A Staten Island judge on Tuesday dealt a major setback to Mayor Zohran Mamdani’s push to raise taxes on the wealthy, saying that the city had mishandled the rollout of a tax on high-end second homes and must start over.
The judge, Wayne M. Ozzi of State Supreme Court on Staten Island, sided with a group of homeowners who had sued the city. The homeowners had argued that the Mamdani administration’s Department of Finance did not try hard enough to determine who should owe the tax before moving toward collecting it.
“Homeowners are being substantially harmed and penalized needlessly by D.O.F.’s method of implementing the tax law,” Justice Ozzi wrote.
The lawsuit did not challenge the legality of the tax on second homes, also known as pieds-à-terre. Unveiled by Gov. Kathy Hochul in the spring and backed by the mayor, the tax was popular among voters and hailed by Mr. Mamdani’s supporters as a way to make good on his pledge to “tax the rich.” It was expected to close a budget gap by raising some $500 million annually to fund city services.
But the bumpy rollout of the policy on a short timeline drew immediate criticism from the mayor’s opponents, and some allies, including Ms. Hochul.
“City Hall botched this rollout and should have just admitted the errors and fixed its own mistake, instead of wasting time and taxpayer dollars by fighting it in court,” said Randy Mastro, a lawyer for the homeowners and a former city official who has criticized the mayor.
It is not clear how the judge’s decision will affect the city’s ability to collect the money as the case continues: The first tax bills typically go out in November, and the funds must be collected by the spring for this fiscal year.
Within hours of the decision, the city filed court papers saying it would appeal — a move that would place the ruling on hold until an appellate court weighs in. Matthew Rauschenbach, a spokesman for Mr. Mamdani, said the city would meanwhile “continue implementing the surcharge fairly, efficiently and in full compliance with the law,” he said.
“Our administration is fighting every day to deliver for working New Yorkers,” Mr. Rauschenbach said. “The ultrawealthy are fighting in court to avoid paying their fair share. They have filed lawsuit after lawsuit to protect their privilege, and we will not back down.”
Passed in the state budget, the tax would apply to condos and co-ops that are used as second homes with a “market value” — a complicated metric determined by the city’s Finance Department — of at least $1 million and to one-, two- and three-family second homes with a “market value” of more than $5 million.
The lawsuit argued that the city had sowed confusion by sending out notices to about 17,000 New Yorkers informing them that their properties could be subject to the tax, without first making sure that the property owners were not full-time residents. The suit also took issue with the city’s publishing an online list of nearly one million “properties that may be subject to the charge” that included the owners’ names.
Justice Ozzi ordered the city to take down the list and replace it with a more limited version that shows only the properties subject to the tax. He said it must also cancel its previously mailed notices, narrow the list of recipients and send new notices that include detailed information about how the city determined that each property would be subject to the charge.
If the appellate court sides with the city, the rollout will proceed as it had before Tuesday’s decision. But if Justice Ozzi’s order is upheld, the city faces the difficult proposition of starting from scratch to send out tax bills before the end of the year, said Mark Limardo, a partner at the law firm Herrick Feinstein who works on tax matters.
“This is a big chunk of work that the city will have to engage in,” he said. “It remains to be seen if the city has the resources right now to even do it, and to do it quickly.”
Justice Ozzi had issued a temporary restraining order to pause the rollout last month, but the city appealed, which had the effect of halting the order.
In court filings on Aug. 25, the city offered its most detailed defense yet of the complex process of administering the tax, and acknowledged the complaints from some homeowners over its messaging.
The city said that it was extending the deadline to file proof of residency to Oct. 6; it had previously been Sept. 18. As of Sept. 16, it had approved the proofs of residency submitted by some 4,700 property owners and was reviewing thousands more.
The city had sought dismissal of the suit, arguing that the plaintiffs had not shown that the rollout had meaningfully harmed them and that proving that a property was a primary residence was straightforward, even when it is owned by a trust or corporate entity.
James Whelan, president of the Real Estate Board of New York, an influential lobbying group that has opposed the tax, said on Tuesday that the group had warned that the tax was “rushed forward without adequate consideration of its legal, practical and economic consequences.”
Justice Ozzi’s decision came after two separate lawsuits were filed this week in State Supreme Court in Suffolk County, a suburb east of New York City that includes the Hamptons.
Both of those suits argue that the tax itself is unconstitutional and should be overturned. They say that the law establishing the tax violates provisions of the state constitution that limit how much the city can collect in real estate taxes every year. Among other claims, they also argue that the tax is discriminatory because it applies only to residents of states other than New York.
The first suit, filed on Monday, was brought by the former commerce secretary Wilbur Ross, his wife Hilary Geary Ross and the casino mogul Steve Wynn, all of whom live in Florida but own second homes in New York City. Notices from the city indicate that the Rosses would owe roughly $83,000 and Mr. Wynn about $183,000 under the tax, according to the lawsuit.
The second lawsuit, filed on Tuesday, was brought by the corporation that owns an Upper East Side co-op building known as The Montclair, and by a handful of homeowners, including some who live in Florida and in Suffolk County.
In an interview on Tuesday, Mr. Ross said he thought Mr. Mamdani and his allies were trying to “shield themselves from any voter fallout” that would come from taxing wealthy New Yorkers, by instead taxing out-of-state residents who cannot influence policy at the ballot box.
In response to those legal challenges, representatives of Ms. Hochul and Mr. Mamdani said on Tuesday that the city and state would defend the tax in court.
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