Court Opinion

ID: 9901751
Source: CourtListenerOpinion
Date Created: 2023-11-22 15:09:22.941313+00
Date Added: 2024-06-11T09:21:38.399779
License: Public Domain

[J-5A-2023 and J-5B-2023] [MO: Todd, C.J.]
                    IN THE SUPREME COURT OF PENNSYLVANIA
                                 EASTERN DISTRICT

 DIANE ZILKA,                                    :   No. 20 EAP 2022
                                                 :
                      Appellant                  :   Appeal from the Order of
                                                 :   Commonwealth Court entered on
                                                 :   January 7, 2022, at No. 1063 CD
               v.                                :   2019 affirming the Order entered on
                                                 :   June 26, 2019, in the Court of
                                                 :   Common Pleas, Philadelphia
 TAX REVIEW BOARD CITY OF                        :   County, Civil Division at Nos. 02438
 PHILADELPHIA,                                   :   and 02439, October Term 2018.
                                                 :
                      Appellee                   :   ARGUED: March 7, 2023

 DIANE ZILKA,                                    :   No. 21 EAP 2022
                                                 :
                      Appellant                  :   Appeal from the Order of
                                                 :   Commonwealth Court entered on
                                                 :   January 7, 2022, at No. 1064 CD
               v.                                :   2019 affirming the Order entered on
                                                 :   June 26, 2019, in the Court of
                                                 :   Common Pleas, Philadelphia
 TAX REVIEW BOARD CITY OF                        :   County, Civil Division at Nos. 02438
 PHILADELPHIA,                                   :   and 02439, October Term 2018.
                                                 :
                      Appellee                   :   ARGUED: March 7, 2023

                                  DISSENTING OPINION

JUSTICE DOUGHERTY                                       DECIDED: NOVEMBER 22, 2023
       The Majority correctly recognizes “the crux of the dormant Commerce Clause is

that a state may not tax a transaction or incident more heavily when it crosses state lines

than when it occurs entirely within the State, nor may it impose a tax which discriminates

against interstate commerce . . . to the burden of multiple taxation[.]” Majority Opinion at

2 (internal quotation marks and citations omitted). But, in my view, failing to aggregate
state and local taxes plainly results in discrimination against interstate commerce, so I

must dissent.1

       Like the Majority, I find Comptroller of Treasury v. Wynne, 575 U.S. 542 (2015) to

be “instructive on the question of aggregation.” Majority Opinion at 22. However, Wynne

is not on all fours with the present scenario and thus is persuasive, but not controlling.

The Wynne Court did not declare that state and local taxes must be aggregated for

purposes of the dormant Commerce Clause. Taxpayer culled a few passages in Wynne

to argue to the contrary. For example, prior to its analysis, the Court stated “[d]espite the

names that Maryland has assigned to these taxes, both are State taxes, and both are

collected by the State’s Comptroller of the Treasury.” Wynne, 575 U.S. at 546, citing Frey

v. Comptroller of Treasury, 29 A.3d 475, 483, 492 (Md. 2011). The High Court also called

the county portion of the Maryland tax “a so-called ‘county’ income tax[.]” Id. And the

Court declared in a footnote that “it is immaterial that Maryland assigns different labels .

. . to these taxes. In applying the dormant Commerce Clause, they must be considered

as one.” Id. at 564 n.8. However, these statements plainly indicate the Wynne Court did

not consider the “county” tax to be a local tax and thus the Court could not conceivably

have decided the issue we face in the present dispute. Indeed, even the footnoted quote

taxpayer seizes upon specifically referenced Maryland, a state, to make the point that a

state cannot simply label a state tax as a local tax to overcome the constitutional demands

of the dormant Commerce Clause.2

1 A tax violates the dormant Commerce Clause if it fails to do any of the following: (1)

apply to an activity with a substantial nexus to the taxing state; (2) be fairly apportioned;
(3) not discriminate against interstate commerce; and (4) be fairly related to the services
provided by the state. See Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977).
2 I also agree with the Majority that numerous other cases cited by taxpayer, including

Associated Industries, Philadelphia Eagles, Northwood Construction, and 7-Eleven do
not resolve the federal issue as they do not discuss or decide whether state and local
(continued…)

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       But certain portions of Wynne are particularly instructive here. The decision makes

clear “that we must consider ‘not the formal language of the tax statute but rather its

practical effect.’” Wynne, 575 U.S. at 551, quoting Complete Auto Transit Inc., 430 U.S.

at 279. The practical effect of a tax, according to the Wynne Court, is “the economic

impact of the tax.” Id. at 552. This aligns with prior case law discussing how to determine

whether a tax discriminates against interstate commerce.

