Weekly SSRN Tax Article Review And Roundup: Holderness Reviews Zelinsky's Dormant Commerce Clause Lessons From Wayfair And Wynne

This week, Hayes Holderness (Richmond) reviews Edward A. Zelinsky (Cardozo), Comparing Wayfair to Wynne: Lessons for the Future of the Dormant Commerce Clause,  22 Chap. L. Rev. ___ (2019).

South Dakota v. Wayfair captivated the state and local tax (“SALT”) world this past summer, as the Supreme Court abandoned the dormant Commerce Clause’s (“DCC”) decades-old physical presence rule for sales and use tax collection obligations. The 5-4 decision contained seemingly odd bedfellows: Justice Ginsburg joined Justices Alito, Gorsuch, Thomas, and Kennedy in the majority, and Chief Justice Roberts corralled Justices Sotomayor, Kagan, and Breyer into his dissent. But DCC jurisprudence is an odd area of SALT doctrine, and Professor Edward Zelinsky tactfully sorts the views of the various Justices in his essay, exposing the major fault lines between their various views. With this sorting, Zelinsky is able to answer whether Wayfair’s abandonment of the physical presence rule is unique or whether it foreshadows danger for other parts of the SALT DCC jurisprudence. Spoiler alert: the DCC is not going anywhere fast.

The central conclusion Zelinsky reaches when sorting the Justices is that there is no consensus regarding the role of the DCC in SALT. At one extreme, Justice Thomas rejects the premise of the DCC altogether, and Justice Gorsuch may not be far off from that view. The remaining Justices respect the legitimacy of the DCC, but differ in other ways. Justices Roberts, Sotomayor, Kagan, and Breyer believe that Congress, not the Court, should act to correct misguided or outdated DCC doctrine, whereas Justices Alito and Ginsburg are comfortable with the Court so acting. However, in the 2015 Wynne case, Justices Alito, Roberts, Breyer and Sotomayor viewed the DCC as barring any state taxes that discriminated between residents and non-residents, but Justices Ginsburg and Kagan were convinced that the DCC only protects those taxpayers that cannot vote in the taxing state (i.e. non-residents). With such a muddled lay of the land, only pockets of agreement can be found, and Zelinsky concludes that Justice Kennedy’s replacement is unlikely to significantly alter the Court’s direction in this context.

Relying on these insights, Zelinsky further concludes that the Court is not likely to engage in wholesale revision of the SALT DCC jurisprudence. The DCC skeptics are not going to expand the doctrine, and the remaining Justices are not going to engage in a coordinated deconstruction of the doctrine. Zelinsky shows the high bar to action by analyzing how the Court might approach the issue of dual state residents who are taxed on all of their income by both states. Even though a taxpayer with dual (or more) state residencies would clearly be exposed to the possibility that her same income would be taxed by multiple states, existing precedent would push the Wayfair dissenters to leave the issue to Congress and the lack of attention to the issue would keep Justices Ginsburg and Alito from concluding that the precedent is misguided enough to justify the Court acting.

Zelinsky follows this example with another: his own. Often Zelinsky performs his duties for New York-based Cardozo School of Law from his Connecticut home. Because he is not in Connecticut for the convenience of his employer, only for his personal convenience, New York sources the income arising from that work to New York and subjects it to tax. Connecticut generally offers credits for taxes paid to source states but does not give a credit when the work was physically done in Connecticut. The core of the issue is that Connecticut and New York define “source” differently for telecommuters; Zelinsky is caught between a Nutmeg and a Big Apple.

Though this situation inspires sympathy, the essay’s conclusions are less obvious to the reader than in the dual resident case. Here, Zelinsky concludes that the Court: 1) would be more likely to take on this DCC issue, and 2) would specifically act to prevent the state of non-residency from claiming to be the source of income from telecommuter work. The first point is not too difficult to sort out, but questions remain. The situation would discourage residents of one state from telecommuting to a job in another, violating the Wynne majority’s view of the DCC’s purpose, and non-resident telecommuters’ inability to vote in the source state should also bring Justices Ginsburg and Kagan into the fold. Having six Justices concerned with the substance is a good start, but why not defer to Congress?

Part of the answer provided by Zelinsky is that Wayfair demonstrates that the Court is ready to deal with how major changes in technology affect DCC doctrine; thus, as technology has revolutionized telecommuting by making it more widely-used, the Court should be interested in tackling this DCC issue. If the Court did take the case, Zelinsky argues that a state that sources to itself income from a telecommuter’s work physically performed outside of the state’s borders would lose, presumably to that six Justice alignment discussed earlier. However, the essay may lose the forest for the trees in reaching this conclusion, relying on Zelinsky’s informed sorting of the Justices but overlooking Wayfair’s recognition of the diminished value of physical presence in today’s world for determining when an activity takes place in a state.

After Wayfair, surely New York can reasonably assert that telecommuting into Cardozo should be treated the same as physically commuting into Cardozo; otherwise, what would prevent Zelinsky from moving to New Hampshire (a no income tax state) and telecommuting from there to avoid all state taxes on that work? Likewise, Connecticut is surely reasonable to say that any work performed in the state is not to be considered sourced anywhere else. This type of conflict between two state’s legitimate laws—rather than an internal conflict in one state’s laws as in Wynne—raises tradeoffs that Congress is best suited to deal with as a primary matter, and a majority of the Justices may be expected to give Congress that chance.

Ultimately, these questions do not detract from the essay’s important contribution to our understanding of Wayfair and its place within the SALT jurisprudence. Indeed, they highlight the ongoing “quagmire” of this area of doctrine, for which Zelinsky’s insights provide much-appreciated direction. In uncovering the nuances, divisions, and similarities of the views of the sitting Justices with respect to the DCC in this area, Zelinsky ably challenges the reader to consider the future direction of the doctrine and the impact any new members of the Court might have on that direction.

