The U.S. Supreme Court declined to review whether Oklahoma’s capital gains deduction for the sale of interests in companies headquartered in the state violates the federal commerce clause.
The Court on May 13 denied cert in Baskins v. Oklahoma Tax Commission, letting stand the decision of the Oklahoma Court of Civil Appeals, Division II, that the statute does not violate the U.S. Constitution.
Steve Wlodychak of EY told Tax Notes May 13 that he was disappointed that there was no final resolution of the issue from the Court. Oklahoma has a very unusual statute that seems to favor in-state businesses over out-of-state businesses in a discriminatory manner, he said, adding that the case also raised a more global issue of whether a state can use its tax laws to encourage specific types of investment within the state.
But Wlodychak said it is not unusual for the Court to be unable to hear cases that may be important to practitioners because of its tight docket and the limited time it has.
In Baskins, the taxpayers were denied an individual income tax deduction for capital gains resulting from the 2011 sale of their stock in Primus International Holding Co. because the company’s primary headquarters was not in the state. The taxpayers challenged the denial, arguing that the in-state headquarters requirement discriminates against interstate commerce.
The state’s court of civil appeals disagreed, relying on the Oklahoma Supreme Court's decision in CDR Systems Corp. v. Oklahoma Tax Commission that the state's corporate income tax deduction for such capital gains was constitutional.
In a December 19 cert petition, the taxpayers in Baskins argued that the Court should hear the case and reaffirm the dormant commerce clause, adding that there is a “large body of case law arising out of state and lower federal courts striking down similar tax incentives on Commerce Clause grounds.”
The taxpayers added that “there is fierce competition among business in the ‘common market’ for investor funds” and the “statute gives Oklahoma-headquartered companies a competitive advantage over companies headquartered elsewhere.”
In an April 8 brief in opposition, the tax commission countered that the taxpayers “do not compete in the market they allege is being harmed” and that they would lose money if they prevailed. The commission said the taxpayers had received a capital gains deduction for the sale of their stock in another company that is headquartered in Oklahoma, which it would lose if the statute were struck down as unconstitutional.
The commission said that “unlike CDR, Petitioners here are not a business headquartered outside Oklahoma competing for investment dollars; they are investors. The alleged market distortion does not harm them.”
The commission claimed that the deduction is a permissible subsidy because it “does not discriminate in its availability or extent between in-state taxpayers and out-of-state taxpayers.”
“Indeed, the deduction is simply one of myriad incentives, tax breaks, and tax structures that states employ to compete for business and investment,” the commission said.