       A fundamental principle of dormant Commerce Clause jurisprudence is that no

state may “impose a tax which discriminates against interstate commerce by providing a

direct commercial advantage to local business.”       Boston Stock Exch. v. State Tax

Comm’n, 429 U.S. 318, 329 (1977) (internal citation and ellipses omitted). To determine

whether a state tax is discriminatory, it “must be assessed in light of its actual effect

considered in conjunction with other provisions of the State’s tax scheme.” Maryland v.

Louisiana, 451 U.S. 725, 756 (1981). As such, “it is our duty to determine whether the

statute under attack, whatever its name may be, will in its practical operation work

discrimination against interstate commerce.” Id., quoting Best & Co. v. Maxwell, 311 U.S.

454, 455-56 (1940).

       In order to determine the actual effect of the City’s failure to provide taxpayer a

credit for the remaining Delaware Income Tax (DIT) balance, we consider it “in

conjunction with other provisions of the State’s tax scheme[,]” id., including the

Pennsylvania Income Tax (PIT). First, we note “[s]tate taxes stand on a different basis

from local levies” as state taxes “are essential to the very ‘preservation’ of the state

itself[,]” while local taxes “are authorized or permitted by the state, not for its actual

preservation, but merely to maintain the machinery of local government.” McClelland v.

income taxes must be considered in the aggregate for purposes of a dormant Commerce
Clause analysis. See Majority Opinion at 22.

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City of Pittsburgh, 57 A.2d 846, 848 (Pa. 1948). Notwithstanding this observation about

the different purposes behind these taxes, the McClelland Court’s explanation of the

ultimate authority for all taxes imposed in this Commonwealth supports my position here:
       [t]he validity of [a] taxing ordinance does not depend upon whether the tax
       is regarded in a legal sense as a state or local tax. All taxes in Pennsylvania
       levied by municipal and quasi municipal corporations must, of course, be
       authorized by the legislature. In that sense, therefore, all may be
       considered state taxes.
Id. (emphasis omitted).3 See also Allegheny Cnty. v. Commonwealth, 534 A.2d 760, 766

(Pa. 1987) (Nix, C.J., dissenting) (“The majority ignores the fact that the county’s taxing

power is not separate and independent of the state’s taxing power. Rather, the authority

to tax is a power of the state which is delegated by the state to the counties to be exercised

by them in accordance with the terms of that delegation.”), citing Mastrangelo v. Buckley,

250 A.2d 447 (Pa. 1969); Fischer v. City of Pittsburgh, 118 A.2d 157 (Pa. 1955); Evans

v. West Norriton Twp., 87 A.2d 474 (Pa. 1952); and Wilson v. Sch. Dist. of Philadelphia,

195 A. 90 (Pa. 1937). This remains true today as Philadelphia, despite its Home Rule

Charter, is unable to impose taxes unless granted the power by the Commonwealth’s

General Assembly. See 53 P.S. §13133(a)(8). Indeed, the state statute implementing

the PIT, first enacted in 1971, contains a saving clause, specifically permitting

Philadelphia to continue imposing its City Wage Tax, which was implemented in 1939;

3 The Supreme Court of the United States has also made this same point:

       We think the following principles have been established by [prior decisions] and
       have become settled doctrines of this court, to be acted upon wherever they are
       applicable. Municipal corporations are political subdivisions of the state, created
       as convenient agencies for exercising such of the governmental powers of the
       state as may be [e]ntrusted to them. . . . The number, nature, and duration of the
       powers conferred upon these corporations and the territory over which they shall
       be exercised rests in the absolute discretion of the state. . . . The power is in the
       state[.]
Hunter v. City of Pittsburgh, 207 U.S. 161, 178-79 (1907).

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that tax would have otherwise been preempted by the Sterling Act, 53 P.S. §15971.4 See

72 P.S. §7359(a)-(b) (specifically permitting Pennsylvania political subdivisions to

continue collecting income taxes regardless of the Sterling Act). Furthermore, the saving

clause was amended, beginning with tax year 1977, to limit the rate of the City Wage Tax

imposed on nonresidents of Philadelphia. See id. §7359(b)(1)-(2). These legislative

enactments prove the McClelland Court’s point: for validity purposes, local taxes are

considered state taxes. See McClelland, 57 A.2d at 848. The fact that the City Wage

Tax was enacted by the City Council and is collected by the City’s Department of Revenue

are of no constitutional significance.

