Facts & Procedural History
On March 7, 2023, Zilka v. Tax Review Board City of Philadelphia was argued before the Supreme Court of Pennsylvania. Diane Zilka, the Appellant, was a resident of Philadelphia but worked in Wilmington. As a result, she owed taxes to four jurisdictions: (1) Pennsylvania; (2) Philadelphia; (3) Delaware; and (4) Wilmington.
Pennsylvania permits residents who work out of state, and therefore owe taxes to another state, to claim the amount of tax paid to that other state as a credit to offset the taxpayer’s Pennsylvania tax bill. The taxpayer consequently claimed a credit for her Delaware tax (5%) to offset her Pennsylvania tax (3.07%). Since Pennsylvania has a lower state tax rate than that of Delaware, Pennsylvania allowed the taxpayer to apply this credit to the extent of her Pennsylvania tax of 3.07%, thereby creating 1.93% of taxes paid to Delaware but not permitted as a credit against the taxpayer’s Pennsylvania state income taxes.
Then, in addition to claiming a credit for the amount of Wilmington tax paid (1.25%) to offset her Philadelphia tax (3.92%), the taxpayer also attempted to claim a credit against her Philadelphia tax for the 1.93% unused credit that could not be applied at the state level. The Philadelphia Department of Revenue allowed the taxpayer’s credit for her Wilmington tax paid of 1.25% against her Philadelphia tax bill, but it forbid the application of the 1.93% unused credit from her Delaware tax as a credit against her Philadelphia taxes.
The taxpayer appealed the Philadelphia Department of Revenue’s denial of her credit to the Tax Review Board of Philadelphia, claiming that she was entitled to this credit from Philadelphia since she owed 1.93% more in taxes than other Philadelphia residents who work entirely in-state, solely by virtue of her interstate work. She alleged that such a tax scheme resulted in an infringement on interstate commerce in violation of the U.S. Constitution’s Commerce Clause.
The Tax Review Board denied her appeal, and the Court of Common Pleas and the Commonwealth Court of Pennsylvania both affirmed, holding that Philadelphia’s rejection of the taxpayer’s credit did not amount to double taxation and, therefore, was not an unconstitutional hinderance on interstate commerce.
Overview
Legal scholars disagree over the merits of both parties’ respective arguments. Supporters of the taxpayer’s position contend that the 2015 U.S. Supreme Court case of Comptroller of Maryland v. Wynne requires that, for dormant Commerce Clause purposes, a state’s income tax scheme must be evaluated as a whole, inclusive of all the taxes of a state’s political subdivisions. A state’s own labeling of a tax as a city or county tax is irrelevant since political subdivisions are creatures of the state, whose only authority to tax is that which is explicitly granted by the state.
Under such a view, the taxpayer argues that the City of Philadelphia should have provided her with a tax credit for her excess credit derived at the state level, since it being a state level credit is of no constitutional consequence under Wynne’s aggregate approach. And, because Philadelphia denied the credit, the taxpayer—who engaged in interstate economic activity—was subject to a higher tax rate than her counterparts who confined their activity to solely within the state, which is a dormant Commerce Clause violation.
However, the City of Philadelphia asserts that it charges the same rate of tax on all residents, so its tax scheme cannot be discriminatory under the dormant Commerce Clause. Moreover, the City contends that the facts of the relevant tax in Wynne are distinguishable from the characteristics of Philadelphia’s wage tax. Finally, the City argues that the fact that the taxpayer incurs a greater rate of tax is a constitutional interaction of two different but nondiscriminatory tax schemes.
Takeaways
Only time will tell which way the Supreme Court of Pennsylvania will rule. However, there are some important considerations—aside from the constitutional issues—that should be considered.
First, there are tax policy principles supporting both sides. On the taxpayer’s end, there appears to be a lack of proportionality and certainty with regard to the interaction of state and local tax schemes, which economists have long held are detrimental to sound tax policy. However, from Philadelphia’s perspective, the City ought not be forced to foot the bill resulting from the lack of harmonization between the state income tax rates of Pennsylvania and Delaware.
Second, the U.S. Supreme Court has been hesitant to get involved in clearing up much of the prevailing uncertainty in interstate taxation, most recently declining to hear New Hampshire v. Massachusetts, despite fourteen states submitting briefs to the Court—an indication of the pervasiveness of the issue. So, perhaps Zilka may be the case that breaks that trend of Supreme Court deferral.
Lastly, the onset of the COVID-19 pandemic has changed the way many people work. With remote work opportunities on the rise, more and more taxpayers will likely be in Ms. Zilka’s position of interstate employment. As such, now it is more important than ever to clear up these uncertainties in the state and local taxation realm; otherwise, more uncertainty will breed more litigation costs for taxpayers and municipalities, which will increase deadweight losses and stall economic productivity.
Josh Meyerson (LAW ’24) is a Production Editor for the Temple 10-Q.