Inconsistency with the Internal Consistency Test

• Author: Mackenzie Catherine Schott
• Position: J.D., 2017, Paul M. Hebert Law Center, Louisiana State University.
• Pages: 947-974

Inconsistency with the Internal Consistency Test INTRODUCTION Taxpayers, rejoice. Maryland, pay up. The Supreme Court’s recent holding in Comptroller of the Treasury of Maryland v. Wynne triggered some harsh consequences, which included Maryland paying taxpayers nearly $200 million in tax refunds. 1 The implications of the Court’s decision, however, were hidden underneath a murky analysis of the constitutionality of a Maryland tax law. 2 The Supreme Court ultimately struck down the law for violating the dormant Commerce Clause, 3 which in turn caused the state to make large payouts of refunds to taxpaying residents, who, the Court held, had collectively paid millions in unconstitutional state taxes. 4 Wynne has immediate practical consequences for states and taxpayers, and a glimpse into the Maryland aftermath gives an indication of what other states might encounter. After the Supreme Court struck down Maryland’s partial tax credit law, determining that it violated the internal consistency test, the state cured the unconstitutionality by amending the law to now offer a full tax credit. 5 Additionally, Maryland chose to apply this change retroactively, thus offering a refund to any taxpayer who Copyright 2017, by MACKENZIE CATHERINE SCHOTT. 1. Bill Turque, Court: Maryland has Been Wrongly Double-Taxing Residents Who Pay Income Tax to Other States, WASH. POST (May 18, 2015), https: //www.washingtonpost.com/local/md-politics/supreme-court-rules-maryland-in come-tax-law-is-unconstitutional/2015/05/18/1e92ee7a-d16f-11e4-ab77-9646eea6 a4c7_story.html [https://perma.cc/93DX-7SZH]. 2. See infra Part II.C. 3. Comptroller of the Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1795 (2015). 4. Although the Wynne decision provided no discussion on whether the decision would apply retroactively, the Court articulated its rule on retroactivity when discussing the application of the Armco decision. See Armco, Inc. v. Hardesty, 467 U.S. 638 (1984). See also Ashland Oil, Inc. v. Caryl, 497 U.S. 916 (1990). In Ashland, the Court stated the general rule that “constitutional decisions apply retroactively to all cases on direct review.” Id. at 918. Exceptions to the general rule exist, as articulated in Chevron Oil Co. v. Huson. 404 U.S. 97, 106 (1971). Because Wynne likely falls under the general rule and not an exception, Maryland chose to apply Wynne retroactively, thus offering refunds. 5. H.B. 72, 2015 Leg., Reg. Sess. (Md. 2015), http://mgaleg.maryland .gov/2015RS/bills/hb/hb0072f.pdf [https://perma.cc/24P7-KEDZ] (codified as amended at MD. CODE ANN., TAX–GEN. § 10-703(a) (West 2016)). See Wynne, 135 S. Ct. at 1806. 948 LOUISIANA LAW REVIEW [Vol. 77 overpaid taxes under the unconstitutional law. 6 This decision will cost Maryland an estimated $200 million in refunds, 7 and it also means that Maryland will collect nearly $40 million less in tax revenue going forward. 8 This tax revenue decrease means budget cuts for Maryland counties, which might result in cutting some services offered to residents. 9 These changes in Maryland are just the beginning. Some commentators have speculated that New York tax law might encounter a challenge similar to the one in Wynne, 10 while Kansas has already issued guidance on its tax law changes under Wynne. 11 The consequences in Maryland, New York, and Kansas foreshadow what other states will likely suffer if and when their similar tax laws are challenged. Unfortunately, the broader legal implications of Wynne are far less clear than its practical ones for the resident taxpayers of Maryland and other states. Wynne presented the Court with the opportunity to clarify a historically confusing and ambiguous area of dormant Commerce Clause doctrine, but the Court’s opinion in Wynne failed to meet this challenge. 12 6. Bill Turque, Maryland, Opponent of Wynne Tax Case, Now Encouraging Residents to Seek Refunds, WASH. POST (Sept. 28, 2015), https://www.washington post.com/local/md-politics/2015/09/28/657e4c4c-6613-11e5-8325-a42b5a459b1e _story.html [https://perma.cc/44PK-45KW]. See supra note 4 and accompanying text. 7. Turque, supra note 6. See supra note 4 and accompanying text. After Maryland’s decision to apply its tax amendment retroactively, Maryland instructed taxpayers to collect any authorized refunds for any taxes overpaid to Maryland. The Maryland comptroller office issued a bulletin informing Maryland taxpayers of the required action for collecting refunds. Comptroller of the Treasury of Maryland v. Wynne: Frequently Asked Questions, COMPTROLLER OF MD., http://taxes.maryland taxes.com/Individual_Taxes/Individual_Tax_Types/Income_Tax/Tax_Information/ Wynne_Case/Initial_Wynne_FAQs.pdf [https://perma.cc/K7WF-PBCW] (last updated Dec. 7, 2015). 8. Turque, supra note 1. 