D. Zilka v. Tax Rev. Bd. City of Philadelphia

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Diane Zilka, :
:
Appellant :
:
v. : No. 1063 C.D. 2019
: No. 1064 C.D. 2019
Tax Review Board City of : Argued: February 10, 2021
Philadelphia :
BEFORE: HONORABLE P. KEVIN BROBSON, President Judge1
HONORABLE MARY HANNAH LEAVITT, Judge2
HONORABLE PATRICIA A. McCULLOUGH, Judge
HONORABLE ANNE E. COVEY, Judge
HONORABLE MICHAEL H. WOJCIK, Judge
HONORABLE CHRISTINE FIZZANO CANNON, Judge
HONORABLE ELLEN CEISLER, Judge
OPINION NOT REPORTED
MEMORANDUM OPINION
BY JUDGE WOJCIK FILED: January 7, 2022
In these consolidated cases, Diane Zilka (Taxpayer) appeals the orders
of the Philadelphia County Court of Common Pleas (trial court) affirming the
decisions of the City of Philadelphia’s (Philadelphia) Tax Review Board (Board)
that denied her petitions seeking a refund of the Philadelphia Wage Tax paid on her
1
The Court reached the decision in this case prior to the conclusion of President Judge
Emeritus Brobson’s service on the Commonwealth Court.
2
This matter was assigned to the panel before January 3, 2022, when President Judge
Emerita Leavitt became a senior judge on the Court.
income for the taxable periods of January 1, 2013, to December 31, 2015, and
January 1, 2016, to December 31, 2016. Taxpayer argues that she is entitled to a
refund to avoid unconstitutional double taxation on the same income caused by the
Philadelphia Wage Tax. Discerning no error, we affirm.
I. Background
Taxpayer is a resident of Philadelphia, Pennsylvania, but during the tax
years at issue, she worked full time in Wilmington, Delaware. In April 2017 and
June 2017, Taxpayer filed petitions with the Philadelphia Department of Revenue
(Department) seeking refunds for Philadelphia Wage Taxes paid from 2013 through
2015 and 2016, respectively. During those tax periods, Taxpayer’s Delaware
employer withheld the following taxes: Philadelphia Wage Tax, Wilmington Earned
Income Tax (Wilmington Tax), Pennsylvania Income Tax (Pennsylvania Tax), and
Delaware Income Tax (Delaware Tax). Taxpayer claimed a credit for the Delaware
Tax (5%) to offset the Pennsylvania Tax (3.07%) on her Pennsylvania Personal
Income Tax (PIT) return; Pennsylvania allowed a full credit. Taxpayer also claimed
a credit for the Wilmington Tax (1.25%) and the balance of the Delaware Tax (5%
- 3.07% = 1.93%) to offset the Philadelphia Wage Tax (3.92%).3 The Department
allowed a credit for the Wilmington Tax against the Philadelphia Wage Tax but not
for the remainder of the Delaware Tax.
Taxpayer appealed to the Board challenging the Department’s denials
as to both tax periods on the basis that she was entitled to a refund for a portion of
the unused Delaware Tax credits. Taxpayer argued that she was taxed, on average,
3
Taxpayer and Philadelphia both utilized percentages and calculations from the 2014 tax
year as the primary example in their briefs. For sake of simplicity, this Court has done the same.
The 2014 tax year is representative of the other years, albeit slight variations exist.
2
1.93% higher than her intrastate counterparts. Taxpayer claimed that the
Department’s refusal to apply the remainder of the Delaware Tax as credit against
the Philadelphia Wage Tax amounted to an unconstitutional burden on interstate
commerce. The Board denied her appeals, and the trial court affirmed without taking
additional evidence. Taxpayer appealed both decisions to this Court, which we have
consolidated for review.4
II. Issues
Before this Court, Taxpayer argues that the trial court erred by denying
her a credit against her Philadelphia Wage Taxes for the portion of income taxes that
she paid to Delaware, which was not credited against her income taxes paid to
Pennsylvania. Taxpayer contends that the failure to award a credit amounts to
double taxation in violation of the Commerce Clause, U.S. Const. art. 1, §8, cl. 3.