Here’s the rest of this week's SSRN Tax Roundup:

• Ufuk Akcigit (Chicago – Economics), John Grigsby (Chicago – Economics), Tom Nicholas (Harvard – Entrepreneurial Management), and Stefanie Stantcheva (Harvard – Economics), Taxation and Innovation in the 20th Century, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2018-71.
• Alexander Bick (Arizona State – Economics), Bettina Brüggemann (McMaster), Nicola Fuchs-Schundeln (Goethe University Frankfurt), and Hannah Paule-Paludkiewicz (Goethe University Frankfurt), Long-Term Changes in Married Couples’ Labor Supply and Taxes: Evidence from the US and Europe Since the 1980, IZA Discussion Paper No. 11824.
• Vincent Bignon (Banque de France), Cecilia Garcia-Peñalosa (Aix-Marseille University), The Toll of Tariffs: Protectionism, Education and Fertility in Late 19th Century France, Banque de France Working Paper No. 690.
• Sebastian Blesse (Centre for European Economic Research), Philipp Doerrenberg (Centre for European Economic Research), and Anna Rauch, Higher Taxes on Less Elastic Goods? Evidence from German Municipalities, ZEW - Centre for European Economic Research Discussion Paper No. 39.
• Jason Brown (Federal Reserve Bank of Kansas City), Peter Maniloff (Colorado School of Mines), and Dale Manning (UC Davis – Department of Agricultural and Resource Economics), Effects of State Taxation on Investment: Evidence from the Oil Industry, Federal Reserve Bank of Kansas City Working Paper No. 18-07.
• Samuel D. Brunson (Loyola Chicago), Paying for Gun Violence (September 27, 2018).
• John Cawley (Cornell – Human Ecology), Chelsea Crain (Iowa – Tippie College of Business), David E. Frisvold (Iowa – Tippie College of Business), and David Jones (Michigan – Mathematica Policy), The Pass-Through of the Largest Tax on Sugar-Sweetened Beverages: The Case of Boulder, Colorado, NBER Working Paper No. w25050.
• John Cawley (Cornell – Human Ecology), David E. Frisvold (Iowa – Tippie College of Business), Anna Hill (Michigan – Mathematica Policy), and David Jones (Michigan – Mathematica Policy), The Impact of the Philadelphia Beverage Tax on Purchases and Consumption by Adults and Children, NBER Working Paper No. w25052.
• Bruno Chiarini (University of Naples, Parthenope), Maria Ferrara (University of Naples, Parthenope), and Elisabetta Marzano (University of Naples, Parthenope), Credit Channel and Business Cycle: The Role of Tax Evasion, CESifo Working Paper Series No. 7169.
• Nadja Dwenger (Max Planck) and Lukas Treber (University of Hohenheim), Shaming for Tax Enforcement: Evidence from a New Policy, CEPR Discussion Paper No. DP13194.
• Ben Gilbert (Colorado School of Mines) and Joshua Graff Zivin (UC San Diego – International Relations and Pacific Studies), Dynamic Corrective Taxes with Time-Varying Salience, NBER Working Paper No. w25014.
• Joshua C. Hall (West Virginia), and Antonios Koumpias (Michigan – Dearborn, Social Sciences), Growth and Variability of School District Income Tax Revenues: Is Tax Base Diversification a Good Idea for School Financing?, 36 Contemporary Economic Policy 678 (2018).
• Brett Hollenbeck (UCLA – Anderson School of Management) and Kosuke Uetake (Yale School of Management), Taxation and Market Power in the Legal Marijuana Industry (August 23, 2018).
• Fabian Kindermann (University of Bonn), Lukas Mayr (University of Essex), and Dominik Sachs (European University Institute), Dominik, Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs, NBER Working Paper No. w25081.
• Kathryn Kisska-Schulze (Clemson University College of Business), This Is Our House! - The Tax Man Comes to College Sports, 29 Marquette Sports L. Rev. 2 (forthcoming 2019).
• Ivan Ozai (McGill), Tax Competition and the Ethics of Burden Sharing, 42 Fordham International L. J. (forthcoming 2018).
• Kunka Petkova (Vienna University of Economics and Business) and Alfons J. Weichenrieder (Goethe University Frankfurt), The Relevance of Depreciation Allowances as a Fiscal Policy Instrument: A Hybrid Approach to CCCTB?, WU International Taxation Research Paper Series No. 2018-07.
• Erin A. Scharff (Arizona State), Green Fees: The Challenge of Pricing Externalities Under State Law, 97 Neb. L. Rev. 168 (2018).
• Adam B. Thimmesch (Nebraska), Darien Shanske (UC Davis), and David Gamage (Indiana), Wayfair: Substantial Nexus and Undue Burden, 89 State Tax Notes (July 30, 2018).
• Rod Tyers (Australian National University – Economics) and Yixiao Zhou (Curtin University), Automation, Taxes and Transfers with International Rivalry, CAMA Working Paper No. 44/2018.
• Tom Wright (HM Treasury) and Gabriel Zucman (Berkeley – Economics), The Exorbitant Tax Privilege, NBER Working Paper No. w24983.
• Soo Keong Yong (Xi'an Jiaotong University, Business), Lana Friesen (University of Queensland, Economics) and Stuart McDonald (Renmin University of China), Emission Taxes, Clean Technology Cooperation, and Product Market Collusion: Experimental Evidence, 56 Economic Inquiry 1950 (2018).