9. Bill Turque & Donna St. George, Leggett Proposes $50 Million in Cuts to New Montgomery Budget, WASH. POST (July 9, 2015), https://www.washingtonpost .com/local/md-politics/leggett-proposes-50-million-in-cuts-to-new-montgomery-budget/2015/07/08/652fb730-25b8-11e5-b77f-eb13a215f593_story.html [https://per ma.cc/8P2L-Z9AA]. 10. Ashlea Ebeling, Wynne Decision Boon To NYC Pied-A-Terre Owners, FORBES (May 21, 2015, 7:59 AM), http://www.forbes.com/sites/ashleaebeling/2015 /05/21/wynne-decision-boon-to-nyc-pied-a-terre-owners/#2715e4857a0b50a0d40f5 502 [https://perma.cc/ZKV6-QQUM]. 11. Brian Kirkell, Kansas DOR Provides Guidance in Response to Wynne, RSM (Aug. 11, 2015), http://rsmus.com/what-we-do/services/tax/tax-alerts/kansas-dor-provides-guidance-in-response-to-wynne.html [https://perma.cc/7TRC-RZF4]. 12. See, e.g., Bradley W. Joondeph, The Meaning of Fair Apportionment and the Prohibition on Extraterritorial State Taxation, 71 FORDHAM L. REV. 149, 149 2017] COMMENT 949 Recent history of state taxation cases shows the Court wavering between two tests—the Complete Auto test and the internal consistency test—with little rhyme or reason. 13 In deciding whether the Maryland tax violated the dormant Commerce Clause, the Court in Wynne applied the internal consistency test without satisfactory explanation as to why and failed to specifically repudiate its past inconsistencies. As a result, lower courts must grapple with Wynne’s future legal implications: does it actually announce a new controlling standard, or does it simply perpetuate the confusion that its predecessor cases had sown? Honing in on the Court’s confusing jurisprudence, this Comment argues that Wynne should be read as identifying the internal consistency test as the leading standard for state taxation analysis. Even in light of the test’s shortcomings, which the four dissenting Justices identified, the benefits of the internal consistency test make it the preferable choice— namely because of its simplicity, its broad scope, and its consistency with state autonomy. In endorsing the internal consistency test, however, the majority opinion in Wynne still had its weaknesses, leaving questions open for courts applying the test in future state taxation cases. Part I of this Comment provides an overview of the erratic history of state taxation under the dormant Commerce Clause. Part II explains the divided Supreme Court’s most recent analysis in Comptroller of the Treasury of Maryland v. Wynne. Finally, Part III argues that the Court correctly chose the internal consistency test as the leading standard but should have presented its final decision more clearly. I. THE CONFUSED STATE OF STATE TAXATION Courts often evaluate challenged state tax laws within the framework of the dormant Commerce Clause doctrine. In light of that focus, this Comment first provides a brief overview of the dormant Commerce Clause doctrine and then explains more specifically the doctrine’s role in state taxation cases. (2002) (noting that “the [Supreme] Court's state tax decisions over the past century have hardly followed a consistent or logical path”). 13. See infra note 50. For an overview of the internal consistency test’s application over time see Walter Hellerstein, Is “Internal Consistency” Dead?: Reflections on an Evolving Commerce Clause Restraint on State Taxation, 61 TAX L. REV. 1 (2007) [hereinafter Is “Internal Consistency” Dead? ]. 950 LOUISIANA LAW REVIEW [Vol. 77 A. Overview of the Dormant Commerce Clause Although the Commerce Clause explicitly grants Congress the power to regulate interstate commerce, 14 the Supreme Court has long recognized that this affirmative grant of power also implies a negative command that prohibits states from burdening interstate commerce. 15 The negative command is known as the dormant Commerce Clause 16 and directs that states do not have the ability to regulate interstate commerce absent congressional action to do so. 17 In general, the dormant Commerce Clause prohibits states from enacting laws that favor commerce within their own borders to the detriment of other states, thus addressing a fear that dates back to the beginning of the Union. 18 This action by the states is known as “economic protectionism”—that is, protection of intrastate economic interests while burdening interstate interests. 19 Throughout history, courts have used the dormant Commerce Clause to strike down state laws that burden interstate commerce, either on the face of the law or through the effects of the law. 20 14. U.S. CONST. art 1, § 8, cl. 3 (granting Congress the power “to regulate commerce . . . among the several States”). 15. See, e.g., South-Central Timber Dev., Inc. v. Wunnicke, 467 U.S. 82, 87 (1984); Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992); Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 179 (1995). 16. Okla. Tax Comm’n , 514 U.S. at 179–80 (discussing the dormant Commerce Clause). 17. See Comptroller of the Treasury of Md. v. Wynne, 135 S. Ct. 1787, 1794 (2015). 18. Id. See also Dan T. Coenen, Why Wynne Should Win, 67 VAND. L. REV. EN BANC 217, 241–42 (2014). Coenen discusses the history of the dormant Commerce Clause, stating that “the spirit that lay behind...