According to Taxpayer, she was taxed four times on the same income
by Pennsylvania, Philadelphia, Delaware and Wilmington. The Department’s
“policy”5 is to refund similar taxes withheld by other local jurisdictions, but not by
other states. By failing to apply the remainder of the taxes withheld by Delaware
(after the offset applied by Pennsylvania) to offset her Philadelphia Wage Tax, she
4
Where, as here, the trial court took no additional evidence, our review is limited to
determining whether constitutional rights were violated, whether an error of law was committed,
or whether the Board’s findings of fact are supported by substantial evidence. Section 754(b) of
the Administrative Agency Law, 2 Pa. C.S. §754(b); Philadelphia Eagles Football Club, Inc. v.
City of Philadelphia, 823 A.2d 108, 118 (Pa. 2003). Because the issue in this case is a question of
law, our scope of review is plenary. Philadelphia Eagles, 823 A.2d at 118.
5
Taxpayer takes issue with the fact that the Department’s policy is not a formal written
policy, but a practice. Appellant’s Brief at 8-9, 9 n.6. However, the manner in which the
Department applied the tax credits, whether pursuant to a formal written “policy” or an informal
“practice,” is irrelevant for a Commerce Clause analysis.
3
maintains that the Philadelphia Wage Tax and the tax scheme fail the test set forth
in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), in two ways. First,
the tax is not fairly apportioned because it fails to provide a mechanism to mitigate
the risk of duplicative taxation for income earned from interstate commerce and fails
to meet the internal and external consistency tests. The Philadelphia Wage Tax does
not meet the internal consistency test because it taxes interstate wages at a higher
rate than intrastate wages. It does not meet the external consistency test because the
tax “reaches beyond” that portion of the value fairly attributable to economic activity
in the taxing state. Taxpayer conducted no business in Philadelphia; she simply
resided there during the tax years at issue. There is no connection between
Philadelphia and the activity being taxed. Second, Philadelphia’s partial credit
practice discriminates against her because she pays more in tax than her intrastate
counterparts. In support of her position, Taxpayer relies heavily on Comptroller of
Treasury of Maryland v. Wynne, 575 U.S. 542 (2015), in which the United States
Supreme Court applied the Complete Auto test and invalidated a similar tax scheme
under the Commerce Clause.
III. Discussion
A. Commerce Clause - Double Taxation
The Commerce Clause grants Congress the power to “regulate
Commerce . . . among the several States.” U.S. Const. art. 1, §8, cl. 3. “Although
the Clause is framed as a positive grant of power to Congress,” the United States
Supreme Court has “‘consistently held this language to contain a further, negative
command, known as the dormant Commerce Clause, prohibiting certain state
taxation even when Congress has failed to legislate on the subject.’” Wynne, 575
U.S. at 549 (quoting Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S.
4
175, 179 (1995)). Under the dormant Commerce Clause, States “‘may not tax a
transaction or incident more heavily when it crosses state lines than when it occurs
entirely within the State.’” Id. (quoting Armco Inc. v. Hardesty, 467 U.S. 638, 642
(1984)). “‘Nor may a State impose a tax which discriminates against interstate
commerce either by providing a direct commercial advantage to local business, or
by subjecting interstate commerce to the burden of ‘multiple taxation.’” Id. at 549-
50 (quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450,
458 (1959)). In short, the Commerce Clause forbids double taxation. Id. at 550-51;
see, e.g., Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 660 (1948) (New
York tax scheme that sought to tax a portion of a domiciliary bus company’s gross
receipts that were derived from services provided in neighboring States violated
dormant Commerce Clause because it imposed an “unfair burden” on interstate
commerce); Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939)
(Washington state’s tax on income that a corporation earned in shipping fruit from
Washington to other States and foreign countries discriminated against interstate
commerce because the scheme did not similarly expose local commerce to the tax
burden); J.D. Adams Manufacturing Co. v. Storen, 304 U.S. 307 (1938) (State
income tax on a corporation’s out-of-state sales violated the dormant Commerce
Clause by subjecting interstate commerce to double taxation but not intrastate
commerce).
