The Court of Appeals, New York's highest court, has denied review of two Appellate Division decisions dismissing actions brought by out-of-state domiciliaries challenging the constitutionality of New York's taxation of statutory residents. Chamberlain v. N.Y.S. Dep't of Taxation & Fin., No. 2018-1236, 2019 NY Slip Op. 66247 (N.Y., Mar. 26, 2019); Edelman v. N.Y.S. Dep't of Taxation & Fin., No. 2018 1235, 2019 NY Slip Op. 66249 (N.Y., Mar. 26, 2019). In two identical brief orders, the Court of Appeals, on its own motion, dismissed the appeals on the ground "that no substantial constitutional question is directly involved." In both of the decisions below, the Appellate Divisions had rejected the taxpayers' challenges and found that the U.S. Supreme Court's decision in Comptroller of the Treasury v. Wynne, 135 S. Ct. 1787 (2015), does not affect the constitutionality of New York's statutory residency scheme.

Background. For New York personal income tax purposes, individuals who are domiciled outside New York may be taxed as "statutory residents" of New York if they maintain a permanent place of abode in New York and are present in New York for more than 183 days during a year. Tax Law § 605(b). While New York, like many states, provides a tax credit for income taxes paid by its residents to other states, the credit is only available where the taxes paid to the other state arise from income "derived" from (i.e., earned within) another state. Tax Law § 620(a). The credit is generally not available for intangible or investment income, which is usually not treated as having been directly derived from any specific state. More than 20 years ago, in Tamagni v. Tax Appeals Trib., 91 N.Y.2d 530 (1998), the Court of Appeals upheld the system against a constitutional challenge, finding that, under Goldberg v. Sweet, 488 U.S. 252, 266 (1989), the dormant Commerce Clause did not apply because it does not "protect state residents from their own state taxes."

However, in 2015, the U.S. Supreme Court in Wynne explicitly repudiated the statement in Goldberg that was relied on in Tamagni, and concluded that Maryland's residency credit scheme, which allowed credits against a state level tax for taxes paid to other states but not against a county level tax, violated the Commerce Clause's "internal consistency" test, which requires a tax to be structured so that if every state were to impose an identical tax, no multiple taxation would result.

The Chamberlain and Edelman cases. In both cases, the plaintiffs were domiciled in Connecticut, but had permanent places of abode in New York and were present in the state more than 183 days. They filed Connecticut resident income tax returns and paid tax on all of their income, which included income from investments and intangibles. They also filed New York nonresident income tax returns, reporting only wage income earned in New York. In both cases, after audit, the Department of Taxation and Finance determined that the taxpayers were statutory residents who should have filed New York resident income tax returns, and assessed additional tax on the intangible income. The tax was calculated without any credits for the taxes that had been paid to Connecticut.

In both cases, the trial court upheld the assessment, finding that Tamagni continues to control, despite the U.S. Supreme Court decision in Wynne. Appeals were taken to the First Department and the Third Department, and both appellate courts upheld the determinations of the trial courts, concluding that Tamagni remained the law in New York despite the decision in Wynne. The court in Chamberlain, which was decided in November 2018, cited and relied on the June 2018 decision in Edelman, which distinguished Wynne as involving taxpayers who were residents of only one state whose out-of-state business income was at issue, rather than involving intangible investment income as in Tamagni. Because intangible income "has no identifiable situs" and "cannot be traced to any jurisdiction" (citation omitted), the two appellate courts concluded New York's method "does not affect interstate commerce," despite the decision in Wynne. Both courts noted that New York provides a credit for income taxes paid by its residents to other states if the income is "derived therefrom"—meaning earned in the other state— and that therefore New York's residency tax system was not unconstitutional

Both taxpayers sought review by the Court of Appeals under CPLR 5601(b)(1), which provides that decisions of the Appellate Division may be appealed to the Court as of right "where there is directly involved the construction of the constitution . . . of the United States." However, the Court found no substantial constitutional question involved and denied review.

ADDITIONAL INSIGHTS

The decisions by the Third Department in Chamberlain and the First Department in Edelman assume that, because intangible income is not tied to any particular state, the holding in Wynne requiring the application of the internal consistency test did not apply. However, the Court in Wynne phrased the test in terms of whether taxpayers are subject to multiple taxation that would not apply if they were solely taxpayers in one state. Neither Appellate Division court applied that test, or discussed the fact that the dissent in Tamagni did apply that test and would have found New York's statutory residency scheme unconstitutional. Under the internal consistency test, it does appear that New York's system might be subject to further challenge before the U.S. Supreme Court, since if it were the law in every state, taxpayers who are domiciliaries of one state (where they are subject to tax on all of their income, including intangible income), and statutory residents of another, where they are similarly subject to tax on that same intangible income without a credit, are subject to multiple taxation.

It is not yet known whether the plaintiffs in Chamberlain and Edelman will seek review by the U.S. Supreme Court.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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