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Internal Consistency Erasure and Taxpayer Protection (1)

Jan. 12, 2022, 9:45 AMUpdated: Jan. 12, 2022, 12:05 PM

Internal consistency is the tax version of what we tell children about littering. Throwing one juice box on the ground might be okay. But what if everybody did it? It would harm the environment, so it is not allowed. Likewise, a state tax might not harm interstate commerce on its own. But the internal consistency test asks, what if every state applied it? If doing so would harm interstate commerce, the tax is not allowed. Internal consistency thus protects taxpayers from potential multiple taxation. But the New Jersey Ferrellgas decision, now on petition for certiorari before the U.S. Supreme Court, erased that protection. Understanding the subtleties of this erasure can equip advocates to better protect taxpayer interests.

The U.S. Supreme Court birthed internal consistency nearly 40 years ago in Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983). The Court introduced internal consistency as a “component of fairness” in “apportionment...” It then noted that "[b]esides being” fairly apportioned, a levy must not discriminate against interstate commerce. So at its inception, internal consistency was a fair apportionment concept to be considered separately from discrimination.

In 2015, the Supreme Court in Comptroller of Treasury of Md. v. Wynne applied internal consistency to invalidate Maryland’s personal income tax. But this time, the Court described internal consistency as a discrimination concept, explaining that internal consistency “helps courts identify tax schemes that discriminate against interstate commerce.” Perhaps it felt more intuitive to talk about discrimination than apportionment in the personal income tax context. Indeed, the idea of internal consistency as discrimination has intellectual appeal. See, for example, Putting the Commerce Back in the Dormant Commerce Clause: State Taxes, State Subsidies, and Commerce Neutrality, 24 J.L. & Policy 467, 477 (2016) with Ryan Lirette and Alan D. Ward writing “the apportionment prong is not an independent concept but is merely an application of the nondiscrimination requirement.” And in any event, burying internal consistency in discrimination did not hurt the taxpayers in Wynne. But burying internal consistency in discrimination would hurt the taxpayer in Ferrellgas.

Ferrellgas concerns New Jersey’s “partnership filing fee,” which is a levy on partnerships at $150 per partner with a $250,000 cap. Arguably the case should turn on whether the levy is a fee not subject to apportionment or a tax that should be apportioned. But the New Jersey Tax Court decision in Ferrellgas—which was affirmed without substantive additions to its analysis—could be read to apply to Dormant Commerce Clause cases beyond the fee versus tax context.

In Ferrellgas, the New Jersey Tax Court erased internal consistency in three steps.

First, like Wynne, the court buried internal consistency in discrimination, citing commentators who did likewise. In 2018, the court found that “the apportionment prong is not an independent concept but is merely an application of the nondiscrimination requirement’ of the Complete Auto test.”

Second, it found that there was no discrimination because the levy applied equally to interstate and intrastate interests.

Third, it determined that because the levy was nondiscriminatory, it was not necessary to look at internal consistency; the court would need facial discrimination or “proof” of discrimination to consider internal consistency at all. In short, if internal consistency is part of discrimination, and there is no discrimination, then there is no need to ask about internal consistency. Internal consistency burial thus becomes internal consistency erasure.

Setting aside the intellectual merits of the internal-consistency-as-discrimination idea, advocates seeking to avoid Ferrellgas-type decisions should stay close to Container Corp., presenting internal consistency and discrimination separately. Burying internal consistency in discrimination opens the door for courts to erase internal consistency whenever they see a levy as nondiscriminatory. By presenting internal consistency and discrimination separately, advocates can prompt courts—including the Supreme Court if it grants certiorari in Ferrellgas—to consider internal consistency regardless of whether they find discrimination.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jamie M. Zug is an associate in McCarter & English LLP’s Tax & Employee Benefits Practice in Newark. Prior to joining McCarter, he worked as a Deputy Attorney General in the New Jersey Attorney General’s Office where he litigated New Jersey constitutional and tax cases.

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(Made clear the current court status.)

To contact the reporter on this story: Kelly Phillips Erb in Washington at