Upon review, Taxpayer’s income is not being doubly taxed. Taxpayer
never pays more than one local tax or more than one state tax. In other words,
Philadelphia is not taxing Taxpayer’s income “more heavily when it crosses state
lines than when it occurs entirely within the State.” Wynne, 575 U.S. at 549. Rather,
Philadelphia is taxing Taxpayer the same as other residents who worked intrastate –
5
3.92%. Although we recognize that Taxpayer pays 1.93% more than her intrastate
counterparts, that is because Taxpayer chose to work in Delaware, which charges a
higher income tax than Pennsylvania. As the trial court recognized, Delaware’s
higher income tax “is neither unconstitutional, nor attributable to any
unconstitutional action taken by . . . Philadelphia.” Trial Court Op., 8/28/2019, at 5.
While Wilmington charges less than Philadelphia, Philadelphia credited 100% of the
Wilmington Tax to offset the Philadelphia Wage Tax. The fact that Philadelphia
chose not to additionally apply credit for the “unused” balance of the Delaware Tax
towards its Wage Tax does not amount to double taxation. See Wynne. Assuming
the risk that a double tax burden may exist, we examine whether the Philadelphia
Wage Tax withstands the constitutional test set forth in Complete Auto.
B. Complete Auto
Complete Auto is the seminal United States Supreme Court case
addressing the applicability of the Commerce Clause to state and local taxation. In
Complete Auto, the Court fashioned a four-prong test to determine whether a state
or local tax unconstitutionally burdens interstate commerce. 430 U.S. at 279. The
test requires: (1) the activity must have a substantial nexus with the taxing district;
(2) the tax must be fairly apportioned; (3) the tax does not discriminate against
interstate commerce; and (4) there must be a reasonable relationship between the tax
imposed upon the taxpayer and the services provided by the taxing district. Id.Failure to meet any one prong renders the tax unconstitutional. Id. Our focus here
is on the second and third prongs.
1. Second Prong - Fair Apportionment
6
The second prong of the Complete Auto test “‘ensures that each State
taxes only its fair share of an interstate transaction.’” Jefferson Lines, Inc., 514 U.S.
at 184 (quoting Goldberg v. Sweet, 488 U.S. 252, 260-61 (1989)). The purpose is to
eliminate the “danger of interstate commerce being smothered by cumulative taxes
of several states.” Complete Auto, 430 U.S. 277 (citation omitted). We determine
whether a tax on interstate commerce is fairly apportioned by examining whether it
is internally and externally consistent. Jefferson Lines, 514 U.S. at 185 (quoting
Goldberg, 488 U.S. at 261).
a. Internal Consistency
The internal consistency test “‘looks to the structure of the tax at issue
to see whether its identical application by every State in the Union would place
interstate commerce at a disadvantage as compared with commerce intrastate.’”
Wynne, 575 U.S. at 562 (quoting Jefferson Lines, 514 U.S. at 185). The test helps
courts identify tax schemes that discriminate against interstate commerce. Id.
Assuming that every State has the same uniform tax scheme, all states would grant
a credit that precisely reduces the taxpayers’ in-state tax to the same amount they
would pay if they earned all that income in-state. See id. Such a scheme would add
no burden to interstate commerce that intrastate commerce would not also bear. See
id.
“Although the adoption of a uniform code would undeniably advance
the policies that underlie the Commerce Clause,” it is not required. Moorman
Manufacturing Co. v. Bair, 437 U.S. 267, 279 (1978). The dormant Commerce
Clause does not prohibit jurisdictions from using different tax formulas; rather, it
prohibits discrimination that “inhere[s] in either State’s formula.” Id. at 277 n.12.
