Big win for land conservation group in Massachusetts property tax exemption decision
The Supreme Judicial Court of Massachusetts recently ruled that when a charitable organization holds lands for conservation purposes, the organization is entitled to property tax exemptions. The decision in New England Forestry Foundation, Inc. v. Board of Assessors of Hawley held that the New England Forestry Foundation (NEFF) satisfied Massachusetts law, G. L. c. 59, § 5, Third (Clause Third), which exempts certain lands possessed by charitable organizations from property taxes.
Factual and procedural background
In 1999, NEFF, a Massachusetts nonprofit organization, purchased 120 acres in Hawley, Massachusetts for land conservation purposes. To further this purpose, NEFF hired a licensed forester to develop a “forest management plan” to maintain the forest. NEFF also opened the land for public use, such as for hiking and hunting.
NEFF applied for, and acquired, forest-land classification for the land, which reduced NEFF’s tax liability because it held the land in an undeveloped state and managed it under the forest management plan.
NEFF then applied to the assessors for a Clause Third exemption in late 2009 but was denied in April 2010. NEFF appealed such denial to the Hawley Board of Assessors (the Board). The Board concluded that NEFF was not carrying out a charitable purpose within the meaning of Clause Third because forest management is not a traditional charitable purpose and the benefits of NEFF's activities on the land do not inure to a sufficiently large class of persons partly due to NEFF's insufficient efforts to promote the use of the land by the public. The Board further concluded that NEFF did not occupy the land in furtherance of its claimed charitable purposes. NEFF appealed to the Appellate Tax Board, which also denied its request, leading to an appeal to the Massachusetts high court.
Clause Third’s requirements
Clause Third imposes the following two-part test before a charitable organization can claim a property tax exemption:
The land must be held by a charitable organization as defined by Massachusetts law; and
The organization must occupy the land in a way that furthers its charitable purpose.
With respect to the first requirement, the court recognized that the law requires more than just a tax-exempt status from the federal government or a legal status as a charitable organization. Rather, to be a charitable organization, the organization must be conducted so that its actual operations are that of a public charity.
Contrary to the Board’s finding, the court determined that NEFF’s purposes are traditionally charitable within the meaning of Clause Third. The court said that NEFF’s programs and activities benefit an indefinite number of people. The court noted that properly preserved and managed conservation land can provide a tangible benefit to a community even if few people enter the land. For example, land conservation contributes to “ecosystem resilience,” dissipation of stormwater, clean air, and purification of the water supply.
The court also determined that NEFF’s work is traditionally charitable because it assists in lessening the burdens of government. Pursuant to the Massachusetts Constitution, the government has the duty of safeguarding natural resources and ensuring basic environmental quality. The activities of NEFF assist Massachusetts in its conservation policy goals.
In contemplating the second requirement, that an organization must occupy the land in a way that furthers its charitable purpose, the court disagreed with the Board’s determination that in order to demonstrate that NEFF occupied the land for the benefit of the public it had to actively promote the public’s use of the land. The court found that no such duty exists in Clause Third and that in the case of land conservation of a fragile ecosystem, a public access requirement could thwart the land conservation objectives.
The court determined that the proper inquiry regarding the occupation requirement is whether the organization occupies the land at issue in a manner that is less like a private landowner and more like an organization holding the land for the public good. Therefore, the court concluded that when public use of the land is not required for an organization to achieve its charitable purpose, the promotion of public access and use is not required to demonstrate occupancy. Instead, the focus should be on whether the organization is acting like a private landowner and takes affirmative steps to exclude the public’s access to the land, such as by posting “no trespassing” signs. The court noted that in some cases, a compelling case could be made that the exclusion of the public is necessary to achieve the public benefit.
That being said, the court found that NEFF did not, in fact, prohibit public access, basing its finding on the steps NEFF took to inform the public that the land is available for recreation and NEFF’s acquiescence to snowmobilers’, hunters’, and hikers’ use of the land. The court also noted that NEFF used the land by engaging in sustainable forestry practices. NEFF, therefore, showed that it occupied the land within the meaning of Clause Third’s second requirement because it did not exclude the public from its land and engaged in sustainable forestry practices on such land.
The court’s conclusion and industry reactions
Based on its analysis, the court found that NEFF’s 120 acres qualified for the property tax exemption. This was a major victory for NEFF, which owns 7,500 acres in Massachusetts, and for land conservationists in general, because the opinion confirmed that land conservation is a traditional charitable purpose under Massachusetts law.
