Opinion ID: 2324620
Heading Depth: 1
Heading Rank: 4

Heading: The Tax Court

Text: On October 24, 2005, Petitioners individually appealed to the Maryland Tax Court. [11] On February 15, 2006, upon the Comptroller's motion, that court consolidated Petitioners' cases, and on May 10, 2006, heard the parties' arguments. Neither party offered testimony, however, because they had agreed to a stipulation of the background and facts pertinent to the appeal. On June 22, 2006, the Tax Court affirmed the assessments on Petitioners but abated the penalties. The court acknowledged at the outset Petitioners' argument that, because the SNRT imposes a nonresident tax that is applicable solely to nonresident income, not resident income, the provision is facially discriminatory and therefore violates the United States Constitution and the Maryland Constitution and Declaration of Rights. To support that contention, Petitioners cited Fulton Corp. v. Faulkner, 516 U.S. 325, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996), in which the Supreme Court emphasized that state laws that are facially discriminatory against interstate commerce are virtually per se invalid. 516 U.S. at 331, 116 S.Ct. 848 (internal quotation marks omitted) (quoting Or. Waste Sys., Inc. v. Dep't of Env't Quality, 511 U.S. 93, 99, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994)). Although the court neither denied this characterization of Fulton nor that § 10-106.1 ... appear[s] to discriminate against the out-of-state taxpayer, the court reasoned that an appearance of discrimination... does not end the inquiry. Under the Tax Court's interpretation of Fulton, when a tax is facially discriminatory and therefore presumed invalid, the government may overcome this presumption by showing that the statute is a `compensatory tax' designed simply to make interstate commerce bear a burden already borne by intrastate commerce. 516 U.S. at 331, 116 S.Ct. 848 (internal quotation marks omitted) (quoting Associated Indus. of Mo. v. Lohman, 511 U.S. 641, 647, 114 S.Ct. 1815, 128 L.Ed.2d 639 (1994)). To do so, however, the court pointed out that the government must satisfy a three-prong test applied in Fulton: (1) identif[y] ... the [intrastate tax] burden for which the State is attempting to compensate; (2) show that the tax on interstate commerce [is] roughly ... approximate [to]-but [does] not exceedthe amount of the tax on intrastate commerce; and (3) demonstrate that the events on which the interstate and intrastate taxes are imposed [are] substantially equivalent, i.e., that they are sufficiently similar in substance to serve as mutually exclusive prox[ies] for each other. 516 U.S. at 332-33, 116 S.Ct. 848 (some internal quotation marks omitted) (some alterations in original) (quoting Or. Waste Sys., 511 U.S. at 103, 114 S.Ct. 1345). As to the first prong of the compensatory tax doctrine, the Tax Court determined that the evidence is clear that the burden on intrastate commerce for which § 10-106.1, is compensating, is the burden of providing local governmental services, directly or indirectly, to all persons or entities physically situated or doing business within its local borders. By showing that the SNRT did not exceed the local tax burden upon Maryland residents, the Tax Court was satisfied that the Comptroller had demonstrated, under the second prong, that the tax on interstate commerce roughly approximates the tax on intrastate commerce. Specifically, the court noted that § 10-106.1 ensures that non-residents pay Maryland income taxes at the same rate or a lesser rate as Maryland residents. Finally, with regard to the third prong, the Tax Court found that income is the event on which the tax is based for both residents and non-residents. Being the same event for both classes of taxpayer, it meets the test for `substantially equivalent.' After concluding that analysis, the Tax Court turned to the remaining constitutional issues and ruled: [Section] 10-106.1 serves a rational purpose to create parity in the income tax burdens between Maryland residents and non-residents. There is no extra tax burden that would deter a non-resident from free and open commerce inside or outside the state, and there is no extra tax burden that might be construed to violate the privileges and immunities, and equal protection accorded to everyone. Accordingly, § 10-106.1 does not violate the Interstate Commerce Clause ..., the Equal Protection Clause ..., the Privileges and Immunities Clause of the United States Constitution, or the Maryland Constitution and the Declaration of Rights. Because, however, the Tax Court judged the appeal to be in good faith, the court abated the penalties assessed against Petitioners. The Tax Court, however, denied Petitioners' request to abate the accrued interest, reasoning that the court lacked the authority to do so.