7
In other words, there is no “discriminat[ion] against interstate commerce” where the
alleged taxation disparities are “the consequence of the combined effect” of two
otherwise lawful income tax schemes. Id.The United States Supreme Court has repeatedly held that the internal
consistency test is met by a system of credits, which exempts the taxpayer to the
extent that he or she has already paid the same tax in another state. See Jefferson
Lines, 514 U.S. at 185; Goldberg, 488 U.S. at 262; see also Tyler Pipe Industries,
Inc. v. Washington State Department of Revenue, 483 U.S. 232, 245 n.13 (1987)
(noting that “[m]any States provide tax credits that alleviate or eliminate the
potential multiple taxation that results when two or more sovereigns have
jurisdiction to tax parts of the same chain of commercial events”).
Applied here, the Philadelphia Wage Tax meets the internal consistency
test. If every jurisdiction imposed a tax scheme identical to Philadelphia’s, all
individuals earning income outside of their home locality would receive a credit for
income taxes paid to the foreign locality and would pay no more than their intrastate
counterpart. Any additional tax owed by the interstate taxpayer simply results from
the higher tax rate charged on the income by the foreign state. Such consequence
does not render Philadelphia’s tax formula discriminatory under the internal
consistency test. See Moorman.
b. External Consistency
Next, even if a tax is internally consistent, it must also meet the second
component of fair apportionment, i.e., external consistency. Jefferson Lines, 514
U.S. at 184. External consistency examines “the economic justification for the
State’s claim upon the value taxed, to discover whether a State’s tax reaches beyond
8
that portion of value that is fairly attributable to economic activity within the taxing
State.” Id. at 185 (citing Goldberg, 488 U.S. at 262). “[T]he threat of real multiple
taxation (though not by literally identical statutes) may indicate a State’s
impermissible overreaching.” Id.The Philadelphia Wage Tax meets the external consistency test. The
Philadelphia Wage Tax reasonably reflects how and where Taxpayer’s income is
generated – in Wilmington, Delaware. The Philadelphia Wage Tax is not taxing all
of Taxpayer’s income regardless of source. Rather, Philadelphia fairly apportions
the tax according to its relation to the income by providing a credit for the tax owed
to Wilmington. Philadelphia avoided taxing more than its fair share of Taxpayer’s
wages by providing a tax credit for 100% of the Wilmington Tax. As for Taxpayer’s
challenge that Philadelphia has no right to tax her out-of-state income, Philadelphia’s
provision of municipal benefits and services to its residents provides sufficient
economic justification for the imposition of its Wage Tax. Lawrence v. State Tax
Commission of Mississippi, 286 U.S. 276, 279 (1932) (recognizing that “domicile in
itself establishes a basis for taxation. Enjoyment of the privileges of residence within
the state, and the attendant right to invoke the protection of its laws, are inseparable
from the responsibility for sharing the costs of government.”).
2. Third Prong – Discrimination
A State may not “impose a tax [that] discriminates against interstate
commerce either by providing a direct commercial advantage to local business . . .
or by subjecting interstate commerce to the burden of ‘multiple taxation.’” Wynne,
575 U.S. at 549-50 (quoting Northwestern States, 358 U.S. at 458) (citations
omitted); accord Jefferson Lines, 514 U.S. at 197. “Thus, States are barred from
9
discriminating against foreign enterprises competing with local business . . . and
from discriminating against commercial activity occurring outside the taxing
State[.]” Jefferson Lines, 514 U.S. at 197 (citations omitted).
Here, Philadelphia taxes all of its residents’ income at the rate of 3.92%.
It also permits a full credit for any similar taxes paid to other jurisdictions. Because
Taxpayer’s income was subject to the 1.25% Wilmington Tax, Philadelphia applied
1.25% credit toward her Philadelphia Wage Tax. Consequently, Taxpayer is not
paying income tax twice on her interstate income. Rather, Taxpayer is paying the
same 3.92% rate as her Philadelphia counterparts. The difference is that
Philadelphia is receiving only 2.67%, while Wilmington is receiving 1.25%. By
extending a full credit for taxes paid to Wilmington, Taxpayer’s income is not
subject to double taxation. There is no disparate treatment or discrimination between
Taxpayer and other resident taxpayers of Philadelphia. Thus, the Philadelphia Wage
Tax does not discriminate against Taxpayer.
