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New York: Decision from state’s highest court favorable to nonresident taxpayers

It is no secret that New York imposes one of the highest tax burdens on its taxpayers, especially its residents. These high tax rates make it beneficial for not only the extremely wealthy to avoid resident status, but also for less affluent taxpayers to do so where the facts and circumstances support nonresident status.

In the past, there have been several cases where multimillionaires who maintain homes in New York and spend 10 months in those homes each year still claim to be nonresidents. See, e.g., Tamagni v. Tax Appeals Trib. of State of N.Y., 91 N.Y.2d 530, 535 (1998). Even Actor Tom Hanks recently left a premiere of one of his movies early in order to avoid New York residency status. Due to the attractiveness of seeking or maintaining nonresident status, New York legislators enacted laws with the purpose of taxing individuals who are “really for all intents and purposes...residents of the state[.]” Id. However, these laws have at times been applied in ways which frustrate this purpose (and taxpayers).

New York Tax Law § 601 and New York City Administrative Code § 11-1701 impose, respectively, personal income tax on New York and New York City “resident individuals.” There are two ways in which an individual may be taxed as a “resident.” First, the individual will be taxed if his or her permanent and primary home is located in New York (i.e., he or she is domiciled in New York). N.Y. Tax Law § 605(b)(1)(A).

Second, taxes are imposed on a “statutory resident” or someone “who is not domiciled in this state but maintains a permanent place of abode in this state and spends in the aggregate more than [183] days of the taxable year in the state.” N.Y. Tax Law § 605(b)(1)(B).

It is this “statutory resident” test which was considered in the case of Gaied v. N.Y. State Tax Appeals Tribunal, No. 26, ---- N.E.3d ----, (N.Y. Feb. 18, 2014).

Summary of facts and procedural background

In Gaied, during the relevant time period (tax years 2001 through 2003), Mr. Gaied was domiciled in New Jersey and owned an automotive service and repair business on Staten Island, New York and commuted to his business daily. In Nov. 1999, he purchased a multi-family apartment building near his business as a place for his elderly parents to live and as investment property. Mr. Gaied’s parents moved into the apartment building shortly thereafter and continued to live in the building. Mr. Gaied paid the electric and gas bills for the apartment, as well as maintained a telephone number for the apartment in his name. Mr. Gaied claims to have never lived at the apartment, did not keep any clothing or personal effects there, nor did he have sleeping accommodations there. While he did have keys to the apartment, he claims he did not have unfettered access and only slept over on the couch on occasion when his parents requested his attention to their medical needs. Mr. Gaied rented the other two apartments in the building to tenants.

The New York Department of Taxation and Finance (the Department) audited Mr. Gaied’s 2001 through 2003 nonresident tax returns. After the audit, the Department concluded that Mr. Gaied was a “statutory resident” of New York “because he spent over 183 days in New York City and maintained a ‘permanent place of abode’ at the Staten Island property during those years” and issued Mr. Gaied a Notice of Deficiency in the amount of $253,062, plus interest. Gaied, slip op. at 3. Mr. Gaied challenged the assessment, conceding that while he did spend more than 183 days in New York, he did not maintain a “permanent place of abode” in New York.

The antecedent ruling to Gaied interpreted “‘maintains a permanent place of abode’ to mean that a taxpayer need not ‘reside’ in the dwelling, but only maintain it, to qualify as [a] ‘statutory resident’” under the Tax Law.

New York Court of Appeals holding

After multiple appeals, the last two of which found for the state, Mr. Gaied’s case reached the New York Court of Appeals, which is New York’s highest court (Appeals Court).

As noted by the Appeals Court in Gaied, “[t]he Tax Law does not define ‘permanent place of abode’, but the regulations define it as ‘a dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by such taxpayer, [which] will generally include a dwelling place owned or leased by such taxpayer’s spouse.” Gaied, slip op. at 7 citing 20 NYCRR 105.20(e)(1). The Appeals Court further noted that the regulations “provide that, by way of example, ‘a mere camp or cottage, which is suitable and used only for vacations, is not a permanent place of abode.’” Id.

On this basis, the Appeals Court reasoned, considering the legislative history of the relevant statutes, that the “permanent residence” that the tax laws seek to evaluate must relate to the taxpayer himself and that such taxpayer must have a “residential interest” in the underlying property and that “there must be some basis to conclude that the dwelling was utilized as the taxpayer’s residence.” In Mr. Gaied’s case, the Appeals Court found that he did not possess a residential interest.

Ohio: Ohio Supreme Court receives Cleveland “jock tax” case

Last week, former Indianapolis Colts center Jeff Saturday filed an appeal with the Ohio Supreme Court in response to his loss at the Ohio Board of Tax Appeal (BTA). Mr. Saturday’s appeal stems from Cleveland’s tax assessment against him for a game played between the Indianapolis Colts and Cleveland Browns in 2008. However, Mr. Saturday was not in Cleveland for the game and stayed in Indianapolis to rehabilitate his injury. In fact, Mr. Saturday was not in Cleveland for the entirety of 2008. In essence, Mr. Saturday’s Cleveland tax liability is based on the activities of his employer, the Indianapolis Colts. His BTA case was previously covered in the Multistate Tax Update.

Mr. Saturday claimed in his appeal to the BTA that Cleveland’s “jock tax” violates the Commerce Clause of the U.S. Constitution, the Due Process Clause of the U.S. and Ohio Constitutions, as well as Article XVIII of the Ohio Constitution.

