The states' Multiple Taxation of Personal Income.

• Author: Joondeph, Bradley W.

CONTENTS INTRODUCTION I. THE CONSTITUTIONALITY OF MULTIPLE TAXATION A. The "multiple taxation doctrine" B. The permissibility of multiple taxation 1. Multiple taxation through the application of inconsistent division-of-income rules 2. Multiple taxation through the overlap of states' different jurisdictional bases for imposing income taxes II. The Role of Multiple Taxation in Constitutional Analysis A. The jurisdictional limits on a state's power to tax income B. The prohibition on state taxes that discriminate against interstate commerce III. Revisiting Wynne CONCLUSION INTRODUCTION

The multiple state taxation of income--the taxing of the same increment of a particular taxpayer's income by more than one state-has long been considered constitutionally taboo. (1) The reason is plain enough. Such an overlap can only occur when a taxpayer is engaged in income-producing activity in multiple states; taxpayers confining their activity to a single state are necessarily immune. It logically follows that such duplicative taxation, when it occurs, operates to the disadvantage of taxpayers engaged in interstate commerce. And the disadvantaging of interstate commerce, relative to purely intrastate commerce, is typically the sine qua non of a dormant Commerce Clause violation. (2)

Unsurprisingly, then, many Supreme Court decisions have seemed to proclaim that multiple taxation--or even just the risk of multiple taxation--is constitutionally verboten. Consider the Court's 1939 decision in Gwin, White & Prince, Inc. v. Henneford, (3) where the Court invalidated a state tax on the ground that it created, "merely because interstate commerce is being done, the risk of a multiple burden to which local commerce is not exposed." (4) Or consider the Court's opinion in Northwestern States Portland Cement Co. v. Minnesota, (5) where it declared that a state may not "impose a tax which discriminates against interstate commerce ... by subjecting interstate commerce to the burden of 'multiple taxation.'" (6) As the foremost expert in the field has written, "[f]or more than 75 years, the Supreme Court has steadfastly adhered to the doctrine that the dormant Commerce Clause forbids state taxes that expose interstate commerce to a risk of multiple taxation to which intrastate commerce is not exposed." (7)

But matters are not quite so simple. Despite these broad pronouncements, the taxation of the same person's income by multiple states is often perfectly constitutional. And the Supreme Court has so held, for reasons that are central to the states' power to raise revenue--an authority that is essential to their independent sovereignty.

First, it is firmly established that states have the power to tax any income that is earned within their borders. If a taxpayer avails herself of the opportunity to engage in income-earning activity within a given state, that state has jurisdiction to tax her income earned there. (8) (This is often called "source-based" tax jurisdiction.) But as the Supreme Court squarely held in Moorman Manufacturing Co. v. Bair, (9) the Constitution does not prescribe any uniform method for states to determine what income has been earned within their borders; it merely requires that such determinations not be "arbitrary." (10) As a result, the states' income-attribution rules differ substantially from one another, making overlap in the taxation of multistate taxpayers' incomes commonplace. (11) And this multiple taxation, as the Court recognized in Moorman, is entirely constitutional. (12)

Second, in addition to their source-based jurisdiction, states have the power to tax all of the income of their residents, no matter where the individual earns that income. (13) This authority reflects a state's unique relationship with its citizens: the public services it provides, the rights of citizenship it confers, and the protections it affords for the enjoyment of that income. (14) The existence of these two, independent fonts of a state's power to tax an individual's income--on the basis of source and residence--means that often two states will have the authority to tax the same increment of income. And those taxing powers are of equal constitutional status; the Constitution prescribes no rule of priority between the state of source and the state of residence. (15) Hence, the foundations of the states' constitutional powers to impose personal income taxes inherently contemplate--even invite--the existence of multiple taxation. (16)

Thus, the proposition that a state personal income tax that exposes taxpayers to multiple taxation is unconstitutional for that reason is untenable. No doubt, multiple taxation may point to an underlying constitutional problem. An exaction is unquestionably impermissible when it projects the state's taxing authority beyond its lawful jurisdiction, or when it discriminates against interstate commerce. (17) And a tax that violates one of these foundational prohibitions will often result in duplicative tax burdens. But it is a conceptual mistake to confuse a symptom for the underlying disease. Properly understood, multiple taxation only indicates that a constitutional violation may be afoot, not that one necessarily exists.

