Mississippi’s dividend exclusion statute unconstitutionally discriminates against interstate commerce, the Mississippi Supreme Court recently ruled, reversing an $11 million assessment against AT&T. This ruling may provide a refund opportunity for taxpayers affected by the dividend exclusion provision.
Mississippi allows a corporation to exclude from its gross income dividends received from an affiliate under the following conditions: if the dividend income was previously subject to Mississippi taxes and if the affiliated corporation was doing business in the state and filed a Mississippi income tax return for the year in which it paid the dividend. The statutory exclusion does not apply to dividends received from an out-of-state affiliate not subject to tax in Mississippi.
The court ruled that the exclusion statute's requirements violate the commerce clause because the statute discriminates against distributing corporations not domiciled or doing business in Mississippi, as highlighted by Bloomberg BNA's Michael Murphree in the Weekly State Tax Report (subscription required). Relying on the U.S. Supreme Court’s decision in Maryland Comp. of the Treas. v. Wynne, the Mississippi high court analyzed whether the state’s statutory exclusion met the internal consistency test of commerce clause jurisprudence.
The internal consistence test is met when the imposition of a tax identical to Mississippi's by every other state would add no burden to interstate commerce that intrastate commerce would not also bear. The court found that the dividend exclusion fails the internal consistency test because it treats dividends from in-state affiliates differently from dividends received from out-of-state affiliates. This disparate treatment added a second layer of taxation to dividends from out-of-state affiliates and imposed an unconstitutional burden on interstate commerce.
To craft a remedy for AT&T, the court severed the requirement that dividend income was already subject to tax in Mississippi from the exclusion statute. This remedy broadens the application of the exclusion to dividends received from affiliates if the dividends were subject to tax not only in Mississippi but in any other state.
Mississippi taxpayers that have included in income, or that have been denied an exclusion for, dividends received from out-of-state affiliates on their Mississippi income tax returns should consider whether to file refund claims based on the guidance in the AT&T decision.
Continue the discussion on LinkedIn: What hurdles might taxpayers face in seeking refunds based on the Mississippi Supreme Court’s decision?
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