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Grant recipients for upgraded septic systems hit by tax

It was good news for Islander Michael Hodor when he learned Suffolk County would help fund an upgrade to his aged septic system, and more good news when Shelter Island provided more grant money. The county paid $19,883 and Shelter Island approved $4,193 in grant money for the system.

But bad news followed when Mr. Hodor received 1099 forms from the county and the town that said he would add $8,000 to his tax liability because the grants are counted as income.

He actually never saw the grant money, which was paid directly to his contractor, Meg Larsen of Shelter Island Sand, Gravel and Contracting.

Although papers signed by those receiving grants stipulated there could be tax consequences, it was something he wasn’t expecting.

He was not alone.

The county and town for several years have been providing grants for improving septic systems by installing nitrogen-reducing Innovative Alternative (I/A) systems. But the grants became a political football between County Executive Steve Bellone (D) and County Comptroller John Kennedy (R) over taxing the grants. They were rivals for the County Executive’s seat in 2019.

That year, the tax forms were sent to both the person who had applied for the grant and the company handling the installation. But Ms. Larsen said contractors fought what they saw as double taxation on the same money and they won their case, with the county issuing new 1099s to be filed that indicated no income for residents.

Ms. Larsen and her father Peder Larsen have installed many I/A systems without a problem.

Deputy County Executive Peter Scully, who has been known as the water “czar” among county officials, tried fighting the taxes two years ago. But Mr. Kennedy sought and got an Internal Revenue Service opinion that maintained grant money was income and had to be declared.

Mr. Scully argued that taxing the grants would discourage county residents from having the systems, which officials have noted is vital to protect drinking water and surrounding water in the Peconic Estuary from being compromised by high nitrate levels.

Mr. Scully accused Mr. Kennedy of playing politics

The same argument was made by Congressman Lee Zeldin (R-Shirley) when he joined Congressman Tom Suozzi (D-Glen Cove) last year to reverse the IRS ruling. The effort failed to gain traction with colleagues. The two members of the House of Representatives were joined by then-minority leader, now Majority Leader Senator Charles Schumer, but no action was taken. Mr. Zeldin is trying again this year to reverse the IRS decision.

The situation remains difficult, according to Amber Brach-Williams, who is the Shelter Island Town deputy supervisor and a long-time accountant. “They have to declare the income because the IRS matches against the 1099s,” Ms. Brach-Willliams said she tells her clients.

The county grant program was originally designed to encourage people to have the new systems installed without tax consequences, Ms. Larsen said. It was the focal point of Mr. Bellone’s clean water initiative.

The town’s Water Quality Improvement Projects Advisory Board (WQI) was no more pleased with the IRS decision than those at the county level who objected to the tax. But with the imposition of the decision, town officials had no choice but to treat the grants in the same way.

What’s a grant recipient to do?

The initial answer is pay the tax by the May 17 deadline that the federal and state governments have set as tax day this year, replacing the usual April 15 date. If you haven’t the funds, you can generally arrange for payments that come with interest, but that’s better than defaulting altogether.

Mr. Bellone is working to create a countywide water district that could provide grant money without the tax consequences, she said. The effort began last year and is very much alive.

The Suffolk County Department of Health Services has created a “Subwatersheds Wastewater Plan” that would eliminate reliance on old septic systems that are turning out water that is not always potable and is polluting ground and surface waters that all East End elected officials are trying to protect.

It’s a long-term plan, estimated to make a difference in many of the worst areas within about 10 years, while full implementation would likely take 50 years, the county executive said.

“For the first time there is a long-term plan to diminish nitrogen pollution and put Suffolk County on a path to cleaner, healthier water resources,” said Dr. James Tomarken, Commissioner of the Suffolk County Department of Health Services. “Continued reliance on primitive wastewater disposal systems is a mounting threat to both our environment and our economy.” The New York State Department of Environmental Conservation provided funding for the development of the plan.

Its estimated cost would be $2.7 billion over 50 years and would replace 253,000 cesspools and septic systems with the I/A systems and connect other properties to sewers.

How would it be funded?

Instead of issuing grants to individuals, the plan borrows a page from efforts adopted in other areas. In Maryland, a “Bay Restoration Fee” was implemented to fund such an effort. Spokane, Wash. implemented a water consumption fee to fund its upgrades.

Deputy County Executive Scully called the plan an economic opportunity that would create good-paying jobs.

“Because both our environment and our economy are underpinned by the bays that surround us and the below-ground aquifers that supply our drinking water, no other issue in history has united such a diverse group of stakeholders,” Mr. Bellone said. “The fight to reverse decades of nitrogen pollution from outdated cesspools and septic systems has created a unity of purpose among scientists, business leaders, environmentalists, the building trades and organized labor.”

Ms. Larsen said she believes the county plan is likely to be implemented and it could turn around the tax bite being experienced by grant recipients now.