New York Tax Case Involving Shoe Icon May Shape State Commerce

The Supreme Court should decide whether the founders of the Edelman Shoe Co., who live in Connecticut, are subject to a New York tax on income from the sale of the company, according to tax experts filing briefs in support of the couple.

Otherwise, they said, interstate commerce could take a hit and lead to double taxation.

Samuel and Louise Edelman, founders of the Edelman Shoe Co., say New York unconstitutionally taxed them when they sold their company in 2010. The Edelmans live in Connecticut, but met New York’s definition of residency as well. Connecticut also taxed the income from the sale of their business interests.

If the Supreme Court doesn’t step in, the same kind of tax could expand to other states, according to a brief from the Tax Foundation and a second brief from American University’s Kogod Tax Policy Center Executive Director Donald T. Williamson and the National Society of Tax Professionals.

Before the Edelmans’ case, “the incentives were clearly driving legislatures toward harmony,” according to the brief from Williamson and the National Society of Tax Professionals.

“But legislatures are watching this petition, and if the Court denies review here, the winds will shift,” the brief said.

The legal issue centers on a 2015 Supreme Court decision, Comptroller v. Wynne, where the high court said a Maryland tax regime unconstitutionally violated the internal consistency test, an application of the U.S. Constitution’s dormant Commerce Clause. The test hunts for discrimination against interstate commerce by asking whether a state law—if it became the law of every state—would place a greater burden on commerce across multiple states than on commerce fully within a state.

“With every state looking to widen its tax base through this end run around Wynne, the effects on interstate commerce and investments that yield intangible income would reverberate far beyond New York’s borders,” The Tax Foundation said in its brief. A sale of business interest is considered intangible income.

In the Edelmans’ case, a New York court limited the test to the circumstances involved in Wynne, saying the tax on the Edelmans was different because it involved intangible income and multi-state residency. New York said the pair met the state’s definition of legal residency, owning “a permanent place of abode” in the state and spending some time in the state on more than 183 days in the year.

Kannon K. Shanmugam, who chairs the Supreme Court and Appellate Practice Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP, is representing the Edelmans as well as a second couple in a similar case.

New York has until August 26 to file responses to the Edelmans’ petition.

The case is Edelman v. N.Y. State Dep’t of Taxation and Fin., U.S., No. 18-1570, amicus briefs filed 7/24/19.