David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: interpreting the commerce clause. We're talking this week about the case Edelman v. New York, in which the parties recently petitioned for an appeal to the Supreme Court. The case involves tax credits for taxes paid to another state. Tax Notes Today State legal reporter Andrea Muse has been following this case and recently talked to somebody about it. Andrea, welcome to the podcast.
Andrea Muse: Hi, Dave.
David Stewart: So, who did you talk to?
Andrea Muse: I talked with Don Williamson. He's a professor at Kogod School of Business at American University. He serves as the Department of Accounting and Taxation chair and the director at the Graduate Tax Program. Don submitted an amicus brief in support of the Edelmans.
David Stewart: Now, what sort of issues did you discuss?
Andrea Muse: So, we discussed the commerce clause, the holding of Wynne, which reaffirmed the internal consistency test, and whether the facts of Edelman implicate the commerce clause.
David Stewart: Alright, let's listen to that interview.
Andrea Muse: Hi. I'm Andrea Muse and I am with Don Williamson. Don served as counsel for the Kogod Tax Policy Center in an amicus brief for a case before the U.S. Supreme Court where taxpayers are challenging New York's individual income tax scheme that Don's calling the son of Wynne.
Donald Williamson: Thank you for having me, Andrea. Pleasure to be here. A few words about the Wynne case and how it came about: The Wynne case was a Supreme Court case in 2015, closely decided case, 5-4 opinion, where Mr. Wynne was a shareholder of an S Corporation and the S corporation did business in about 39 states. Mr. Wynne when he filed his individual income tax return being a resident of the state of Maryland had to report all of his gross income to Maryland, but then attempted to credit the portion of that income that was taxed in the other states against his Maryland state tax. Maryland permitted the credit against the state income tax, but not against the county income tax. In the state of Maryland, you have a state income tax plus the county has a surcharge. Maryland refused to accept the credit against the county tax and we went up through the court system, ending up in the Supreme Court.
Andrea Muse: And I understand the holding in that case, the Supreme Court reaffirmed the internal consistency test.
Donald Williamson: That's correct and that is the importance in my view of the Wynne decision in that it formalized the internal consistency test as the measure for whether the dormant commerce clause of the Constitution has been violated. As we all know, the commerce clause provides that Congress will not prohibit interstate commerce, but then through judicial interpretation, there has been now a dormant commerce clause in the Constitution, or interpreted in the Constitution for many years. And in the dormant commerce clause, that basically says no state can interfere with interstate commerce by taxation that exceeds the tax on intrastate tax. So, under the dormant commerce clause, states may not tax interstate commerce more than intrastate commerce.
Andrea Muse: And Wynne also had a couple of dissents, correct?
Donald Williamson: Yes, they did. And Wynne basically concluded that the internal consistency test is the standard for measuring whether the dormant commerce clause has been violated. As you point out, Andrea, it's a 5 to 4 decision. There was a principle dissent by Justice Ginsburg, where she argued that this was a policy decision of the state of Maryland and they did not have to allow the out-of-state credit against the county tax. The majority, however, viewed that the dormant commerce clause commanded that the credit be given against the county tax. There was also dissents by Justice Scalia and Thomas, where they simply view, given their background of being strict constructionists, that the dormant commerce clause was basically a fiction and there is no such thing as a dormant commerce clause in the Constitution. Now going forward, of course, we don't have Justice Scalia anymore. It's a little unknown what Justice Kavanaugh is going to do with a dormant commerce clause and this case leads to that issue that we'll discuss in a moment.
Andrea Muse: And as you said, with now the new justices in the U.S. Supreme Court, we have this New York case.
