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Kansler v. Mississippi Department of Revenue

Supreme Court of Mississippi

November 29, 2018


          DATE OF JUDGMENT: 08/31/2017






          ISHEE, JUSTICE

         ¶1. Michael and Vickie Kansler moved to Mississippi from New York for Michael's job and, over the following years, exercised stock options stemming from that employment. The Kanslers took the position that the stock options' income was taxable only in Mississippi, which reduced their tax burden significantly. New York saw things differently and found a substantial portion of the income taxable by it. This liability to another state would have entitled the Kanslers to a credit on their Mississippi taxes worth more than $250, 000-but by the time the New York audit was finished, our statute of limitations barred the Kanslers from amending their Mississippi returns. They now argue our statute of limitations unconstitutionally discriminates against interstate commerce.

         ¶2. Mississippi's treatment of the statute of limitations for amending tax returns is unremarkable and appears to be shared with many other states.[1] The Kanslers' dormant Commerce Clause argument, on the other hand, is novel. And it depends on an unprecedented and erroneous attempt to apply the "internal consistency test," intended to evaluate the apportionment of taxes, to the collateral effects of a statute of limitations. We hold that the challenge is instead governed by the discrimination/Pike[2] balancing test employed by the United States Supreme Court in Bendix Autolite Corp. v. Midwesco Enterprises Inc., 486 U.S. 888, 108 S.Ct. 2218, 100 L.Ed.2d 896 (1988), the only United States Supreme Court case to scrutinize a statute of limitations under the dormant Commerce Clause. While Bendix and its ilk offer little guidance-Justice Scalia famously compared the Pike balancing test to trying to decide "whether a particular line is longer than a particular rock is heavy"[3]-the Kanslers' challenge fails because our statute of limitations is facially nondiscriminatory and has only an incidental effect on interstate commerce, one that is justified by the practical difficulties of tax administration and the State's interest in finality. The Kanslers bear the burden of proving otherwise, so any uncertainty must be resolved against their challenge. We affirm the Mississippi Department of Revenue's decision to refuse the refund request.


         ¶3. This case comes up on summary judgment. The facts are not disputed, and the following facts are drawn from the facts stipulated in the chancery court.

         ¶4. Michael Kansler worked for Entergy in New York, and he received stock options as part of his compensation. The Kanslers lived in New York until they were relocated to Mississippi in May 2007. During 2008 and 2009, Michael was still employed by Entergy in Mississippi. The Kanslers timely filed their Mississippi tax returns for the 2008 and 2009 tax years and paid taxes on their worldwide income, as required by Mississippi law. Some of that income derived from Michael's stock options. The stock options had been granted over several years before the Kanslers moved to Mississippi. The options vested over multiple years, including after the Kanslers moved to Mississippi.

         ¶5. In 2012, New York began an audit of the Kanslers' taxes related to the exercise of stock options in 2008, 2009, and 2010. On December 29, 2014, New York completed the audit and assessed the Kanslers additional tax and interest. The Kanslers paid the assessment on December 31, 2014. In January 2015, the Kanslers filed amended Mississippi tax returns and requested a refund of $257, 140 based on the credit allowed for income taxes paid to other states.[4] The Mississippi Department of Revenue denied the refund request because it was outside of the three-year limitations period.[5] The Kanslers appealed to the Department's Board of Review and then to the Mississippi Board of Tax Appeals, both of which affirmed the Department's decision. The Kanslers challenged the constitutionality of the limitations period in both appeals, but each body affirmed the Department's decision based on the text of the statute without considering its constitutionality. The Kanslers then appealed to the Chancery Court of the First Judicial District of Hinds County, arguing that the limitations period under Section 27-7-313 violates the Commerce, Due Process, and Equal Protection Clauses of the United States Constitution, and that the Department's actions were arbitrary, capricious, and beyond its statutory authority. Both parties filed motions for summary judgment. The chancellor granted the Department's motion and denied the Kanslers' motion, finding that the refund limitations period does not violate the United States Constitution. The Kanslers appeal from that judgment.


         ¶6. This Court reviews a chancellor's grant or denial of summary judgment de novo. Miss. Dep't of Revenue v. AT & T Corp., 202 So.3d 1207, 1213 (Miss. 2016). Summary judgment is only appropriate "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." M.R.C.P. 56(c).