As reported by the Boston Globe, Jessica Owley, a professor of law at SUNY Buffalo Law School, explained that “[o]ne of the things about this case that scared people is that the town was questioning whether land conservation was a charitable purpose, whether it really helped people. What’s great about this opinion is the Massachusetts court looked at it and said public purposes and charitable purposes can be a lot broader than that.” NEFF Executive Director Robert Perschel announced in a press release that his organization will soon release a report quantifying the public benefits of maintaining New England forestry.
That being said, not everyone was pleased with the decision. Quoted in the same Boston Globe report was Geoffrey Beckwith of the Massachusetts Municipal Association. Beckwith explained his disappointment, stating “[t]his decision will essentially mean that these communities will not be able to collect even minimal property taxes from many parcels. This will certainly have a great impact.”
Landmark case in the making?—U.S. Supreme Court takes up whether states may tax income earned in other states
On May 27, 2014, the U.S. Supreme Court granted certiorari to Comptroller v. Wynne, indicating the Court’s determination that the case is worthy of its attention. The sole question presented in Wynne is as follows:
Does the United States Constitution prohibit a state from taxing all income of its residents—wherever earned—by mandating a credit for taxes paid on income earned in other states?
Depending on the outcome of this case, certain state tax laws nationally could be overturned or require substantial revision in order to remain constitutional.
This case arrived at the Court after a ruling by the Court of Appeals of Maryland (the state’s highest court), Comptroller v. Wynne (Wynne II), 431 Md. 147 (2013), which held that Maryland’s income tax law discriminated against interstate commerce and, as a result, violated the dormant Commerce Clause of the U.S. Constitution (dormant Commerce Clause explained further below).
Summary of facts
The taxpayers in Wynne II, Brian and Karen Wynne (the Wynnes), were a married couple who resided in Howard County, Maryland during 2006, the relevant tax year. In that year, Brian Wynne owned a small interest in Maxim Healthcare Services, Inc. (Maxim), an S corporation that conducted business nationally. Accordingly, Maxim filed income tax returns in 39 states. Due to Maxim’s S-election, Maxim’s income was passed through to its shareholders for federal and Maryland tax purposes. As a result of this pass through treatment, the Wynnes received a pro rata share of taxes paid by Maxim to other states. The Wynnes then claimed a credit for income taxes paid in other states and the income earned in other states from Maxim when filing their Maryland income tax return.
Maryland state law imposes an income tax on individuals comprised of three parts:
State income tax
County income tax
Tax on those subject to state income tax but not the county income tax at a rate equal to the lowest county tax (Special Non-Resident Tax or SNRT)
Maryland law further provides for an individual subject to its state income tax to take a credit for taxes paid to other states for similar taxes. However, no credit is given for the county income tax for similar income taxes in other states, although such a credit had previously applied with respect to the county tax until 1975. Note that the county tax and SNRT have been held to be state taxes for constitutional purposes.
The Maryland Comptroller of Treasury (the Comptroller) issued an assessment after reviewing and revising the local tax owed in the Wynnes’ 2006 Maryland income tax return. After some unsuccessful lower decisions, the Wynnes argued successfully in the Circuit Court for Howard County that “an appropriate credit for out-of-state income taxes paid” on Maxim’s income should be available to them, reversing the lower court determination. The Comptroller then appealed the Circuit Court’s opinion to the Court of Appeals of Maryland, which affirmed the decision of the Circuit Court.
Applicable law addressed in Wynne II
The crux of the case is Wynnes’ position (and the Comptroller’s contrary position) that the state’s income tax is a violation of the dormant Commerce Clause to the U.S. Constitution.
As the Wynne II decision succinctly summarized: “The dormant Commerce Clause is a restriction on State power that is not explicitly articulated in the Constitution but that has been derived as a necessary corollary of a power specifically conferred on Congress by the Constitution.” The Commerce Clause provides Congress with the power to “regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” U.S. Const., Art. I, § 8, cl. 3. “Though phrased as a grant of regulatory power to Congress, the [Commerce] Clause has long been understood to have a ‘negative’ [or dormant] aspect that denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce.” Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93 (1994). The dormant Commerce Clause will not affect the application of a tax unless there is actual or prospective competition between entities in an identifiable market and state action that either expressly discriminates against or places an undue burden on interstate commerce. General Motors Corp. v. Tracy, 519 U.S. 278 (1997).
