COST: Dividend Exclusion Case Has Nationwide Implications

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By Bebe Raupe

Dec. 21 — Mississippi's policy of taxing dividends that a corporation receives from a subsidiary based on whether the subsidiary is located in state is “facially discriminatory,” according to the Council On State Taxation.

COST filed an amicus brief Dec. 17 with the state supreme court, where the Mississippi Department of Revenue is appealing a ruling that struck down the dividend exclusion statute (Dep't of Revenue v. AT&T Corp., Miss., No. 2015-CA-00600, amicus brief filed, 12/17/15).

Dividend Exclusion Statute

In March, a Mississippi Chancery Court ruled that the state dividend exclusion statute is an unconstitutional violation of the commerce clause of the U.S. Constitution (AT&T Corp. v. Miss. Dep't of Revenue)(65 DTR K-2, 4/6/15).

Mississippi Code Ann. Section 27-7-15(4)(i) exempts dividends from a taxpayer's gross income only if those dividends are received from domestic affiliates that do business and file income tax returns in Mississippi. It doesn't permit the exemption of any dividends received by a taxpayer from any affiliate that doesn't do business in the state.

Weighing in on behalf of AT&T Corp., COST said the “case at bar” addresses important issues regarding all multijurisdictional taxpayers' rights under the commerce clause.

COST said its membership—almost 600 of the largest multistate corporations engaged in interstate and international commerce, many of whom do business in Mississippi—will be impacted by the broader implications of the case, noting the group's “objective is to preserve and promote equitable and nondiscriminatory state and local taxation of multi-jurisdictional business entities.”

Uphold Previous Ruling

The amicus brief asks the court to affirm the decision of the chancery court, which held that Section 27-7-15(4)(i) unconstitutionally favored domestic corporations over those out of state.

Using a four-prong test set out by the U.S. Supreme Court in Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977), the chancery court examined the statute to see if it would survive a commerce clause challenge.

To pass, the tax must be applied to an activity with a substantial nexus with the taxing state, the tax must be fairly apportioned, the tax mustn't discriminate against interstate commerce and the tax must be fairly related to the services provided by the state while analyzing a Mississippi tax scheme. The court found that the statute failed the third prong of the test.

Relying on Precedent

COST's amicus brief reaches the same conclusion, adding that the U.S. Supreme Court has refined what constitutes a discriminatory tax in Oregon Waste Sys. v. Dep't of Envtl. Quality, 511 U.S. 93 (1994); there the court stated discrimination “simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. If a restriction on commerce is discriminatory, it is virtually per se invalid.”

The U.S. Supreme Court addressed an issue similar to the one in this case in Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue and Fin., 505 U.S. 71 (1992), according to the brief. In that case, the court held that Iowa's law that allowed corporations to take a deduction for dividends received from domestic subsidiaries, but didn't allow corporations to take a deduction for dividends received from non-U.S. subsidiaries, was both discriminatory and unconstitutional.

Iowa was a separate return filing state similar to Mississippi and it was attempting to treat dividend income received by a taxpayer differently based solely on where the subsidiary paying the dividends was doing business, according to the brief.

As with the chancery court in this case, the U.S. Supreme Court in Kraft rejected a number of arguments made by the state that there could be some justification for this facial discrimination that could overcome the commerce clause violation, COST said. “As the Court found in Kraft, the differential treatment of dividends received by a taxpayer based solely on where the issuing subsidiary was doing business violated the Commerce Clause.”

To contact the reporter on this story: Bebe Raupe in Cincinnati at

To contact the editor responsible for this story: Ryan Tuck at

For More Information


Text of COST's brief is at