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Good News for SALT Taxpayers? Supreme Court Overturns Federal Agency Deference

by Stephen P. Kranz, Diann Smith and Michael J. Hilkin | Jun 28, 2024 | Nationwide Importance

On June 28, 2024, in Loper Bright Enterprises v. Secretary of Commerce, the Supreme Court of the United States ruled to overturn its four-decade-old decision in Chevron USA Inc. v. Natural Resources Defense Counsel. While the Loper case addressed deference to administrative agencies under the federal Administrative Procedure Act (APA), its outcome may give state and local taxpayers a better chance of persuading state courts that a tax authority’s interpretation of a tax statute is invalid. This is because many states have relied on the Chevron doctrine when deciding that state administrative procedure acts require deference to an agency action. State courts must now reconsider whether the eradication of Chevron deference at the federal level also applies at the state level.

BACKGROUND

Chevron set the standard that federal courts must apply binding deference to a government agency’s interpretation of the law in the absence of a clear answer within the statute itself. Under the Chevron doctrine, if a federal statute was silent or ambiguous on a question of law, and the federal agency charged with enforcing the law had provided an interpretation of that statute, a court was required to defer to the relevant federal agency’s interpretation (even if the court on its own would have reached a different result). For decades, Chevron prevented entities challenging agency action from receiving a balanced review of an issue by courts. The Chevron doctrine has historically presented significant hurdles to plaintiffs, including taxpayers, seeking to challenge actions of federal agencies (such as the Internal Revenue Service).

But in Loper, the Supreme Court decided that the holding in Chevron is inconsistent with the APA and the historical and constitutional role of the judicial branch, and thus explicitly overturned the Chevron deference standard. This means that, with respect to federal agency interpretations of law, the thumb has been taken off the scale. (Of course, there are still lots of other thumbs on this scale, such as the burden of proof is always on the taxpayer and the preference of judges to favor the state for fiscal reasons, but let’s take a win when we can!).

EFFECT ON STATE TAX CONTROVERSIES

The holding in Loper should impact the scope of state court review of state and local tax authority interpretations of law in many circumstances. This is because (a) many states have adopted language substantially similar to the federal APA at issue in Loper and (b) many state courts have specifically cited to Chevron in deferring to a tax authority’s interpretation of the law.

The potential application to states is clear based on several statements in the Loper opinion. The Supreme Court stated, “Chevron cannot be reconciled with the APA” and “[a]gencies have no special competence in resolving statutory ambiguities. Courts do.” In states that do not have specific statutory provisions providing for deference to a tax authority or specifically delegating authority for interpretation of a specific statute to a tax authority, taxpayers should raise the decision in Loper in an action challenging tax authority regulations. [...]

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New York Issues Much-Anticipated Guidance on Taxation of Telecommuting Employees

by Richard C. Call and Arthur R. Rosen | Oct 23, 2020 | Income Tax, Local Tax, Massachusetts, Nationwide Importance, New Hampshire, New Jersey, New York

Since the outset of the COVID-19 pandemic and work-from-home mandates, New York employers and their nonresident employees have been waiting for the Department of Taxation and Finance to address the million-dollar question: Do wages earned by a nonresident who typically works in a New York office but is now telecommuting from another state due to the pandemic constitute New York source income? New York has historical guidance concerning the application of its “convenience of the employee/necessity of the employer” test, the test used to determine whether a telecommuting nonresident’s wages are sourced to New York, but until recently the Department had been silent as to whether or how such rule applied under the unprecedented circumstances of the COVID-19 pandemic.

As many expected, in a recent update to the residency FAQs, the Department clearly stated its position that a nonresident whose primary office is in New York State is considered to be working in New York State on days that he or she telecommutes from outside the state during the pandemic unless the employer has “established a bona fide employer office at [the] telecommuting location.” The Department adopted the “bona fide employer office” test in 2006 as its way of applying the convenience of the employee rule to employees that work from home. The bona fide employer office test is a factor-based test and, for the most part, a home office will not qualify as a bona fide employer office unless the employer takes specific actions to establish the location as a company office. (See: TSB-M-06(5)I, New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others.) As is apparent in the FAQ, the Department is mechanically applying this test to employees working from home as a result of the pandemic and is not providing any special rules or accommodations for employees that have been required or encouraged by New York State and local governments to telecommute.

Interestingly, the Massachusetts Department of Revenue took a similar approach to New York’s by promulgating a regulation requiring nonresidents that typically work in Massachusetts but are telecommuting from outside the state to pay tax on their wages. On October 19, 2020, New Hampshire filed a Motion for Leave to File Bill of Complaint with the United States Supreme Court challenging the constitutionality of Massachusetts’ regulation. We understand that New Jersey is considering joining New Hampshire in this lawsuit based on New York’s recent guidance, which would require many New Jersey residents to pay New York income tax even though they are no longer working in New York. The US Supreme Court has twice declined to rule on the constitutionality of the convenience-of-the-employee test, so stay tuned on this important development.

