INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
personal income tax
Subscribe to personal income tax's Posts

Tax That DC?!?! FCA Suit on Residency Brings Business Intelligence Company into the Crosshairs

by , , and | Sep 2, 2022 | , , , , , ,

For the first time since the enactment of the False Claims Amendment Act of 2020, the DC Attorney General’s (AG’s) Office has used its new tax enforcement powers to pursue an alleged personal income tax deficiency. This development brings to the forefront a long-simmering constitutional problem with DC’s statutory residency law and offers a stern warning to businesses that assist key employees and executives with their personal tax obligations.

The press rapidly and widely reported on DC’s lawsuit against MicroStrategy Co-Founder, Executive Chairman and former CEO Michael Saylor for alleged evasion of D.C. personal income taxes, which was made public this week. The case alleges that Saylor wrongly claimed that he was a resident of Virginia or Florida (rather than DC) since at least 2012.

The case was originally brought under seal by a relator under DC’s False Claims Act in April 2021—less than one month after the False Claims Amendment Act took effect. Using its new tax authority, the DC AG’s Office filed a complaint last week to intervene (taking over the case going forward). Interestingly, when the DC AG’s Office took over the case, it added MicroStrategy as a defendant under the theory that the company conspired to help Saylor evade DC personal income taxes. Under DC’s False Claims Act, both Saylor and MicroStrategy could be liable for treble damages if a court rules in favor of the DC AG’s Office.

ISSUES WITH DC’S “STATUTORY RESIDENCY” TEST

While determining where an individual is a resident for state and local tax purposes generally requires a fact-intensive analysis, the case against Saylor also implicates DC’s unique (and likely unconstitutional) statutory residency standard. DC’s statute is fundamentally different than statutory residency standards in other states. Most states only tax individuals having their domicile in the state as residents, while some states also have a “statutory residency” test to classify individuals as taxable residents. In most states, a person is classified as a statutory resident if they (1) maintain a permanent place of abode in the jurisdiction and (2) spend more than a specific number of days (typically 183 days) in the jurisdiction.

DC truncates this standard and classifies someone as a statutory resident if they merely maintain a personal place of abode in DC for more than 183 days. Thus, no amount of actual presence of the individual in DC is required. The problem created by this one-of-a-kind standard should be obvious: someone can (as many high-net-worth individuals often do) maintain a residence for 183 days in more than one jurisdiction. Thus, the plain language of the statute would violate the Commerce Clause of the US Constitution because it runs afoul of the internal consistency test. Under this test, a statute is unconstitutional if under a hypothetical situation in which every jurisdiction has the same law as the one being challenged, more than 100% of the tax base would be subject to tax. Here, if every state had a statutory residency test applicable to anyone who had a [...]

Continue Reading



read more

Connecticut Bill Aims to Address the Impact of Telecommuting during the Pandemic

by | Mar 8, 2021 | , , ,

As we continue to face growing concerns because of the nationwide impact of COVID-19, taxpayers should be mindful of the potential impacts that the continued rise in telecommuting may have on their state personal income tax liabilities.

A bill was recently introduced in Connecticut that partially addresses this situation. Connecticut House Bill No. 6513 (HB 6513) clarifies that Connecticut residents will not face double taxation on their 2020 taxes and will instead receive a credit against their Connecticut personal income taxes for taxes paid in other states even if the resident, because of COVID-19, was working remotely from Connecticut rather than from their usual out-of-state office. HB 6513 further states that the Connecticut Department of Revenue Services, in determining whether an employer has nexus with Connecticut for purposes of the imposition of any Connecticut tax, shall not consider the activities of an employee who worked remotely from Connecticut solely because of COVID-19.

HB 6513 passed in the 151-member Connecticut House of Representatives on February 24, 2021, and passed in the 36-member Connecticut State Senate on March 1, 2021. The bill now heads to the state governor’s desk for signature. While it is expected that the Governor will sign the bill, passage of the bill still leaves taxpayers with uncertainty for 2021. Many taxpayers nationwide are likely to continue working remotely (from states other than where their usual offices are located) for the foreseeable future, and absent Congressional legislation or a Supreme Court decision, this state income tax issue does not seem likely to abate any time soon.



read more

U.S. Supreme Court’s Wynne Decision Calls New York’s Statutory Resident Scheme into Question

by and | May 21, 2015 | , , , , , , , , , , , , ,

On May 18, the U.S. Supreme Court issued its decision in Comptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus [...]

Continue Reading



read more

BLOG EDITORS

Stephen P. Kranz

Mary Kay McCalla Martire

Richard C. Call

STAY CONNECTED

Subscribe

TOPICS

ARCHIVES

jd supra readers choice top firm 2023 badge