October 15, 2019

Supreme Court Declines to Hear Appeals Regarding New York’s Taxation of Part-Time Residents

By John Bonk, Director, Tax & Business Services & Zakariya Hussain, Senior Accountant, Tax & Business Services

Supreme Court Declines to Hear Appeals Regarding New York’s Taxation of Part-Time Residents State & Local Tax

The U.S. Supreme Court recently declined to hear two appeals that would require the Court to rule on the constitutionality of New York’s part-time resident taxation regime.

New York grants part-time residents a credit for taxes paid on intangible income in other states, but only so long as the proceeds are derived from economic activities in those other states. The appellants sought a review of New York’s denial of credits for taxes on intangible income remitted to another state and argued that New York law unconstitutionally impeded interstate commerce, in violation of the dormant Commerce Clause.

Both appeals concerned couples whose primary residences were located in Connecticut but who also qualified as New York residents under New York law, as they owned permanent places of abode in New York and exceeded New York’s 183-day residency threshold. Consequently, the couples were subject to taxation on intangible income derived from sales of their businesses in the state of their primary residence (Connecticut), but also in New York. The appellants argued that New York’s denial of a credit for the taxes paid to Connecticut unconstitutionally subjected them to double taxation, and moreover, violated Supreme Court precedent as established in Comptroller v. Wynne as recently as 2015.

In Wynne, the Supreme Court reviewed Maryland’s taxation of residents and non-residents. In holding Maryland’s tax scheme constitutionally impermissible and in violation of the dormant Commerce Clause, the Court implemented an ”internal consistency test” to determine whether the tax scheme at issue would place interstate commerce at a disadvantage in comparison to intrastate commerce, if implemented identically by all 50 states nationwide.

Lower courts in New York had previously differentiated the two appeals from the facts in Wynne by arguing that intangible income and residency issues, present in the two appeals but not in Wynne, sufficiently distinguished them such that an application of the internal consistency test was not required.

Given the Supreme Court’s rejection of the appeals, taxpayers should be aware that they may be subject to taxation on intangible income in multiple states and should consider the possibility of such double taxation as part of their tax planning procedures, at least until the Supreme Court may decide to revisit the issue.

For more information regarding multi-state taxation issues, and how these issues may affect you or your business, please contact your Marcum state and local tax professional.

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