The U.S. Supreme Court has held that a state may tax interstate commerce without violating the dormant Commerce Clause if the tax survives the following four-prong test:
If it applies to an activity with a substantial nexus with the taxing state
Is fairly apportioned
Is not discriminatory towards interstate or foreign commerce
Is fairly related to the services provided by the state
Complete Auto Transit v. Brady, 430 U.S. 274, 279 (1977).
The Wynnes, in challenging the Comptroller’s tax assessment, only challenged the Maryland county tax on the second and the third prongs of the test. However, the Wynnes only needed to show that the tax did not survive one of the prongs.
Is the county tax fairly apportioned? (Second prong)
The Wynne II court found that the tax was not fairly apportioned. To determine whether a tax is fairly apportioned, a court will examine whether each state taxes only its fair share of an interstate transaction. For the tax to be fairly apportioned, courts examine whether it is both internally consistent and externally consistent.
Internal consistency examines the structure of the underlying tax to determine the answer to the following question: If the tax were applied identically by every state in the union, would such tax place interstate commerce at a disadvantage to intrastate commerce? After its evaluation, the Wynne II court found the county tax credit (or lack thereof) was not internally consistent. The court determined under the county tax that a taxpayer with income sourced in more than one state will consistently cause the taxpayer to owe more in combined state income taxes than a taxpayer with income in just the taxpayer’s home state.
External consistency assesses whether a state has only taxed the portion of revenues from the interstate activity which reasonably reflects the in-state component of the taxed activity. The Wynne II court found that without the tax credit on the county tax, that the tax being examined does not apportion income subject to the tax even when the income is derived from entirely out-of-state sources. Thus, this was an indication to the court that the lack of the county tax credit made the tax externally inconsistent.
Does the county tax discriminate against interstate commerce? (Third prong)
A tax is discriminatory if it is facially discriminatory, has a discriminatory intent, or has the effect of unduly burdening interstate commerce. Note that there is no de minimus justification where a court finds a tax to discriminate against interstate commerce. The Wynne II court found that the application of the county tax to the out-of-state pass-through income without application of a credit for out-of-state income taxes on the same income appears to favor businesses that do business primarily in Maryland over their competitors who do business primarily out-of-state (at least in an S corporation context). Therefore, the county tax is discriminatory.
Overall holding of the Wynne II court
The Wynne II court held that while county income tax itself is not unconstitutional, the lack of application of a credit to the county tax offends the dormant Commerce Clause. As a result, the Wynnes’ 2006 income tax liability should be recalculated in a manner consistent with the Wynne II court’s ruling.
Further discussion and debate
The U.S. Supreme Court’s granting of certiorari of Wynne will surely instigate many lively debates among state tax pundits, constitutional scholars, lawyers, and lawmakers alike. Businesses and individuals, especially those with significant multistate activities, should also follow this case as it has potential to have broad implications for their multistate tax obligations. The Multistate Tax Update will continue following the Wynne case as it works its way to a decision of the Court.
Delaware enacts tax bill hike on annual corporate taxes
On April 15, 2014, Delaware Governor Jack Markell signed House Bill 265 (the Bill) into law, effectively increasing annual taxes on companies that incorporate in Delaware. The Bill was introduced as part of efforts to target budget shortfalls in Delaware’s 2015 budget.
The Bill increases the annual taxes paid by general partnerships, limited partnerships, and limited liability companies that have registered to do business in Delaware or filed a statement of partnership existence with the State of Delaware. The annual tax for these entities increased from $250 to $300. The Bill is expected to raise approximately $33 million in tax revenue for Delaware from these types of entities.
The Bill will also affect franchise taxes for corporations incorporated in Delaware. The Bill increases the minimum corporation tax to $175, formerly $75, for non-exempt corporations that are not authorized to sell stock, corporations with authorized capital stock of 5,000 shares or less, and corporations with assumed no-par capital that is $500,000 or less. Similarly, the Bill also increased the minimum corporation tax to $250, formerly $150, for corporations with an authorized capital stock between 5,000 and 10,000 shares and corporations with an assumed no-par capital between $500,000 and $1 million. The corporation franchise tax increase is expected to raise approximately $18 million in tax revenue for Delaware.
The Bill was approved in the House on April 3, 2014, by a margin of 26-13. Next, the Bill was passed in the Senate on April 10, 2014, by a margin of 13-7. In both houses, the Bill received no favorable votes from the minority Republican representatives. The Bill applies retroactively starting Jan. 1, 2014.
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