Suffolk County officials this week criticized County Comptroller John M. Kennedy for sending 1099 income tax forms to homeowners who installed new nitrogen-reducing septic systems at their homes with the financial aid of town and county water quality programs last year—a move they said could hobble septic replacement programs that the county, towns and state have pledged millions in funding to.
If the grant monies disbursed by the county must be counted as income it could mean thousands in additional costs for residents, just as programs intended to essentially eliminate the high costs of installing the low-nitrogen septic systems are ramping up.
Suffolk County Executive Steve Bellone and Deputy County Executive Peter Scully, who has spearheaded Mr. Bellone’s marquee water quality improvement initiative, called the issuing of 1099s to homeowners who took advantage of the $10,000 county grants a bizarre decision by Mr. Kennedy since the grant funds go directly to contractors who install the systems and not to the homeowners. They have implied that his decision is politically motivated—Mr. Kennedy is challenging Mr. Bellone in the race for county executive this year—and demanded that the comptroller rescind the 1099s sent to homeowners while his office awaits an opinion on the matter from the IRS.
“It makes no sense to threaten homeowners with tax liability unless and until the IRS has indicated that issuing 1099s to homeowners is appropriate,” Mr. Scully said in a letter he sent to Mr. Kennedy on Thursday, March 14. “Given that the April 15 deadline for filing of 2019 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.”
Last year, the county offered homeowners grants of up to $10,000 each to help cover the costs of installing the new low-nitrogen septics, which can cost upwards of $20,000 to purchase and install. Southampton and East Hampton augment the county funding with their own rebate programs, offering up to $16,000 to their residents for the installation of the systems. In 2019, thanks to an influx of state cash for the program, the county is offering grants of up to $30,000 per home.
Mr. Scully said the county specifically designed its program to avoid the potential taxing of the grants as income by the homeowners. Since the checks from the county are cut directly to the contractors who design and install the systems, the 1099s should likewise be going to the contractors who received the funding for the work they did, Mr. Scully said.
“We spent the last year looking at the issue, talking to towns, talking to tax attorneys, and everyone has come to the conclusion that it’s black-and-white—whoever gets the check, gets the 1099,” Mr. Scully said. No other municipality in the state issues 1099s to homeowners for septic replacement grants, he said.
In March 2018, after Mr. Kennedy’s office sent 1099s to the smattering of homeowners who tapped the newly created grant program in late 2017, Mr. Bellone’s office had solicited an interpretation from its independent tax attorneys, which said the grant money did not have to be reported as income by the homeowners because the county program gives its funding directly to the contractors who design and install the low-nitrogen septic systems.
Mr. Kennedy said his office’s reading of that opinion left him and his staff uncomfortable with its interpretations of federal income tax law, a point he says he made clear to them, and that the county executive’s office should have sought out a determination from the IRS itself.
“The internal revenue code makes it mandatory—not a ‘may’—that state and local governments issue the 1099 where there is disbursement of public funds,” the comptroller said. “They say the check is going to the professionals. Yes, the plumber got that income. But who has the unit when they leave? Who has the enhanced property value because of those county funds?”
Mr. Kennedy said that if the county executive’s office is correct, and the IRS says such grant funding does not have to be reported as income, any homeowners who consequently overpaid their taxes can file an amended tax form. But if the county does not issue the 1099s and the IRS determines they should have, the county could be subject to fines, itself, for not meeting filing demands.
The dispute also carries the taint of politics because Mr. Kennedy is the Republican nominee to run against Mr. Bellone, a Democrat seeking re-election to a third term as county executive, this year.
Mr. Kennedy said the implication that he sent the tax bills to discourage participation in one of Mr. Bellone’s cornerstone initiatives is wrong.
“I want clean water just like everybody else,” he said. “I know there’s some people who are not happy but … in April 2018, when I told them I didn’t agree with their interpretation, I was still putting together my campaign for comptroller. This is not an issue for a campaign.”
Some private tax professionals, Mr. Kennedy noted, may advise their clients that they don’t have to count the grant or rebate money reported on the 1099 as taxable income.
Southampton Town this year amended its program to allow its applicants for the $15,000 rebates it is offering to have the funds sent as grants directly to the contractors, like the county does. East Hampton Town still offers only rebates and tells applicants that they will have to file the 1099 income form.
For the homeowners who got the 1099s from one or more municipality this year, the threat of a huge tax bill next month is looming over them while county officials wrestle with its necessity.
Dorothy Minnick, a senior citizen and part-time real estate broker from Flanders, installed her low-nitrogen septic system early in 2018, before Southampton Town had amended its rebate program, and received 1099s from both the county and the town. She says that calculating the $25,000 in aid—her system cost $27,000 to install because of complications with her property—her income for the year bumped her into a new tax bracket. She said the difference was several thousand dollars.
“It seems ridiculous that a grant would be called money that I earned,” Ms. Minnick said. “I had to fill out a W-9 to get the approvals from the county but everything else said that no money changes hands with the homeowner, so I wasn’t expecting to get a 1099. Then it came and I thought something was amiss.”
She said that if she’d known about the potential tax costs, she would not have put in a low-nitrogen system.
Suffolk County has hundreds of thousands of homes that are not connected to sewers and have on-site waste-water systems. Cesspools, which are little more than holes in the ground and often sit in groundwater, and septic systems that capture solids but release liquid waste directly into groundwater—which are still the minimum standard in most of Suffolk—have been blamed for high nitrogen levels in local waters that feed harmful algae blooms that have decimated wild shellfish stocks and intermittently cause massive die-offs of finfish in local bays and ponds.
Marine scientists have said that one way to reduce the influx of nitrogen into bays is to improve the nitrogen-removal of home septics in areas rimming tidal bays and harbors or freshwater ponds where groundwater flow can carry contaminants to surface waters very quickly.
But Suffolk County began approving low-nitrogen septic systems for use only in 2016 and the handful of systems that are available are expensive. While the two South Fork towns have mandated their use in new construction and major renovations in sensitive areas, the respective grant and rebate programs have been intended to ease the sting of the costs.
To ease the burden, and encourage septic upgrades, the county dedicated $2 million a year to its grants. The five East End towns approved amendments to the Community Preservation Fund laws that allow up to 20 percent of a town’s annual CPF revenues to be directed to water quality programs like the septic replacement rebates. And last year Governor Andrew Cuomo directed $75 million toward a statewide septic replacement fund to combat nitrogen loading. Of the $15 million of that funding earmarked in the first year, $10 million is destined for Suffolk County, according to Mr. Scully.
The replacement programs have been fairly slow to get off the ground—only about 70 of the systems have been installed county-wide, just 27 of which were in the South Fork towns, and another 80 are approved for installation—and officials say that the additional burden of an increased tax bill will hamper their growth even more.
“The county comptroller needs to work this out to not hurt the program, that’s the long and short of it,” said Southampton Town Supervisor Jay Schneiderman, who narrowly lost to Mr. Kennedy in last fall’s comptroller’s race. “For those people who are being forced to put in these systems, it makes it a little easier to swallow. For people who aren’t mandated but could voluntarily put in these systems and have it paid for by the town and the county, it’s important that it not be too complicated and that their costs are minimized to the greatest extent possible, or we’re going to have a hard time convincing them to do it and it could really jeopardize our ability to get these systems in the ground.”
on Mar 18, 2019