California Tax Break Unconstitutional

Seems the case is based on the commerce clause.

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450989918666159249&hl=en&as_sdt=2&as_vis=1&oi=scholarr While the high court tells us that states may "structur[e] their tax systems to encourage the growth and development of intrastate commerce and industry," the court attaches the fundamental caveat that those structures may not "discriminatorily tax the products manufactured or the business operations performed in any other State."

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As this involves the federal constitution, I suppose it could be appealed all the way to the Supreme Court. I'm sure lots of states have laws like these.

I don't think anyone could have been expected to see it coming. To me, the CA rule seems valid as a states right. It sounds similar to how CA exempts CA muni bond dividends from your California AGI, but not from other states.

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If the lower court ruling was based on the U.S. Constitution, that is the only way it can be appealed.

No surprise at all. A number of cases have been lost by states who wanted to do something similar. For example, North Carolina (like many other states) used to not tax pensions made to retired NC state government employees but they did tax the pensions other residents earned for their work for other state governments. NC lost in court.

That also is likely to be challenged in the courts if it hasn't been already.

Seeme to me it was more privileges and immunities. You can't treat citizens of one state differently from citizens of another state. They are reading that to mean that you can't treat those who invest in in-state companies different from those who invest in out-of- state companies.

One exception to that rule is when there is a financial basis for the distinction. For example state universities can charge out-of- state students more than in-state students because those in the state have already paid toward the universities through their taxes. At least in theory.

Or if it was based on a federal statute. Only if the ruling is based on what the courts call "independent state grounds" will the US Supreme Court normally not deal with it. However that was the case in Bush v. Gore, but they took up the case anyway.

Thanks for the information.

It's in the courts now, which is why it came up. A court ruling threw out the CA procedure, and the Franchise Tax Board is going back to demand tax increases for returns filed within the last four years.

___ Stu

Massachusetts has a tax deduction for the first $100 or $200 (depending on filing status) of interest from in-state banks. Is this likely to run afoul of this ruling?

That's interesting. The case I cited was a California state case, so it is not necessarily indicative of what other states or the federal courts would do.

Based on general principles, though, it might be a process that would be ok, though (without knowing more about it) I'd guess it would not. An argument would be that in-state banks pay tax on their incomes while out-of-state banks don't. So allowing the deduction for in- state interest is paid for by the tax paid by the in-state banks.

On the other hand the in-state banks probably get a tax deduction for interest paid, so the deduction for borrowers actually deprives the state of income it would otherwise have gotten, and at the same time puts out-of-state banks at a competitive disadvantage. And that's not allowed.

It is almost assuredly unconstitutional.

However, given that the MA tax rate is 5.65%, the tax break is only worth $5.65 or $10.30.

Not exactly worth suing about, so I suspect the provision will remain as no one's going to spend the money to sue for such a paltry sum.

Now, MA used to have a much more obnoxious provision (that the above is a remnant of): interest on in-state banks was taxed at 6% while all other interest (bonds, out of state banks, etc.) was taxed at 12%. But that was repealed quite some time ago.

But as we all know, that infamous decision has no precedential value, anywhere.

That's what the decision itself said. However non-precedential cases do have a way of creating an expectation of what the court/agency would do in a similar situation in the future.

For example private letter rulings are technically not precedential. Though practitioners often look to them to see what the IRS might do in a similar situation. Even the courts will sometimes look at private letter rulings.