Finishing SALT: May Wrap-Up and June Highlights

by McDermott Will & Emery | Jun 5, 2018 | Audits, Local Tax, Sales Tax

Top Hits You May Have Missed

New Mexico Administrative Hearings Office Issues Timely Opinion Regarding State Taxation of Subpart F Income and Dividends from Foreign Affiliates

Oregon Bars Use of Three Factor Apportionment Formula

McDermott Defeats New York False Claims Act Case Alleging Starbucks Failed to Collect and Remit Sales Tax

Looking Forward to June

June 1, 2018: Stephen Kranz presented “Diverse Routes to Resolving SALT Audit Issues” at the Georgetown Law Advanced State and Local Tax Institute in Washington, DC. Stephen discussed numerous complex audit issues facing tax administrators and taxpayers alike, including avenues for equitable resolution of complex audit issues and evaluation of when litigation is the best means of resolution.

June 5, 2018: Alysse McLoughlin is presenting “Partnership Audit Regulations: The Great Unknown” at the Federation of Tax Administrators Annual Meeting in Nashville, TN.

June 21, 2018: Britt Haxton, Kristen Hazel, Enrica Ma, Jane May, Sandra McGill, Alysse McLoughlin, Maureen O’Brien and Diann Smith are presenting at Tax in the City® New York about the various impacts of tax reform on state and local taxes, digital commerce, cross-border transactions, and compensation structures and fringe benefits. There will also be a CLE/CPE session on the ethical considerations around tax reform. Email Maria Dubinets at mdubinets@mwe.com to register.

June 25, 2018: Alysse McLoughlin is presenting “State Implications of the Federal Partnership Rules” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.

June 26, 2018: Stephen Kranz is presenting “Taxability of Digital Goods and Services” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC. Stephen will present an overview of US digital taxation, the characterization of tangible personal property, related legislative and administrative developments, and an update on recent litigation in digital tax. He will also provide an overview of best practices, including minimizing sales and use tax on software related transactions as well as audit tips.

June 27, 2018: Jane May is presenting “State Payroll Audits” at the Institute for Professionals in Taxation (IPT) Annual Conference in Vancouver, BC.

June 28, 2018: Stephen Kranz is speaking at the National Conference of State Legislatures (NCSL) Executive Committee Task Force on State and Local Taxation, Lake Tahoe NV, regarding federal tax reform and next steps on the remote sales tax. He will also present an overview of the South Dakota v. Wayfair Supreme Court oral arguments and upcoming decision.

Finishing SALT: April State Focus & March Wrap-Up

by McDermott Will & Emery | Apr 5, 2018 | Nationwide Importance, Nexus, South Dakota, Tax Base

A Grain of SALT: April State Focus – South Dakota

On April 17, the United States Supreme Court will hear oral argument in South Dakota’s case challenging the Court’s physical presence requirement for sales tax nexus. South Dakota v. Wayfair, Docket 17-494.

50 years ago, in National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), the Supreme Court held that the Due Process and Commerce Clauses of the United States Constitution barred states from requiring remote retailers with no physical presence in a State to collect and remit sales tax. In 1992, the Court affirmed its prior ruling under the Commerce Clause. Quill v. North Dakota, 504 U.S. 298 (1992).

Quill has been at the center of state tax nexus controversy since the time of its issuance, as states have worked to restrict, and taxpayers have worked to expand the scope of the ruling. States and taxpayers have been continually tied up in disputes regarding the meaning of “physical presence” sufficient to trigger nexus. Concerned about the rapid growth of digital commerce, states have advanced increasingly aggressive theories of “physical presence” in an attempt to stem the loss of sales tax revenues from internet sales. Taxpayers, on the other hand, repeatedly have sought to apply the physical presence nexus standard to other types of taxes, principally income tax. Until South Dakota v. Wayfair, the Supreme Court declined to accept review of any case seeking further guidance with respect to the physical presence nexus standard. (more…)

Illinois Supreme Court Holds City of Chicago Went Too Far in Taxing Cars Rented Outside Its Borders

by Catherine A. Battin | Jan 25, 2017 | Constitutional Issues, Illinois, Local Tax

The Illinois Supreme Court, in Hertz Corp v. City of Chicago, 2017 IL 119945 (Jan. 20, 2017) , held that the City of Chicago’s ruling requiring rental car companies located within three miles of the City to collect tax on vehicle rentals is unconstitutional under the home rule article of the Illinois Constitution. Hopefully, the court’s ruling will stymie the City’s expansive interpretation of its taxing powers.

The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property or (2) the privilege of using in the city personal property that is leased or rented outside of the city.” Mun. Code of Chi. § 3-32-030(A). While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City. Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).

The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11). The plaintiffs argued that Ruling 11 extends the reach of the tax ordinance beyond Chicago’s borders in violation of the home rule provision of the Illinois Constitution and violates the federal due process and commerce clauses. The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.” Ruling 11 § 1. The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.” Ruling 11 § 3. As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs. Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).

Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax. The Ruling applies to companies with suburban addresses located within three miles of the City. The presumption may be rebutted by any writing disputing the conclusion that the vehicle is used more than 50 percent of the time in the City. The opposite is assumed for non-Chicago residents. Ruling 11 § 3. The Ruling provides that such a writing can be as simple as a customer’s [...]

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