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Is the double taxation of dual residents fair? The U.S. Supreme Court recently declined to consider two cases brought by Connecticut taxpayers who sold their businesses and had to pay taxes on the sale gains in both Connecticut and New York. That leaves in place a double-taxation scheme that tax experts thought the Supreme Court had quashed in an earlier 2015 case, Comptroller v. Wynne.
Both taxpayers called Connecticut home—but worked in New York, had a place there and spent more than 183 days there, so they also qualified as residents of New York. Consequently, Sam and Louise Edelman paid more than $6 million in New York state taxes on shares in Edelman’s shoe business. Richard Chamberlain and Martha Crum paid $2.7 million in New York tax on shares of his communications company. In both cases, the New York taxes were paid on top of Connecticut taxes paid on the same income, with no credit.
Any “intangible income”—any investment income or capital gain income—is treated as unearned and faces this double taxation in New York and Connecticut. For some taxpayers that can be a moderate amount of income from a stock portfolio. No big deal. But if you sell the stock in your company in a year and generate a lot of capital gain income, “then this becomes a serious problem,” says tax lawyer Tim Noonan with Hodgson Russ in Buffalo, who represented the couples as co-counsel. “Our position wasn’t that our clients shouldn’t have paid New York taxes, just New York should give them credit for what they paid in Connecticut.” What about getting a credit in Connecticut? “Connecticut won’t give it [the revenue] up!” Noonan says. “It takes two to tango.”
The question presented was whether the New York tax scheme that taxes the intangible income of individuals domiciled in the state, without offsetting credits for taxes paid to another state of domicile violates the dormant Commerce Clause under the Supreme Court’s ruling in Wynne. In Wynne, the Supreme Court ruled that a Maryland income tax policy that was a form of double taxation was unconstitutional because it violated the Commerce Clause of the U.S. Constitution by hindering interstate commerce. The New York courts said the Edelman and Chamberlain cases were distinguishable from Wynne.
The couples petitioned the Supreme Court, with support from five friend of the court briefs arguing to end the double tax. They were filed on behalf of the Business Council of New York State; The Tax Foundation; The Kogod Tax Policy Center and The National Society of Tax Professionals; The National Federation of Independent Business Small Business Legal Center; and the American Academy of Attorney-Certified Public Accountants. NFIB’s brief, for example, argued that if every state adopted New York’s tax system, it would disincentivize working across state lines.
Noonan has made a profession of dealing with the perpetual controversies around residency laws—whether a second home is a “permanent place of abode” and what counts as a day towards the 183-day test to be a statutory resident. What if your cellphone pings in New York when you’re driving in Greenwich on the border, for example?
At this point, the only way to correct this issue of double taxation of intangible income is through a legislative fix, but there’s no indication that the New York state legislature has any appetite to do so. The New York state brief to the Supreme Court suggested another path: Wait and see if this pops up in another state, and then the Court could take it on.
For additional coverage, see Forbes’ contributor Peter Reilly’s The Voraciousness of New York Income Tax And The Jersey City Solution and What Happens When You’re A Full-Year Resident Of More Than One State.
Links to the petitions and the amicus briefs are available here and New York State’s opposition brief here.