C. Wynne
Wynne illustrates the application of the Complete Auto test. In Wynne,
the United States Supreme Court analyzed the constitutionality of Maryland’s
personal income tax scheme to determine whether it discriminated in favor of
intrastate over interstate economic activity. Wynne, 575 U.S. at 545. Maryland
residents were subject to a two-part income tax: (1) a “state” income tax; and (2) a
“county” income tax. Id. Residents who paid income tax to another jurisdiction for
income earned in that jurisdiction were allowed a credit against the “state” tax, but
not the “county” tax. Id. at 545-46. Despite the assigned name, the “county” tax
was a state tax because it was collected by the Maryland State Comptroller of the
10
Treasury. Id. at 546. Consequently, part of the income that a Maryland resident
earned outside of the State could be taxed twice. Id.
The Wynnes were Maryland residents who earned pass-through income
from a Subchapter S corporation that earned income in 39 States. Wynne, 575 U.S.
at 546-47. When filing their Maryland income taxes, the Wynnes claimed an income
tax credit for the taxes paid to the other 39 States. Id. at 547. The Maryland State
Comptroller of the Treasury allowed the Wynnes a credit against their “state”
income tax, but not against their “county” income tax. Id. The Wynnes challenged
the tax scheme as double taxation. The United States Supreme Court agreed. Id.
The Wynne Court opined that, pursuant to the Commerce Clause of the
United States Constitution, a State may not impose a tax that discriminates against
interstate commerce either by providing a direct commercial advantage to local
business or by subjecting interstate commerce to the burden of multiple taxation.
Wynne, 575 U.S. at 549-50. The Wynne Court examined tax schemes that it had
previously found to be unconstitutional because they “had the potential to result in
the discriminatory double taxation of income earned out of state and created a
powerful incentive to engage in intrastate rather than interstate economic activity.”
Id. at 561; see, e.g., Central Greyhound Lines; Gwin, White & Prince; J.D. Adams.
The Wynne Court noted that the tax schemes in the aforementioned three cases
“could be cured by taxes that satisfy . . . the ‘internal consistency’ test.” Id. at 561-
62 (quoting Jefferson Lines, 514 U.S. at 18).
The Wynne Court opined that for a tax to satisfy the internal consistency
test, there must be a credit for similar taxes paid by a resident taxpayer to other
jurisdictions based on income earned there. Wynne, 575 U.S. at 561-62. Otherwise,
the tax amounts to a tariff, “which is fatal because tariffs are ‘[t]he paradigmatic
11
example of a law discriminating against interstate commerce.’” Id. at 565 (quoting
West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 193 (1994)). The Court
illustrated:
Assume that every State imposed the following taxes,
which are similar to Maryland’s “county” and “special
nonresident” taxes: (1) a 1.25% tax on income that
residents earn in State, (2) a 1.25% tax on income that
residents earn in other jurisdictions, and (3) a 1.25% tax
on income that nonresidents earn in State. Assume further
that two taxpayers, April and Bob, both live in State A, but
that April earns her income in State A whereas Bob earns
his income in State B. In this circumstance, Bob will pay
more income tax than April solely because he earns
income interstate. Specifically, April will have to pay a
1.25% tax only once, to State A. But Bob will have to pay
a 1.25% tax twice: once to State A, where he resides, and
once to State B, where he earns the income.
Id. at 567-68.
The flaw in Maryland’s personal income tax scheme was that it
imposed a “county” income tax without any credit for similar income taxes paid by
resident taxpayers to other states based on income earned in those states. Wynne,
575 U.S. at 564-65. The scheme resulted in double taxation of some income earned
by Maryland residents outside the state. Id. at 565. The Wynne Court emphasized
that the “Maryland scheme’s discriminatory treatment of interstate commerce is not
simply the result of its interaction with the taxing schemes of other States.” Id.