       This view is supported by decisions from other jurisdictions. These decisions

discuss use and sales taxes, but Wynne made clear that a distinction between use and

sales taxes and income taxes is not relevant in the constitutional analysis. The Wynne

Court stated as follows:
       The discarded distinction between taxes on gross receipts and net income
       was based on the notion, endorsed in some early cases, that a tax on gross
       receipts is an impermissible “direct and immediate burden” on interstate
       commerce, whereas a tax on net income is merely an “indirect and
       incidental” burden. This arid distinction between direct and indirect burdens
       allowed “very little coherent, trustworthy guidance as to tax validity.” And
       so, beginning with Justice Stone’s seminal opinion in Western Live Stock v.
       Bureau of Revenue, 303 U.S. 250 [ ] (1938), and continuing through [more
       recent cases], the direct-indirect burdens test was replaced with a more
       practical approach that looked to the economic impact of the tax.

4  The Sterling Act provides the City “an enormously broad and sweeping power of
taxation[,]” while “recogniz[ing] that the City cannot duplicate the Commonwealth’s
imposition of a tax[.]” Williams v. City of Philadelphia, 188 A.3d 421, 429 (Pa. 2018)
(internal citations omitted).

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Wynne, 575 U.S. at 552 (internal citations omitted). Accordingly, I consider the following

additional cases for their persuasive value.5

       In Arizona Department of Revenue v. Arizona Public Service Co., 934 P.2d 796

(Ariz. Ct. App. 1997), a public utility company located in Arizona bought coal from a mine

in McKinley County, New Mexico and paid gross receipts taxes to McKinley County and

New Mexico as well as excise and severance taxes to New Mexico. See id. at 798.

Arizona assessed use taxes against the company for those purchases and the company

claimed a credit for all taxes paid in New Mexico. See id. Arizona allowed a credit for the

New Mexico gross receipts tax, but denied credit for the remaining taxes. See id. On

appeal, the Arizona tax court reversed, granting the company credit for the McKinley

County gross receipts tax, and the Arizona Court of Appeals affirmed. See id. at 798-99,

801. The court held the statutory exemption for taxes paid “under the laws of another

state of the United States” included county taxes, explaining as follows:
       [Arizona] ignores the inherent relationship McKinley County necessarily
       shares with the state of New Mexico. Counties are state-created entities.

5 The Majority would not rely on these decisions, and I certainly do not suggest they are

binding. But they all stand for the proposition that a failure to aggregate state and local
taxes results in a violation of the dormant Commerce Clause and, as such, their
persuasive value is clear. See, e.g., League of Women Voters v. Commonwealth, 178
A.3d 737, 803 (Pa. 2018) (“we may consider, as necessary, . . . any extra-jurisdictional
case law from states[,] . . . which may be helpful and persuasive”); Commonwealth v.
Small, 189 A.3d 961, 973 (Pa. 2018) (turning “to other jurisdictions for guidance”). See
also Obiter Dictum, BLACK’S LAW DICTIONARY (11th ed. 2019) (explaining even dicta “may
be considered persuasive”). In any event, and respectfully, the Majority does not present
support for its opposite conclusion, instead relying on Wynne to state “the Court’s logic
and characterization of the county tax as a state tax based on the circumstances
underlying its creation and the manner of its collection via the state’s comptroller reveal
that state and local taxes need not be aggregated for purposes of a dormant Commerce
Clause analysis[.]” Majority Opinion at 22-23. As I have explained, Wynne is persuasive,
but it does not control this matter. See supra; see also Concurring Opinion (Wecht, J.) at
10-11 (“the Wynne Court itself did not focus its analysis on Maryland’s aggregate state
and local tax burden”) (emphasis omitted). Its reasoning, however, clearly supports my
conclusion and cuts against the conclusion of the Majority.

                    [J-5A-2023 and J-5B-2023] [MO: Todd, C.J.] - 6
       Counties have only the powers that a state gives them. Counties draw their
       taxing authority from the state constitution.

