The U.S. Supreme Court has called for the view of the solicitor general in Zilka v. Philadelphia, a case with potentially far-reaching implications in state and local tax.
At issue is whether the interaction of Pennsylvania/Philadelphia and Delaware/Wilmington taxes violates internal consistency. Reed Smith attorney Michael Lurie noted this means that the U.S. government will be filing a brief about whether the case presents a federal interest that is important enough for the Supreme Court to grant certiorari (decide to hear the case). This development also may likely push back the timing of the case, he suggested.
While the court is not bound by the solicitor general’s recommendation, it tends to be “pretty deferential” to it, according to Lurie. He noted that the case could affect a wide range of state and local tax issues:
- The case is important because it could address the interaction of state and local taxes for Commerce Clause analysis.
- It has a direct impact on Philadelphia residents who work in Wilmington.
- The case is not likely to result in a refund to many taxpayers or to have significant revenue impact.
At issue in the case is whether Philadelphia unconstitutionally discriminated against interstate commerce by subjecting a Philadelphia resident who worked exclusively out of state to its wage tax and allowing her credit against that tax only for the local tax she paid to another jurisdiction, while declining to afford her additional credit for the out-of-state income tax she paid.
“In conjunction with this overarching issue, we must determine whether, for purposes of the dormant Commerce Clause analysis implicated herein, state and local taxes must be considered in the aggregate … We conclude that state and local taxes need not be aggregated in conducting a dormant Commerce Clause analysis, and that ultimately, the city’s tax scheme does not discriminate against interstate commerce. Accordingly, we affirm the order of the Commonwealth Court,” the Pennsylvania Supreme Court wrote in a ruling. (“Dormant Commerce Clause” is the principle that courts may weigh state legislation against Commerce Clause values even where no direct congressional action has taken place.)
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According to Chief Justice Debra McCloskey Todd of the Pennsylvania Supreme Court, “The Sixteenth Amendment contains a ‘negative command’ which “prohibits certain state taxation even when Congress has failed to legislate on the subject.”
Philadelphia provides a credit for taxes paid to Wilmington but not for taxes paid to Delaware, and this violates internal consistency, according to Lurie: “The taxpayer said that state and local taxes need to be aggregated in determining the credit due.”
So far, the courts have said that it does not violate internal consistency, but several justices on the Pennsylvania Supreme Court said that it presented an “interesting question,” Lurie said. “The order inviting the government to file a brief makes it more likely than before that the court will grant cert, but it also depends on what the solicitor general says,” Lurie noted. “If they say that cert should be granted because of a strong federal interest, it is likely that cert will be granted, but if they say it affects a limited number of taxpayers, or that this is an important issue but it is not the right case to decide the issue, it is less likely the court will grant cert. “
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