(emphasis added). Instead, the Court ruled that Maryland’s tax scheme was
inherently discriminatory and operated as a tariff in violation of the Commerce
Clause. Id.
Notably, the Wynne Court explained that “Maryland could remedy the
infirmity in its tax scheme by offering, as most States do, a credit against income
12
taxes paid to other States . . . . If it did, Maryland’s tax scheme would survive the
internal consistency test and would not be inherently discriminatory.” Wynne, 575
U.S. at 568. The Court then tweaked its hypothetical:
[A]ssume that all States impose a 1.25% tax on all three
categories of income but also allow a credit against income
taxes that residents pay to other jurisdictions. In that
circumstance, April (who lives and works in State A) and
Bob (who lives in State A but works in State B) would pay
the same tax. Specifically, April would pay a 1.25% tax
only once (to State A), and Bob would pay a 1.25% tax
only once (to State B, because State A would give him a
credit against the tax he paid to State B).
Id. at 568.
Although factually distinguishable, Wynne is instructive here. Wynne
specifically recognized that a constitutional infirmity of double taxation can be
avoided by offering a credit against similar income taxes paid out of state.
Philadelphia did just that by providing a full credit for the Wilmington Tax, which
is similar to the Philadelphia Wage Tax, just as Pennsylvania provided a credit for
the Delaware Tax.
Contrary to Taxpayer’s assertions, Wynne does not compel
Philadelphia to apply an additional credit for any dissimilar taxes, such as the
Delaware Tax or otherwise aggregate of tax credits. Although the Wynne Court held
that Maryland was required to offset its so-called “county” tax against other “state”
taxes, the “county” tax was actually a state tax because it was administered, adopted,
mandated, and collected by the state. Here, both the Philadelphia Wage Tax and
Wilmington Tax are municipal taxes. As the trial court aptly observed, it is a “simple
‘apples to apples’ approach – state taxes to state taxes and local taxes to local taxes.”
13
Reproduced Record at 89a. Based upon our reading of Wynne, such an approach is
reasonable and passes constitutional muster.
Although we understand that Taxpayer pays more than her intrastate
counterparts, such is not the result of an unconstitutional tax scheme. Rather, it is
simply the “result of the interaction of two different but nondiscriminatory and
internally consistent schemes.” Wynne, 575 U.S. at 562. Taxpayer chose to work
in a jurisdiction with a higher tax rate. Philadelphia is not responsible for the fact
that Delaware charges 1.93% more than Pennsylvania. Consequently, even after
Philadelphia and Pennsylvania applied credits to corresponding income taxes paid
to Wilmington and Delaware, respectively, Taxpayer’s income was subject to a
higher tax rate because of tax disparities that exist between the taxing districts, not
because of a discriminatory policy or practice. In short, Taxpayer is not paying
income tax twice on her interstate income. There is no support for Taxpayer’s
position that local and state taxes must be aggregated for Commerce Clause
purposes. Philadelphia and Pennsylvania are two distinct taxing jurisdictions
administering two distinct taxes to two different sets of citizenry.
IV. Conclusion
Upon review, because Philadelphia fully credited income tax withheld
for the Wilmington Tax, Philadelphia’s refusal to additionally credit the remaining
income tax withheld for the Delaware Tax does not amount to double taxation.
Accordingly, we affirm the orders of the trial court.
MICHAEL H. WOJCIK, Judge
14
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Diane Zilka, :
:
Appellant :
:
v. : No. 1063 C.D. 2019
: No. 1064 C.D. 2019
Tax Review Board City of :
Philadelphia :
ORDER
AND NOW, this 7th day of January, 2022, the orders of the Court of
Common Pleas of Philadelphia County, dated June 26, 2019, are AFFIRMED.
__________________________________
MICHAEL H. WOJCIK, Judge