This clarification concerning the role of multiple taxation in assessing the constitutionality of a state personal income tax is significant, for it resolves an important question left unanswered by the Supreme Court's recent decision in Comptroller of the Treasury of Maryland v. Wynne. (18) There, the Court invalidated a provision of Maryland's personal income tax that taxed Maryland residents on the entirety of their incomes, wherever earned, without offering a credit for income taxes paid to other states. (19) (Maryland also imposed this same tax on nonresidents, on the income they earned within the state. (20)) Maryland's scheme necessarily exposed its residents who earned income outside the state--when other states taxed that same income on a source basis--to double state-level taxation. (21)

The first part of the Court's analysis in Wynne invoked three decisions invalidating state taxes that had subjected taxpayers to the risk of multiple taxation. (22) Remarking that these cases were "particularly instructive," the Court seemed to intimate that tax schemes producing this sort of "double taxation of income earned out of the State" are necessarily unconstitutional. (23) But the Court ultimately grounded its holding in the conclusion that--viewing Maryland's scheme as a whole, as applied to both residents and nonresidents--it discriminated against interstate commerce. (24) And in doing so, the Court reserved the question of whether the Constitution permits states to impose nondiscriminatory personal income taxes on the entirety of their residents' incomes without protecting those taxpayers from the risk of multiple taxation, disclaiming that it was establishing any "rule of priority" for the state of source. (25) The Court thus left undecided whether such a scheme--which would necessarily expose taxpayers engaged in interstate commerce to duplicative burdens not borne by taxpayers confining their activities to one state--would violate the dormant Commerce Clause. (26)

This article explains why it would not--why a state personal income tax that exposes taxpayers to multiple taxation is entirely constitutional so long as it neither projects the state's taxing powers beyond the state's lawful jurisdiction nor discriminates against interstate commerce.

Part I demonstrates that, contrary to the broad-brush generality that the Constitution prohibits state income tax schemes that produce multiple taxation, such schemes can be perfectly constitutional, giving lie to the generality. Part II then explains that, though income taxes that result in multiple taxation are frequently unconstitutional, the reason is not the multiple taxation itself, but those schemes' violation of one of the two deeply embedded, foundational limits on states' taxing authority: (1) that states may only tax income over which they have lawful jurisdiction; and (2) that states may not impose taxes that discriminate against interstate commerce. Finally, Part III illustrates how this understanding of multiple taxation--disentangled from the deeper principles that determine a state income tax's constitutionality--answers the question left open by Wynne. Specifically, a state's nondiscriminatory personal income tax on the entirety of its residents' income--absent any provision protecting taxpayers from duplicative burdens stemming from other states' taxing that same income--is constitutionally permissible, despite the resulting multiple taxation for taxpayers engaged in interstate commerce.

1. THE CONSTITUTIONALITY OF MULTIPLE TAXATION

   1. The "multiple taxation doctrine"

      It is a well-worn general principle of state and local tax law that the Constitution forbids state income tax schemes that expose taxpayers engaged in interstate commerce to multiple taxation. Indeed, though the Supreme Court has been somewhat inconsistent on this point, (27) many of the Court's decisions have articulated the principle that a state tax that subjects taxpayers to the risk of multiple taxation (and not just actual multiple taxation) violates the dormant Commerce Clause. (28)

      This "multiple taxation doctrine" is often traced to the Supreme Court's 1938 landmark decision in Western Live Stock v. Bureau of Revenue. (29) There, the Court upheld a New Mexico gross receipts tax imposed on a newspaper's revenue from out-of-state advertisers (dispensing with the formalistic rule that states may not impose taxes "directly" on interstate commerce). (30) But in so holding, the Court explained that a state tax would violate the Commerce Clause if it subjected taxpayers engaged in interstate commerce to duplicative tax burdens. States are forbidden from imposing taxes

      of such a nature as to be capable, in point of substance, of being...