       The derivative relationship between a state and its counties means that
       when a county imposes a tax, it does so pursuant to a delegation of state
       tax authority. McKinley County is no exception. Its tax was imposed under
       the laws of New Mexico because that state’s enabling statutes created its
       taxing power. Given this relationship, the word “under” is not ambiguous.

       Furthermore, and contrary to our analysis above, if we agreed with [Arizona]
       that the term “under” refers only to a state tax, the outcome would raise a
       constitutional problem. The Commerce Clause of the United States
       Constitution forbids discrimination against interstate commerce. A state
       may not subject a transaction to a greater tax when it crosses state lines
       than when it occurs entirely intrastate.
Id. at 799 (internal citations omitted). The court of appeals thus declined to read the

exemption as providing credits for other state taxes (but not county taxes) as such an

interpretation “would pose serious constitutional problems[.]” Id.

       The Supreme Court of Colorado reached a similar result in General Motors Corp.

v. City & County of Denver, 990 P.2d 59 (Colo. 1999). In that case, the City and County

of Denver imposed a use tax on vehicles that were purchased in Michigan, passed

through an emissions testing lab run by General Motors in Denver, and sold in Michigan.

See id. at 64. Denver provided a credit for sales or use taxes paid “to other municipalities

on the materials costs of the vehicles prior to the vehicles’ arrival in Denver[,]” and

General Motors sought credit for taxes paid to other states as well. Id. at 64-65 (emphasis

omitted). The court held a provision of Denver’s tax code that provides an exemption for

“sales which the city is prohibited from taxing under the Constitution or laws of the United

States” prevented it “from invalidating the use tax in its entirety[,]” but the court also held

Denver’s tax structure discriminated against interstate commerce by only “credit[ing]

taxes paid to other municipalities.”     Id. at 70 (internal citation omitted).     The court

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concluded that, pursuant to the dormant Commerce Clause, General Motors was entitled

to credits for taxes paid to other states and municipalities. See id. at 71.

       The Supreme Court of Appeals of West Virginia also tackled this issue.             In

Matkovich v. CSX Transp. Inc., 793 S.E.2d 888 (W. Va. 2016), CSX, a railroad company,

was directed to pay the West Virginia Motor Fuel Use Tax on the fuel it buys in other

jurisdictions and uses in West Virginia. See id. at 891. While West Virginia afforded a

tax credit for sales taxes on fuel paid to other states, CSX also sought credit for sales

taxes on fuel paid to cities, counties, and localities of other states. See id. The Office of

Tax Appeals granted CSX’s petition for refund, determining CSX was entitled to the credit

it sought. See id. at 892. Eventually the West Virginia Tax Commissioner’s appeals

reached the state’s supreme court, and, relying on Wynne, General Motors, and Arizona

Public Service, that court affirmed. See id. at 896-98. The supreme court determined the

tax credit must “extend[ ] both to sales taxes CSX has paid to other states on its purchases

of motor fuel therein and to sales taxes that CSX has paid to the subdivisions of other

states when it has purchased motor fuel in such locales[,]” and that “[a]ny other

construction of this statute would invariably violate the Commerce Clause’s prohibition on

subjecting interstate transactions to a greater tax burden than that imposed on strictly

intrastate dealings.” Id. at 897 (emphasis omitted). “[B]ecause disallowance of the sales

tax credit for sales taxes imposed by the subdivisions of other states would produce a

‘total tax burden on interstate commerce [that] is higher’ than a purely intrastate

transaction,” the Court held any other construction of the statute would “be violative of the

dormant Commerce Clause.” Id. at 898, quoting Wynne, 575 U.S. at 567.

       Based on all the above, I would hold for purposes of a dormant Commerce Clause

analysis, the City Wage Tax, and the City’s crediting system, must be considered as part

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of the Commonwealth’s income tax scheme. 6 Otherwise, its economic impact cannot be

assessed “in light of its actual effect considered in conjunction with other provisions of the

State’s tax scheme.” Maryland v. Louisiana, 451 U.S. at 756. When PIT and the City

Wage Tax are considered together in this way, it becomes clear that the City’s failure to

grant taxpayer’s refund petition unconstitutionally discriminated against interstate

commerce. The tables below further illustrate this discriminatory effect.7

6 Justice Wecht acknowledges there must be “some form of state-level aggregation” as

otherwise “a state potentially could avoid providing full credits to its residents for taxes
paid to other states on income earned in the other states by authorizing cities or political
subdivisions to impose a portion of the tax directly.” Concurring Opinion (Wecht, J.) at
12-13. We agree that “allowing the result in any one case to hinge on whether a given
tax is labeled state, local, county, city, or non-resident is . . . unworkable[.]” Id. at 13. We
disagree, however, that we must permit the continuation of this unworkable (and
unconstitutional) practice simply because the United States Supreme Court has yet to
confront the issue.
7 These tables use approximate tax rates.

