Paul L. Caron

Friday, September 28, 2018

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).

Holderness (2017)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Justices Roberts, Sotomayor, Kagan, and Breyer believe that Congress, not the Court, should act to correct misguided or outdated DCC doctrine, whereas Justices Alito and Ginsburg are comfortable with the Court so acting.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:

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