I read with great interest Steve Wlodychak’s and Bruce Ely’s insightful article on the Utah Supreme Court’s opinion in Steiner v. Utah State Tax Commission. I fully agree with them that the U.S. Supreme Court should take this case to resolve the questions and misstatement raised by the Utah Court on the current state of Commerce Clause jurisprudence.
The Utah Court’s finding that the Constitution’s Foreign Commerce Clause does not apply to individuals is remarkable. Is that Court really willing to accept that Utah can tax individuals at a higher tax rate on income from Canada than on income from Utah? The Court’s decision in Wynne does not support that astonishing reading.
Further, why wouldn’t the owners of an S corporation be entitled to the same degree of protection under the Foreign Commerce Clause as a C corporation and its owners? The Utah Court’s view turns our system of constitutional protections on its head by providing greater protections to artificial constructs than to individuals. When the Constitution was adopted, corporations were uncommon. No evidence exists that the Founding Fathers intended that greater protection be provided to a small number of corporations at that time than to individuals.
What is truly noteworthy is the Utah Supreme Court’s accusation that the U.S. Supreme Court apparently didn’t realize that a state tax on the worldwide income of its residents would violate the external consistency test. External consistency was a term the U.S. Supreme Court invented in 1983, perhaps to take the place of the discredited fourth prong of Complete Auto. It was part of the Court’s discussion of apportionment in the context of California’s corporate franchise tax. In my opinion, an income tax imposed on the basis of residency has nothing to do with external consistency. But if it does, then the Supreme Court implicitly accepted that it would pass muster under the external consistency doctrine. In terms of who has a deeper understanding of that doctrine, I would place my money on the U.S. Supreme Court.
I regret that the Utah court did not explore the issue raised in the article it cited that I co-authored with the late Michael McIntyre (Richard D. Pomp and Michael J. McIntyre, GATT, Barclays, and Double Taxation, 8 STATE TAX NOTES 977 (1995)). If the federal government already provides a credit for a foreign subnational tax, must a state also allow a credit?
Finally, the Utah Supreme Court didn’t seem to appreciate that every internally inconsistent tax is discriminatory, but that an internally consistent tax can also be discriminatory. I also question the Court’s incredible conclusion that “the continuing vitality of the Complete Auto test is thus in serious doubt.” The Court’s statement is what is in serious doubt, not Complete Auto. If the continued vitality of Complete Auto is in doubt, someone forgot to tell the Wayfair Court, which cites it favorably throughout the opinion, as Wlodychak and Ely rightly point out.
I join in Wlodychak’s and Ely’s call for the U.S. Supreme Court to correct the number of misstatements made by the Utah court.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Richard D. Pomp is the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law.