State and Local Taxation: More on the Dormant Commerce Clause and Maryland’s “County” Tax

divisible-taxesThere are actually three dissents in Comptroller of the Treasury of Maryland v. Wynne, No 13-485 (May 18, 2015). Two are fairly predictable: since it’s a dormant commerce clause case, Justice Scalia and Justice Thomas are dissenting because they think the dormant commerce clause is judge-made nonsense. While predictable, Justice Scalia’s dissent is entertaining, as he delivers his argument with great force.

The third, Justice Ginsburg’s, is different. It is thought-provoking; when I got the chance to read it carefully, I understood why the majority spends so much of its time countering her analysis. It certainly suggests that the case was a much closer call than the majority opinion’s analysis would lead the reader to believe.… Read More

State and Local Taxation: The Supreme Court Applies the Dormant Commerce Clause and Invalidates Maryland’s “County” Tax

divisible-taxesTwo provisions of the Constitution limit the authority of states to impose taxes. The due process clause requires that a state have sufficient nexus with a taxpayer or transaction to impose a tax, which is typically a fairly low threshold. In contrast, the commerce clause has historically had more teeth.

While some of the current justices disagree with the Court’s dormant commerce clause jurisprudence, in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Court established a test that is used to determine whether a state tax violates the dormant commerce clause. A tax will withstand a commerce clause challenge “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” 430 U.S at 279.… Read More

The City that Loves You Back: Philadelphia Business Taxes for Non-Residents.

The City of Philadelphia has some significant business taxes. If you are based there you learn fairly quickly about the Business Income and Receipts Tax (BIRT) (formerly known as the Business Privilege Tax) and the Net Profits Tax (NPT).

What is less well-known is that the City’s taxes apply to non-residents who conduct a limited amount of business there.

The City has adopted regulations that make its business taxes applicable in as broad a context as possible. The BIRT is applicable to any taxpayer with sufficient contact with the City to satisfy the U.S. Constitution, and NPT applies to any taxpayer with taxpayer with sufficient contact with the City to satisfy the U.S.… Read More

Cancellation of Indebtedness Is Income in Pennsylvania, Part IV.

The final part of the majority opinion in Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014) deals with the question whether non-resident taxpayers were the subject of constitutionally improper disparate treatment.
The majority opinion rejected that contention. While acknowledging that the question was “close,” the majority concluded that there was no violation of the Privileges and Immunities Clause or of the Equal Protection or Commerce Clauses. Wirth, majority slip op. at 55. The result rested on two distinct rationales. First, the court noted that the non-resident taxpayers could offset the foreclosure gain against other Pennsylvania sourced income.… Read More

Cancellation of Indebtedness Is Income in Pennsylvania, Part III.

This post continues my coverage of Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014), in which a majority of the Supreme Court of Pennsylvania held that foreclosure of property securing a non-recourse loan gives rise to a taxable gain.
After concluding that an assessment of gain based upon Tufts was proper, the Court next turned to how to calculate the amount of the gain. The taxpayers argued that the amount of the gain should be limited to the principal amount of the mortgage plus the limited interest that had previously been deducted to offset the partnership’s limited income.… Read More

Cancellation of Indebtedness Is Income in Pennsylvania, Part II.

This post continues my coverage of Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014), in which a majority of the Supreme Court of Pennsylvania held that foreclosure of property securing a non-recourse loan gives rise to a taxable gain.
Income from the disposition of property is taxable under Pennsylvania’s Personal Income Tax. 72 P.S. § 7303(a)(3). The Department of Revenue has issued a regulation that provides for the recognition of gain “in the taxable year in which the amount realized from the conversion of the property into cash or other property exceeds the adjusted basis of the property.” 61 Pa.… Read More

Cancellation of Indebtedness Is Income in Pennsylvania, Part I.

Recently, the Supreme Court of Pennsylvania addressed the treatment of cancellation of indebtedness as income, reviewing the Commonwealth Court’s decision in Marshall v. Commonwealth, 41 A.3d 67 (Pa. Commw. 2012), which I covered in April 2012. The Supreme Court came down on the side of the Commonwealth. Wirth v. Commonwealth, No. 82 MAP 2012 (Pa. June 17, 2014).
The case involved non-resident taxpayers who invested in a Connecticut limited partnership that acquired an office building in Pittsburgh. Wirth, majority slip op. at 2. After the building went into foreclosure, the partnership was liquidated. The partnership had lost money throughout its existence, and ultimately, the 380 million dollar mortgage loan used to purchase the property had mushroomed to 2.6 billion dollars.… Read More

Too Thin A Reed: A Trust Cannot Be Taxed Based Solely on the Settlor’s Domicile.

The commerce clause grants Congress the authority to regulate commerce among the states. Because this power is reserved to Congress, the Supreme Court has traditionally held that the Commerce Clause also restricts state power, barring legislation that imposes unreasonable burdens on interstate commerce, although some current justices disagree with this “dormant commerce clause” doctrine.

State and local taxes are frequently the subject of dormant commerce clause challenges. In a 1977 opinion, the Supreme Court developed a four part test that governs the validity of a state or local tax under the dormant commerce clause. Under this test, state and local taxes will be upheld if 1) they apply to a taxpayer that has a sufficient connection (or “nexus”) to the jurisdiction imposing the tax; 2) they are fairly apportioned so that the state or political subdivision is taxing its fair share of the taxpayer’s revenue, income or property; 3) they do not discriminate against interstate commerce; and 4) they are fairly related to the benefits provided by the taxing authority.Read More

Reading Really Is Fundamental: A Reminder that Statutory Language Is Important.

Lawyers are prone to focus on case law. Perhaps it’s because our education was focused upon reading cases. Or it may just be that cases are easier to read: even a weak judicial opinion is far better written than the vast bulk of legislation. But we need to remember to focus on statutory language because it is often controlling. A recent local tax case from the Commonwealth Court drives this point home.

In Giles & Ransome, Inc. v. Whithall Twp., No. 645 C.D. 2012 (Pa. Commw. Feb. 11, 2012), the court addressed a dispute over the extra-territorial impact of a business privilege tax.Read More

Philadelphia Real Estate Tax Assessments-A New Attack, Part II.

This will continue my discussion of the complaint in Gerald S. Kaufman Corp. v. Commonwealth, 652 MD 2012 (Pa. Commw.). As I discussed in my initial post, the case is an attack on legislation that was put in place when City Council deferred the implementation of the Actual Value Initiative; the General Assembly and the council both passed laws that direct that 2013 property taxes be calculated by applying Philadelphia’s predetermined ratio to 2011 values to determine real estate taxes. The plaintiffs note that the 2012 common level ratio for Philadelphia was significantly lower and posit that their right to uniformity in taxation is therefore violated because they will not be able to invoke the common level ratio if they file an appeal.Read More