

As Suffolk’s Water Quality Czar, I write now with a sense of urgency in an effort to limit any further impacts to Suffolk County taxpayers resulting from the unilateral decision of your office to issue 1099 forms which could make grants under the Septic Improvement Program taxable for homeowners.

As you are aware, the program was carefully designed to make the grant process easy and affordable for homeowners. One important aspect of that effort was structuring the program to ensure that homeowners never receive disbursements of funds. Instead, grant funds are disbursed to companies which install nitrogen reducing septic systems, so that IRS reporting requirements should be met through the issuance of 1099-MISC forms to those companies, and not to homeowners. That aspect of the program was made clear at its inception, and all involved companies submitted required W-9 forms expecting to receive the 1099-MISC forms as planned.

In January 2018, however, without prior discussion, and without explanation, your office demanded that the Department of Health Services obtain a W-9 form from a homeowner who had participated in the program. Staff in the Department of Health Services subsequently learned that your office had issued 1099s for the 2017 tax year to both installers and homeowners for the same system installs. The reason why this double reporting occurred has not been explained.

In the wake of that action by your office, the County sought and obtained a legal opinion on the tax reporting issue from its tax counsel, which concluded and advised that 1099 G forms should not be issued to homeowners, and that 1099-MISC forms should be issued to companies receiving funds under the program, consistent with established program guidelines.

Over the past several weeks, the Department of Health Services has been made aware that your office had directed staff to issue 1099 G forms to individual homeowners who completed installations during the 2018 tax year, exposing those homeowners to potential tax liabilities. More recently, you have been quoted in the media as having indicated that you plan to request a letter ruling from the IRS on the matter.

Assuming that this report is accurate, it makes no sense to threaten homeowners with tax liability unless and until the IRS has indicated that issuing 1099s to homeowners is appropriate. For that reason, the purpose of this letter is to formally request that your office rescind the 1099s issued to homeowners pending receipt of the letter ruling you have indicated that you will seek from the IRS.

Given that the April 15, 2019 deadline for filing of 2018 income taxes is looming for Suffolk County taxpayers, who are already reeling from the impacts that changes to the federal tax code limiting deductions of property taxes are having on their personal finances, I would ask that your office take immediate steps to rescind the 1099s issued to homeowners, and to advise homeowners that such action is being taken.

Please confirm that such action will be taken on a priority basis. A careful and deliberate approach to the issue is important given the potential implications for the statewide $75 million New York State Septic System Replacement Program established by the State under the leadership of Governor Cuomo.

I look forward to working with you to ensure that Suffolk County taxpayers are protected against additional tax liability.

Respectfully,

PETER A. SCULLY

Deputy County Executive