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Jamie C. Yesnowitz
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The Mississippi Supreme Court affirmed a decision upholding the three-year statute of limitations period for filing amended Mississippi income tax returns.1
The statute prevented the taxpayers from filing an amended return to claim a credit for income taxes paid to another state, but the Court determined that any discrimination against interstate commerce alleged by the taxpayers was merely incidental to the state’s otherwise nondiscriminatory statute of limitations. Because the taxpayers failed to prove that the burden imposed on commerce was clearly excessive compared to the benefits, the Court upheld the statute.
The taxpayers in this case (a husband and wife) relocated from New York to Mississippi in May 2007. The husband’s employer provided the husband with stock options as compensation, granted over several years and vested during the time the taxpayers were New York and Mississippi residents. The taxpayers filed 2008 and 2009 Mississippi tax returns based on their worldwide income, which included income derived from the stock options.
In 2012, New York conducted an audit of the taxpayers’ 2008 through 2010 tax returns, relating to the income derived from the stock options. The audit was completed on Dec. 29, 2014, and the taxpayers were assessed additional tax and interest which was paid on Dec. 31, 2014. Following the assessment, the taxpayers filed amended Mississippi tax returns in January 2015 for the 2009 and 2010 periods requesting a refund of $257,140, based on an individual’s ability to take a tax credit for income tax paid to another state.2
The Mississippi Department of Revenue denied the taxpayers’ refund request because it was barred by the three-year statute of limitations for filing amended income tax returns.3
The taxpayers appealed the denial of the refund to the Department’s Board of Review and the Mississippi Board of Tax Appeals. Both upheld the Department’s refund denial based on the statute of limitations. Following the decision of the Mississippi Board of Tax Appeals, the taxpayers appealed to the Chancery Court of the First Judicial District of Hinds County and argued that the statute of limitations violates the Commerce, Due Process, and Equal Protection Clauses of the U.S. Constitution. The chancellor denied the taxpayers’ motion and they appealed to the Mississippi Supreme Court.
Mississippi Supreme Court analysis
On appeal, the Mississippi Supreme Court considered the taxpayers’ argument that the state’s three-year statute of limitations for amending a tax return impermissibly violates interstate commerce because it does not provide taxpayers enough time to amend a Mississippi tax return after an audit by another state.4
According to the taxpayers, the statute violates the negative or dormant aspect of the Commerce Clause of the U.S. Constitution because in-state taxpayers do not suffer the same burden as taxpayers with filings in multiple states.5
Dormant Commerce Clause
Under the Dormant Commerce Clause, a state is prohibited from enforcing laws designed to benefit in-state interests by simultaneously burdening out-of-state interests.6
State laws that discriminate against interstate commerce are per se
However, under the Pike
balancing test, when a state law “regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”8
In South Dakota v. Wayfair, Inc.
, the U.S. Supreme Court recently explained that these principles are used to decide Commerce Clause challenges, but they are “subject to exceptions and variations.”9
Complete auto test
The taxpayers argued that the Mississippi Supreme Court should consider the constitutionality of the statute of limitations under one of the “exceptions and variations” referenced in Wayfair
– the Complete Auto
The four-prong Complete Auto
test requires that: (1) there must be a substantial nexus between the taxpayer and the state; (2) the tax must be fairly apportioned; (3) the tax must not discriminate against interstate commerce; and (4) the tax must be fairly related to the services provided by the state.11
The Court explained that the Complete Auto
test is intended to evaluate the constitutionality of taxes rather than state regulations in general. Specifically, the Court was “not aware of any decisions applying the test to a statute of limitations, even when it is related to taxes.”
The Court noted that the taxpayers did not argue that the statute violated the first prong (substantial nexus) or the fourth prong (fairly related to services provided by the taxing state) of the Complete Auto
test. However, these prongs have been applied to analyze collateral burdens similar to those alleged by the taxpayers. In Wayfair
, the U.S. Supreme Court determined that a statute requiring the collection of sales taxes by out-of-state retailers did not place an undue burden on interstate commerce. A major concern was compliance costs that include administrative errors in administering the tax. In the instant case, the taxpayers similarly complained that the statute of limitations exposes taxpayers that engage in interstate commerce to an increased risk of tax mistakes. The Wayfair
Court applied a balancing test and held that the challenged law did not create an undue burden on interstate commerce.