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            Table 1: Current Tax Structure Denying Additional DIT Credit

                                       Working in Philadelphia          Working in Wilmington

        City Wage Tax Rate                     4.00%                           4.00%

             PIT Rate                          3.00%                           3.00%

       Wilmington Tax Rate                      N/A                            1.25%

             DIT Rate                           N/A                            5.00%

   Total Tax Rate Before Credits               7.00%                          13.25%

          Less PIT Credit                       N/A                           (3.00%)

     Less City Wage Tax Credit                  N/A                           (1.25%)

    Total Tax Rate After Credits               7.00%                           9.00%

                   Table 2: Tax Structure if Additional DIT Credit is Allowed

                                       Working in Philadelphia          Working in Wilmington

        City Wage Tax Rate                     4.00%                           4.00%

             PIT Rate                          3.00%                           3.00%

       Wilmington Tax Rate                      N/A                            1.25%

             DIT Rate                           N/A                            5.00%

   Total Tax Rate Before Credits               7.00%                          13.25%

          Less PIT Credit                       N/A                           (3.00%)

     Less City Wage Tax Credit                  N/A                 (1.25% + 2.00% DIT = 3.25%)

    Total Tax Rate After Credits               7.00%                           7.00%

       The tables reflect how disallowing the credit at issue here causes those living in

the City and working in Wilmington to have their income taxed at a rate two percent higher

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than those who live and work in the City. The City’s practice of allowing a credit only for

taxes paid to other municipalities results in the total tax burden being higher on City

residents engaged in interstate commerce, i.e., those who choose to work in Wilmington,

than City residents who choose to work in the City. Stated another way, the City’s practice

of disallowing a credit for additional non-credited state taxes discriminates against

interstate commerce by providing a direct commercial advantage to those who live and

work in Philadelphia; it thus violates the dormant Commerce Clause. See Wynne, 575

U.S. at 549-50 (dormant Commerce Clause “precludes States from discriminating

between transactions on the basis of some interstate element,” including “tax[ing] a

transaction or incident more heavily when it crosses state lines than when it occurs

entirely within the State” or “impos[ing] 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.”) (internal quotation

marks, brackets, and citations omitted).8

8 It appears the Majority is reluctant to mandate aggregation of state and local taxes in a

dormant Commerce Clause analysis before the U.S. Supreme Court itself does so. See
Majority Opinion at 26 (out-of-jurisdiction case law “provides a poor basis on which for
our Court to declare, for the first time, that state and local level taxes are one and the
same for purposes of the Commerce Clause”) (emphasis added); Concurring Opinion
(Wecht, J.) at 13 (“I believe that the task of modifying [the dormant Commerce Clause]
doctrine (if at all) should be left for the Court that invented it in the first place.”). Generally
speaking, I agree this Court “should proceed cautiously when asked to be the engine of
innovation in federal constitutional law, since mistaken predictive judgments can be
disruptive of Pennsylvania law and can cause substantial injustice where the predictive
judgments are erroneous.” Commonwealth v. Molina, 104 A.3d 430, 458 (Pa. 2014)
(Opinion Announcing the Judgment of the Court) (Castille, C.J., dissenting).
Nevertheless, the question of aggregation is now squarely before this Court and we must
answer it consistent with the Constitution of the United States and related case law. See
Burt v. Titlow, 571 U.S. 12, 19 (2013) (“state courts have the solemn responsibility equally
with the federal courts to safeguard constitutional rights”) (internal citation omitted). In so
doing, we merely interpret and “implement the federal command up to its limits, but no
farther.” Commonwealth v. Sanchez, 82 A.3d 943, 994 (Pa. 2013) (Castille, C.J.,
concurring). And “[f]ederal review is always available to correct errors” in our
(continued…)

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      Justice Mundy joins this dissenting opinion.

interpretation. Id. It may well be this case is worthy of certiorari so that the Court can
provide further guidance with respect to its dormant Commerce Clause jurisprudence.

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