UPDATE: On October 3, 2017, the Supreme Court of the United States declined to review Steager v. CSX Transportation, noting that a true split between state courts of last resort does not exist.
On April 17, 2017, West Virginia Tax Commissioner Dale Steager submitted a petition for certioriari to the Supreme Court of the Unites States for review of Matkovich v. CSX Transportation. The appeal arises from a West Virginia Supreme Court of Appeals majority opinion that found West Virginia’s practice of offering a credit for sales and use taxes paid to other states, but not other local governments and municipalities, to be unconstitutional. The ruling was based on the U.S. Supreme Court decision in Comptroller of Treasury of Maryland v Wynne, which struck down Maryland’s credit for income taxes paid to other states regime as unconstitutional. Both cases revolve around the Dormant Commerce Clause, the Constitution’s prohibition of favoring intrastate commerce over interstate commerce. The Supreme Court agreed to consider granting certiorari in Steager v. CSX Transportation and has scheduled a conference for Sept. 25. While the Supreme Court considers certiorari, let’s review the constitutional underpinnings of the decision and the cases that led to the West Virginia Supreme Court’s decision.
Taxation under the Dormant Commerce Clause: A Four-Part Test
The Supreme Court developed a test to evaluate taxation under the Dormant Commerce Clause in Complete Auto Transit, Inc. v. Brady. The case involved a “privilege tax” imposed upon a motor carrier that delivered motor vehicles manufactured outside of Mississippi. The cars were delivered by rail to Jackson, Miss., at which point the motor carrier loaded the cars onto their trucks for delivery at final destinations across the state. The carrier argued that the delivery service they provided was one part of interstate commerce and that the privilege tax was unconstitutional when applied to interstate commerce. After decisions upholding the tax in state court, the carrier petitioned the Supreme Court to review the case.
In deciding to uphold the tax, the court laid out the four-part test for taxation under the Dormant Commerce Clause. A state tax will survive a challenge under the Dormant Commerce Clause if:
● the tax applies to an activity with a substantial nexus with the taxing state;
● the tax is fairly apportioned;
● the tax is not discriminatory towards interstate or foreign commerce; and
● is fairly related to the services provided by the state.
The carrier never argued that the tax violated any part of the test, but simply relied on a previous case, Spector Motor Service v. O’Connor, which invalidated a privilege tax on interstate commerce. The court quickly distinguished the facts of that case and ruled that the tax satisfied constitutional scrutiny under the Dormant Commerce Clause.
Comptroller of Treasury of Maryland v Wynne
On May 18, 2015, the Supreme Court struck down as unconstitutional Maryland’s credit for income taxes paid to other states regime for violating the Dormant Commerce Clause of the Constitution in Wynne. The case arose from a shareholder of an S Corporation doing business in over 30 states. The shareholder was offered a credit against Maryland state taxes for income taxes paid in other states, but not a credit against the Maryland county tax.
The court reasoned that the tax violates the third part of the Dormant Commerce Clause test for taxation, also known as the “internal consistency” test. Under this test, the court assumes that all states have adopted a similar tax regime as the state in question. The resulting effect must not tax interstate commerce at a higher rate than intrastate commerce. Assuming that all states offer a credit for state income taxes paid but not local income taxes paid, as Maryland does, state governments would tax interstate commerce at a higher rate than intrastate commerce. The Court found this discrimination between interstate and intrastate commerce unconstitutional and struck the offending state statutes.
Steager v CSX Transportation
All of these developments led to the present case, which arises from a denial of a credit for sales and use taxes paid in Matkovich v. CSX Transportation. West Virginia offers a credit for sales and use taxes paid to other states, however, the offer does not extend to sales and use taxes paid to local governments and municipalities. Because CSX imports the fuel it uses in the transportation of goods within West Virginia, CSX claims that they are forced to pay sales and use tax twice, once in the state from which the fuel is sent, and then again once the fuel is imported to West Virginia, in violation of the four-part test used in Wynne.
In November 2016, the West Virginia Supreme Court found that the denial of a credit for sales and use taxes paid to local governments and municipalities violated the Dormant Commerce Clause. West Virginia’s statute concerning the credit does not address whether the credit extends to sales and use taxes paid to state and local governments. Although the credit operates to reduce use tax liability, the credit is transactional in nature and does not contain the traditional hallmarks of a credit such as the ability to carry forward, transfer, or claim a refund for a credit amount in excess of the liability. However, as in Wynne, the statute, as applied by the Tax Commissioner in this case, fails the internal consistency test. If all states were to adopt a similar regime as West Virginia, out-of-state commerce would be taxed at a higher rate than intrastate commerce due to the double taxation. As discussed, Steager then appealed to the Supreme Court. Over the summer, CSX submitted its brief and West Virginia responded.
We will have to wait and see if the Supreme Court grants certiorari in this case. We know that as recently as Wynne that the Supreme Court is sticking by the four-part test first announced in Complete Auto. Further, the facts of Wynne are strikingly similar to the facts of CSX Transportation, the two notable differences being that the credit is for sales and use taxes as opposed to income taxes, and that an individual was harmed in Wynne whereas a corporation is suffering the harm in CSX. These differences may determine whether the Supreme Court deems the case worthy to add to their docket.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Assume the imposition of sale and use taxes twice is unconstitutional. Which state should receive the sales tax revenue of a good created in one state and then imported to another?
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