The taxpayers argued that the statute of limitations violated the second prong (apportionment) and third prong (discrimination against interstate commerce – essentially the Pike
balancing test) of the Complete Auto
test. The second prong requires a consideration of the internal consistency of the statute. As explained by the U.S. Supreme Court, “[i]nternal consistency is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear.”12
The test investigates whether or not the identical application of the tax by each state would place interstate commerce at a disadvantage when compared to intrastate commerce. A failure of this test shows the state is attempting to collect more than its fair share of taxes from those operating in interstate transactions compared to those in intrastate, since collecting more tax in one state would place interstate commerce at the mercy of the remaining states who could also assess additional tax.13
The taxpayers argued that the Mississippi statute of limitations failed the internal consistency test because interstate taxpayers are burdened by the three-year window when compared to those who only have income from sources within Mississippi.
In rejecting the taxpayers’ argument, the Court explained that the internal consistency test “employs a hardline rule” that does not allow the balancing of the state’s interest against the impact on interstate commerce. If the internal consistency test were applied as suggested by the taxpayers, no tax on interstate commerce could survive the test. The Court was not aware of any case where a tax scheme was found to fail the internal consistency test due to administrative procedures such as the statute of limitations. Thus, the Court rejected the taxpayers’ “novel attempt to apply the internal consistency test to a statute of limitations.”
Application of discrimination / balancing test
The Court also rejected the taxpayers’ argument that the statute of limitations violated the third prong of the Complete Auto
test that the statute does not discriminate against interstate commerce (the Pike
discrimination / balancing test). After determining that the statute of limitations for amended tax returns is not discriminatory on its face, the Court applied the Pike
discrimination / balancing test discussed above. The Court acknowledged that the statute of limitations may burden interstate commerce to an extent, but the Court determined that any discrimination was “incidental” to the otherwise nondiscriminatory statute of limitations. The taxpayers failed to meet their burden of proof that the statute’s burden on interstate commerce is “clearly excessive in relation to the putative local benefits.” Also, the Court noted that in the only similar case that it could find, Nissan Motor Corp. v. Commissioner
the Massachusetts Supreme Court rejected the constitutional challenge. The Court also agreed with a decision of the Utah Supreme Court that cautioned against novel Commerce Clause arguments.15
The Mississippi Supreme Court’s Commerce Clause analysis with respect to a statute of limitations provision applicable to filing amended tax returns reflects how difficult it sometimes can be for taxpayers to utilize constitutional principles to avoid an arguably unfair result. The Court rejected the taxpayer’s internal consistency argument and applied a traditional discrimination / balancing test to find against the taxpayers, even though the Court admitted that to some extent, the law burdened interstate commerce. The taxpayers had a legitimate argument that the statute discriminates against interstate commerce because tax departments in other states often do not conclude their audits in the three-year statute of limitations period referenced in the statute. Accordingly, taxpayers with a filing obligation in another state may be deprived of the opportunity to claim the credit for income taxes paid to another state on an amended return. However, the Court used a balancing test to conclude that any discrimination was “incidental,” and that the relatively high bar of showing that the burden of the law on interstate commerce was clearly excessive in relation to the benefits of the law was not met.
The Mississippi Supreme Court’s decision to rule the statute of limitations constitutional is a cautionary tale that could have an adverse impact on interstate taxpayers currently undergoing multiple and/or lengthy state audits. While the Mississippi statute of limitations has an exception for taxpayers under audit by the Internal Revenue Service or the Department,16
this grace period does not extend to taxpayers who may be audited by other taxing jurisdictions. While it is worth noting that Massachusetts17
have exceptions allowing taxpayers to amend their returns in response to another state’s audit, the majority do not, including most of Mississippi’s neighboring states.
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