The COVID-19 pandemic has drawn renewed attention to the possibility that state tax regimes may result in multiple taxation of personal income. In a new article, Bradley Joondeph explores the constitutional significance of multiple taxation of personal income, and he concludes that multiple taxation isn’t actually that problematic. To prove his point, Joondeph begins with an overview of contexts in which courts have blessed state tax laws that result in multiple taxation. Joondeph describes two major sources of multiple taxation: conflicting apportionment methods and conflicting jurisdictional bases.
When taxing nonresidents, states may only tax income sourced to their state, but it is not always obvious where income should be sourced. The problem is especially pronounced in the context of multi-state corporations, and states have adopted different apportionment formulas for sourcing corporations’ income. These formulas often conflict in ways that result in multiple taxation, but the Supreme Court has long held that this is fine.
In addition to the source-based jurisdiction described above, states have jurisdiction to tax their own residents—regardless of where that income is earned. Multiple taxation may arise when one state taxes a person on the basis of residency, while another state taxes that same person (a nonresident) based on source-of-income. There is a relatively consistent policy across states for the residence-state to yield to the source-state (by providing tax credits for taxes paid to other states, for example). However, Joondeph convincingly argues that such policies are not constitutionally required.
Having shown that state tax laws can interact in ways that result in multiple taxation but survive constitutional scrutiny, Joondeph turns to the cases when they do violate the Constitution. He argues that, when such laws run afoul of the commerce clause, it is because they either exceed the state’s taxing jurisdiction or discriminate against interstate commerce. These constitutional violations often produce multiple taxation, but the multiple taxation itself should be understood as a mere symptom of the violation.
Based on this understanding of the precedent, Joondeph then turns to the Supreme Court’s 2015 decision in Maryland v. Wynne. In that case, the Court struck down a Maryland tax law that (i) taxed residents on worldwide income without providing a tax credit for taxes paid to another state and (ii) taxed nonresidents on Maryland-sourced income. The law resulted in double taxation of income earned by Maryland residents in other states. But Joondeph argues that multiple taxation was not the constitutional problem. Consistent with the Court’s dicta (more on this in a minute), Joondeph explains that the law would have survived constitutional scrutiny if it had applied solely to residents. The fact that the law may interact with other states’ laws to trigger multiple taxation would not violate the commerce clause.
Joondeph’s article is an excellent overview of the state of the law. I look forward to assigning this piece to my SALT students, who always look a bit skeptical and frustrated when I tell them that multiple taxation is often a signal of a commerce clause violation, but not always. In my own view, the law is awfully messy on this point, making it challenging to explain to law students who really, really want to know “the answer.” Joondeph makes an admirable attempt to sort through the chaos, and I’m inclined to agree with his conclusion that multiple taxation does not necessarily constitute a commerce clause violation.
But I’m left with some questions. I would have loved to see this Article dive deeper into the internal and external consistency tests for evaluating states’ apportionment methods. As Joondeph explains, the internal consistency test analyzes tax laws under a thought experiment that assumes, hypothetically, that all states have adopted the same tax regime. A tax law will fail the test if it results in multiple taxation under this thought experiment even if it does not produce double taxation in real life. Moreover, a law will pass the internal consistency test if it does not result in multiple taxation under the thought experiment—even if it does produce double taxation in real life.
To balance out these somewhat counterintuitive conclusions, the internal consistency test is normally paired with the external consistency test. The external consistency test looks to the real world to understand whether the apportionment method actually reflects a reasonable sense of how income was generated. The existence of real-world multiple taxation would be a very strong signal that an apportionment formula is not reasonable—so a tax that produces multiple taxation will often (but not always!) fail the external consistency test. I would have loved to hear more from Joondeph about how these tests affect how we think about the constitutional significance of multiple taxation itself.
The decision in Wynne relied heavily on the internal consistency test, even going so far as to suggest in dicta “fixes” that would solve the multiple tax problem under the hypothetical. Among these fixes is the one analyzed by Joondeph—stop taxing nonresidents. (If, hypothetically, no state taxed nonresidents, then there would be no risk of multiple taxation, and a tax credit would be unnecessary). But the Court didn’t analyze the Maryland law—or its fixes—under the external consistency test. It is entirely possible that this “fix” would have failed an external consistency analysis. At least one state supreme court case, Steiner v. Utah, has interpreted Wynne as essentially killing the external consistency test. I get the sense that Joondeph would probably agree with Steiner that the external consistency test is dead, and internal consistency is all that remains. And I could be convinced that that’s right—but I would have loved to see a full analysis of the issue.
This article provides a clear and thoughtful analysis of commerce clause restrictions on state taxing power. I recommend this article to anyone interested in state and local tax law, constitutional law, or personal income tax issues.