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Monday, November 13, 2006

Kentucky Files Cert. Petition in Davis, Which Prohibits Tax Exemption for In-State Municipal Bond Interest

The State of Kentucky has filed a cert. petition in the U.S. Supreme Court in Davis v. Department of Revenue, 193 S.W.3d 557 (Ky. App. 2006), in which the Kentucky Court of Appeals held that the state's tax system violates the dormant commerce clause of the U.S. Constitution by exempting interest on Kentucky state & local bonds while taxing interest on out of state bonds. The opinion notes that Kentucky's system is used in a majority of states, and that the only court to consider the commerce clause issue (Ohio) upheld the constitutionality of the system. The Kentucky Supreme Court denied the state's motion for discretionary review.  Department of Revenue v. Davis, No. 2006-SC-105-D (8/17/06).

Question Presented:  Whether a state violates the dormant Commerce Clause by providing an exemption from its income tax for interest income derived from bonds issued by the state and its political subdivisions, while treating interest income realized from bonds issued by other states and their political subdivisions as taxable to the same extent, and in the same manner, as interest earned on bonds issued by commercial entities, whether domestic or foreign.

Reasons for Granting the Writ:

  1. This Case Presents An Important Question of Federal Constitutional Law on Which the Courts Below Are Divided
  2. The Decision Below Is at Odds With Prior Decisions of This Court and Presents an Important Constitutional Question That Should be Settled by This Court

(Hat tip:  Greg Germain).  Prior TaxProf Blog coverage:

http://taxprof.typepad.com/taxprof_blog/2006/11/kentucky_files_.html

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