         ¶7. We also apply a de novo standard of review when deciding the constitutionality of a state statute. Commonwealth Brands, Inc. v. Morgan, 110 So.3d 752, 758 (Miss. 2013) (citing Johnson v. Sysco Food Servs., 86 So.3d 242, 243 (Miss. 2012)). Statutes "come before us clothed with a heavy presumption of constitutional validity." Ex rel. T.L.C., 566 So.2d 691, 696 (Miss. 1990), overruled on other grounds by In re J.T., 188 So.3d 1192 (Miss. 2016)). "The party challenging the constitutionality of a statute is burdened with carrying his case beyond all reasonable doubt before this Court has authority to hold the statute, in whole or in part, of no force or effect." Id. (citations omitted).

         ¶8. Also potentially relevant is Mississippi Code Section 27-77-7(5) (Rev. 2017), which provides in relevant part,

At trial of any action brought under this section, the chancery court shall give no deference to the decision of the Board of Tax Appeals, the Board of Review or the Department of Revenue, but shall give deference to the department's interpretation and application of the statutes as reflected in duly enacted regulations and other officially adopted publications. The chancery court shall try the case de novo and conduct a full evidentiary judicial hearing on all factual and legal issues raised by the taxpayer which address the substantive or procedural propriety of the actions of the Department of Revenue being appealed.

         But this provision has not been not cited by the Department of Revenue in its brief, nor has the Department cited any "duly enacted regulations" or "other officially adopted publications" relevant to our analysis.


         I. Dormant Commerce Clause

         ¶9. The Kanslers argue Mississippi's three-year statute of limitations for amending a taxpayer's return impermissibly burdens interstate commerce because it does not give taxpayers enough time to amend a Mississippi tax return after an audit by another state, which can take far longer than three years. They contend that this violates the negative or dormant aspect of the Commerce Clause of the United States Constitution because in-state taxpayers do not suffer the same difficulty.

         A. The Dormant Commerce Clause

         ¶10. The Constitution gives Congress the authority to regulate interstate commerce. U.S. Const. art. I, § 8, cl. 3. But "[a]lthough the Clause is framed as a positive grant of power to Congress, [the United States Supreme Court has] consistently held [it] to contain a further, negative command, known as the dormant Commerce Clause." Maryland v. Wynne, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015). The dormant aspect of the Commerce Clause "prohibits economic protectionism-that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." Fulton Corp. v. Faulkner, 516 U.S. 325, 330, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996). Absent congressional approval, a state may not discriminate against or impose excessive burdens upon interstate commerce. Wynne, 135 S.Ct. at 1794. "In the absence of conflicting federal legislation the States retain authority under their general police powers to regulate matters of 'legitimate local concern,' even though interstate commerce may be affected." Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 36, 100 S.Ct. 2009, 64 L.Ed.2d 702 (1980).

         ¶11. State laws that discriminate against interstate commerce "face a virtually per se rule of invalidity." Granholm v. Heald, 544 U.S. 460, 476, 125 S.Ct. 1885, 161 L.Ed.2d 796 (2005). But 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"; this is the Pike balancing test. Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970). "[T]hese two principles guide the courts in adjudicating cases challenging state laws under the Commerce Clause," but they are, as the Supreme Court recently put it, "subject to exceptions and variations." South Dakota v. Wayfair, Inc., 138 S.Ct. 2080, 2091, 201 L.Ed.2d 403 (2018). Others have been less charitable, saying the dormant Commere Clause jurisprudence remains a "quagmire" that offers "little in the way of precise guides to the States in the exercise of their indispensable power of taxation." DIRECTV v. Utah State Tax Comm'n, 364 P.3d 1036, 1049 (Utah 2015) (quoting Nw. States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959)).

         B. The Mississippi Statutes at Issue

         ¶12. Mississippi taxes the worldwide income of its residents. See Miss. Code Ann. § 27-7-5 (Rev. 2017). To avoid double taxation, Mississippi offers a credit for income taxes paid to other states. See Miss. Code Ann. § 27-7-77 (Rev. 2017). This credit, however, is limited to how much Mississippi would have taxed the income. Miss. Code Ann. § 27-7-77(2)(c) (Rev. 2017). Since New York has a higher income tax rate, the Mississippi credit would have been less than the tax assessed by New York. Or, put ...

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