In finding for the City of Cleveland, the BTA explicitly avoided any analysis or ruling on Mr. Saturday’s constitutional assignments of error. Such questions of constitutionality, the BTA explained, were not within the BTA’s subject matter jurisdiction and it therefore could not rule on those questions. Thus, Mr. Saturday did not have the entirety of his case heard. For these constitutional questions to be addressed, an appeal to the Ohio Supreme Court was necessary—which is exactly what Mr. Saturday has now done.

While state tax nexus has long been an area of contention, this case has the potential to be one of great precedential value as far as personal tax nexus is concerned. Only time will tell how the Ohio Supreme Court ultimately handles this case and how the outcome may affect tax nexus, at least in Ohio.

U.S. Supreme Court indicates interest in Maryland double taxation case

The U.S. Supreme Court has indicated interest in reviewing a Maryland Court of Appeals (the highest state court in Maryland) decision (Md. Comptroller of Treas. v. Wynne, 64 A.3d 453 (Md. 2013)) that the credit for taxes paid to other states must include the local tax in addition to the state portion of the tax. In addition, the U.S. Supreme Court has invited the Solicitor General to file a brief on this case expressing the views of the U.S. on this issue.

Maryland state and county tax

The State of Maryland assesses income tax on its state tax returns in two portions. The first portion includes the state tax at a maximum rate of 5.75 percent. The other portion includes the local county tax, which varies between 1.25 percent and 3.2 percent, depending on the tax rate imposed by the taxpayer’s county of residence. For nonresidents who pay Maryland state taxes, there is a special non-resident tax assessed instead of the county tax, which is equal to the rate of the lowest county tax. Since 1975, Maryland tax law has provided a credit to Maryland residents for taxes paid to other states only against the Maryland state portion of the tax and not against the county portion of the tax.

Factual background

Brian and Karen Wynne appealed a tax assessment that denied a tax credit against the Maryland county tax portion for tax payments made to other states. Mr. Wynne was a minority owner in an S-corporation, which filed state tax returns in 39 states. The S-corporation allocated to each shareholder a pro rata share of the taxes paid to the various states. Such tax returns did not indicate if payments of income taxes were made to any county or local entity in other states. The Wynnes appealed this double taxation.

Majority opinion of Maryland Court of Appeals

The majority opinion found that limiting the tax credit for payments of out-of-state income taxes to the state portion of the Maryland income tax was unconstitutional because it violated the dormant Commerce Clause of the U.S. Constitution by discriminating against interstate commerce. The Court stated that due to the denial of the tax credit, taxpayers who earn substantial income from out-of-state activities may pay significantly more in total state and local taxes than a similar taxpayer whose income is derived wholly from in-state activities. The Court determined that such different treatment creates a disincentive for the taxpayer (or his S-corporation) from engaging in income-generating activities in other states.

The majority opinion found the comptroller’s argument that the county income tax is not directed to interstate commerce unpersuasive and that the Wynnes have failed to identify any interstate commercial activity affected by the failure to allow for a tax credit against the county income tax. The majority opinion also found unpersuasive the comptroller’s alternative argument that if every taxing jurisdiction adopted Maryland’s tax regime, a taxpayer would only be required to pay one resident county income tax. The majority opinion seemed to indicate that they viewed the county income tax as a state tax for constitutional purposes. In addition, the majority opinion noted that under dormant Commerce Clause analysis, there are only two regimes, state and federal. The Court did not believe there was authority in case law to analyze a third level, a local tax level, so that such local taxes need to be only considered in light of local taxes in other jurisdictions.

Dissenting opinion of Maryland Court of Appeals

The dissent held that the Wynnes failed to meet their burden of proving that the dormant Commerce Clause was implicated because they failed to prove that requiring the payment of the county income tax without a tax credit either expressly discriminates against interstate commerce or places more than an incidental burden upon interstate commerce.

In addition, the dissent argued that the Wynnes benefit from the services provided by their county of residence that are funded with such county income taxes. The dissent argued that allowing taxpayers to pay a lesser amount of county income tax, would have the “possible absurd result” of having one neighbor pay little or no tax for county services while another neighbor with similar income may pay a substantial local tax to support such services.

Potential local tax impact

In the Maryland Attorney General’s brief to the U.S. Supreme Court, he noted that the Court of Appeals decision could cost local Maryland governments $45 million to $50 million annually. However, most counties and municipalities do not impose a local income tax and instead rely on sales taxes and property taxes to fund county and municipal services.

For those states that permit the imposition of local income taxes, the impact of a potential U.S. Supreme Court case requiring tax credits to be applied to local taxes could be huge, especially since not all local jurisdictions permit tax credits. For example, Ohio currently allows its municipalities to impose income taxes, which are usually imposed by the city in which a taxpayer works or generates pass-through income and the city in which the taxpayer resides. Generally, the city of residence will determine how much, if any, tax credit will be given for any taxes paid by such taxpayer in other local jurisdictions. This would generally apply if the local jurisdiction is within or outside the state. The current Ohio municipal tax regime may result in one neighbor paying local taxes in his city of residence to support local services, while another similarly situated neighbor pays no local resident taxes due to tax credits for payments made to other local jurisdictions. However, such services are also supported with property and sales taxes paid by taxpayers.

Interestingly, the majority opinion seems to view the county income tax as a state tax. If it is actually considered a state tax, then a tax credit should be granted against such county income tax for the payment of out-of-state taxes in order to avoid double taxation. However, if the county income tax is really a local income tax, then perhaps the Supreme Court will take the opportunity to analyze a third level, the local level, and what impact local income taxes may have on interstate commerce.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Jeremy J. Schirra
216.348.5444
jschirra@mcdonaldhopkins.com 

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

 

 

 

 

 

 

 

 

 

 

 

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