The Mississippi Supreme Court upheld the Mississippi Chancery Court’s decision in Mississippi Dep’t of Rev. v. AT&T Corp., Dkt. No. 2015-CA-00600-SCT (Miss. S. Ct. 10/27/2016), holding that the Mississippi dividend exclusion statute was unconstitutional under the dormant aspect of the Commerce Clause of the U.S. Constitution.
Generally, the dormant aspect of the Commerce Clause has been read to prohibit regulatory measures that benefit in-state economic interests by unequally burdening out-of-state companies that are similarly situated.
Under the Mississippi dividend exclusion statute (Code Section 27-7-15(4)(i)), Mississippi taxpayers were allowed to exclude from their Mississippi tax base dividends that had been subject to the Mississippi tax, but not dividends that had not been subject to the Mississippi tax, e.g., dividends received from subsidiaries that did not have nexus in Mississippi. Armed with this provision, the Mississippi Department of Revenue (“Department”) assessed AT&T $11.75 million in additional income tax, interest, and penalties for tax years 1997-1999 based on its income from subsidiaries that did not have Mississippi nexus.
AT&T protested this assessment, arguing that the differing treatment of dividends under Code Section 27-7-15(4)(i) established a discriminatory method of taxation in violation of the dormant aspect of the Commerce Clause of the U.S. Constitution. The Mississippi administrative tribunals disagreed, but the Chancery Court of the First Judicial District of Hinds County sided with the taxpayer. The Department appealed to the Mississippi Supreme Court.
Relying on a string of federal and state court cases as precedent, as well as the 4-part test from Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the Mississippi Supreme Court noted that a tax must be internally consistent, among other requirements, to be constitutional. In broad terms, a taxing statute is internally consistent when the statute would not impose a tax burden on interstate commerce that is different from the tax burden imposed on intrastate commerce, assuming the statute under review were enacted in each state. AT&T argued that the Mississippi dividend exclusion statute was internally inconsistent because, if an identical statute was enacted in every state, dividends received by a parent company from a subsidiary that does not have nexus with the parent company’s state would be taxed twice; whereas dividends received by a parent company from an in-state subsidiary would be taxed only once. The Mississippi Supreme Court agreed, finding that the dividend exclusion statute was internally inconsistent in violation of the dormant aspect of the Commerce Clause, and was therefore unconstitutional.
The Department argued that the 4-part test from the Complete Auto decision was only relevant for a tax, not a deduction. The Mississippi Supreme Court was unpersuaded because the U.S. Supreme Court has applied Complete Auto in analyzing tax credits, deductions, and exemptions, in addition to taxes. The Department also contended that the Mississippi divided exclusion statute did not unfairly tax a portion of value not attributable to the taxpayer’s economic activity in Mississippi. The Mississippi Supreme Court found this issue moot, because the threshold issue of whether the Mississippi dividend exclusion statute was internally inconsistent was answered in the affirmative.
As a result of this decision, Mississippi taxpayers that were either denied, or did not claim, the dividend exclusion for dividends received from affiliates that did not have nexus in Mississippi should consider filing refund claims for open years. Mississippi taxpayers should also consider whether they can claim the dividend exclusion on prospective returns.
Contact the authors: Ted Bots, Trevor Mauck