Donald Williamson: Yes. This is the Edelman case and the Edelman case is basically an individual domiciled in the state of Connecticut. Domicile – that is the place where they permanently intend to live – the Edelmens, but they also had a business and lived in New York state for 183 days a year. They had an apartment in New York. And so, they under New York law were considered to be statutory residents. Anyone who has abode in New York and stays in New York for 183 days is considered a statutory resident, therefore, subject to worldwide tax under income. And being domiciled in the state of Connecticut, under Connecticut law they were taxed on 100 percent of their income in Connecticut. So, we see double taxation in this case. What the Edelmens then did was sell their stock in their corporation in New York for a large gain – so large there was almost $7 million of New York state tax on the table – and then attempted to credit the tax against that same income, those being paid in the state of Connecticut. New York rejected that, saying that there was no need to allow a credit at all in that case.
Andrea Muse: And one concern that the tax community seemed to have with this case is how the lower courts came out and determined this case.
Donald Williamson: Yes, well, we can see initially we have double taxation in this situation. And one would say initially that the dormant commerce clause should be invoked to prevent double taxation because that really discriminates against interstate commerce. So at first blush, that seems to be in my view at least and the reason I wrote the amicus brief in this case, was that. However, the lower courts summarily dismissed the application of Wynne and the internal consistency test that determines whether the dormant commerce clause been violated, simply saying because unlike Wynne, Edelman was a resident of New York and Wynne was not a resident of New York. So therefore, in one case, one credit was granted. In the other it was not, simply because of the dual residency issue. And that's why we in the amicus brief felt that the dormant commerce clause needs to be invoked here in the case of dual residence, because the internal consistency test does require that we measure whether there is more tax to be paid through interstate commerce simply because they're a resident of Connecticut and a resident of New York, than if they were simply a resident of New York or Connecticut. There really is double taxation here and that really does inhibit interstate commerce versus intrastate commerce.
Andrea Muse: And there was also an issue about the source of income, correct?
Donald Williamson: Yeah, the other issue, of course, is New York said that the source of the gain follows the individual. And since the individual under New York State law is a statutory resident, it is New York source income. That sourcing issue really has to be addressed by the court as well, because we see here states can very easily define source any way they want. They can say an amount of income is sourced to their state or sourced outside their state. And so, when you couple that with the dual residency definitions that the states make up themselves, we can very easily see how states through the interpretation of the rules and the creation of the rules can basically emasculate the Wynne decision and the application of the internal consistency test that is the standard for measuring whether interstate commerce has been violated.
Andrea Muse: What's the concern for taxpayers if the Supreme Court doesn't take this case?
Donald Williamson: Well, if the Supreme Court doesn't take the case, then that basically limits Wynne enormously and the application of the internal consistency test to determination whether you have interstate commerce or interstate commerce and the application of that test to determine what your tax, or a dormant commerce clause should apply. So, if they don't accept the case, it makes it very easy for states to get around the dormant commerce clause. There's no question about that. If they take the case, then once and for all, this court can – and this is why I'm calling it son of Wynne – the court can determine the limits of the dormant commerce clause. And there are many folks that say we have to have limits to the dormant commerce clause. Others say there is no limits to the dormant commerce clause. We live today in a global economy. Everything has interstate commerce implications. And so almost any transaction of any sort implicates the commerce clause, with it, the dormant commerce clause, and therefore, the internal consistency test that would prevent double taxation. We can understand how the states would recoil at that, having to be required to grant credits in such cases. But indeed, in the world today that we live in, I think we have to recognize that.
Andrea Muse: Thank you very much, Don.
Donald Williamson: Thank you very much for having me.
David Stewart: And now, instead of coming attractions, I'm joined by Content and Acquisitions Manager Faye McCray with a special announcement.
Faye McCray: Thanks, Dave. The winner of this year's Christopher E. Bergin Award for Excellence in Writing is Benjamin Marcus Satterthwaite of the University of South Carolina School of Law. The Christopher E. Bergin Award for Excellence in Writing recognizes superior student writing on unsettled questions in law or policy. It is named in honor of the late Christopher E. Bergen, former president and publisher of Tax Analysts. Daniel Pessar of Harvard Law School earned this year's honorable mention. You can read Benjamin's winning submission on September 30th in Tax Notes Federal, State and International.
David Stewart: Thank you, Faye. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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